An exporter offering ninety-day terms has money tied up in invoices. Selling those invoices converts them to cash, and the pricing depends on which risks transfer with them.
What is actually being sold
The exporter assigns the right to collect a receivable to a finance company, which pays a discounted amount immediately and collects the full sum when it falls due.
The discount reflects the time until payment, the cost of funds, the administrative work of collection, and the probability the buyer does not pay.
This is a sale of an asset rather than a loan against it, which affects how the transaction appears in the exporter's accounts if the sale qualifies as a true transfer.
Where the credit risk lands
Under recourse arrangements, the exporter must repay the advance if the buyer defaults. The finance company is lending against the invoice, not buying the buyer's credit.
Under non-recourse arrangements, the finance company absorbs the buyer's failure to pay, subject to defined exclusions. It underwrites the foreign buyer directly.
Non-recourse costs more, and approval depends on the finance company's view of the buyer rather than of the exporter, which can be an advantage for a small seller with large customers.
Why disputes are usually excluded
Non-recourse cover normally applies to the buyer's inability or refusal to pay a valid debt, not to a dispute over the goods.
If the buyer claims short delivery or defective quality, the receivable is contested, and the exporter typically has to resolve it before any cover responds.
This is why documentation and acceptance evidence matter. A clean, undisputed invoice is what the arrangement is designed to fund.
How cross-border adds cost
Collecting from a foreign buyer requires local capability, and finance companies operating internationally often work through correspondents in the buyer's country.
Currency adds another layer. An invoice denominated in the buyer's currency exposes the financier to exchange movement between advance and collection unless it is hedged.
Legal enforceability of the assignment also varies. Some jurisdictions require notice to the buyer for the transfer to be effective, and some contracts prohibit assignment outright.
Why it is used despite the cost
The alternative for many exporters is declining orders that require long terms, since carrying the receivable would exhaust their working capital.
Longer terms are a competitive variable in international sales, and the ability to offer them can be worth more than the discount costs.
Whether the arrangement makes sense depends on the margin on the underlying sale, which is a calculation specific to each business rather than a general rule.