Export finance refers to a range of financial products and services aimed at helping businesses fund their export activities.
Export finance is designed to help businesses overcome these challenges by providing them with the financial support they need to succeed in international trade. This article aims to provide an overview of export finance, including what it is, its types and sources, its advantages and challenges, and its overall importance for businesses.
Let’s take a closer look at how export finance can help avoid cash flow problems to help a business thrive. And if you need an immediate export finance quote, just fill in our simple form.
Do You Need a Specialist Export Finance Quote?
- Find the right funding to grow your international trading and pursue bigger opportunities
- Bridge the Cash Flow Gap Between Paying Your Suppliers & Getting Paid
- Release the Value of Outstanding Invoices
- Competitive Foreign Exchange Service Minimises Risk
- We Will Never Sell Your Data
What is Export Finance?
Export Finance is the term to describe the specialist range of finance focussed on the export market. It can include pre-shipment financing, post-shipment financing, supply chain financing, trade credit insurance, and other forms of financial support.
Export financing aims to support businesses reaching an international market. Once a shipment has left domestic customs, there can be a significant time period while the goods are in transit and are then collected by the importer.
Especially where emerging markets are concerned, the ability to extend attractive payment terms to the importer is often a substantial part of winning an order.
Export finance aims to maintain a positive cash-flow cycle during the gap. t can be provided by various sources, including banks, financial institutions, and government-backed schemes.
How Does Export Finance Work?
The most common form of export finance is similar to invoice factoring, whereby money is advanced against the value of unpaid invoices.
It’s a form of asset-based finance tailored to businesses exporting to international markets.
Effectively, it’s a loan whereby invoices (in this case, those held by a foreign debtor) are used as collateral for an advance.
In general, export finance plays a critical role in helping businesses overcome the barriers to exporting via managing cash flow, reducing the risk of losses from non-payment, and improving competitiveness by providing them with access to working capital.
Pros and Cons of Export Finance
Pros of Export Finance:
- Improved Cash Flow: Export finance provides access to working capital, reducing the need to wait for payment from overseas customers and allowing for earlier payment for goods and services.
- Reduced Risk: Export finance can reduce the risk of non-payment and other losses associated with exporting, allowing businesses to focus on growing their international trade operations.
- Increased Competitiveness: Export finance provides businesses with the financial resources they need to expand their reach and improve competitiveness in international markets.
- Access to Working Capital: Export finance provides businesses with access to working capital, allowing them to invest in new products, services, and markets and grow their business.
Cons of Export Finance:
- Complex Processes: Obtaining export finance can be complex and time-consuming, requiring significant time and resources.
- Cost Implications: Export finance can be expensive, with fees and interest rates impacting a business’s bottom line.
- Lack of Information and Support: Some businesses may struggle to find the information and support they need to access export finance, leading to difficulties securing funding.
- Time Implications: Obtaining export finance can take significant time, delaying a business’s ability to invest in new products, services, and markets and grow their business.
How apply for export finance
- Assess your needs: Determine the financing you require that best suits your needs and the terms you prefer.
- Research and compare options: Research various sources of export finance, such as banks, export credit agencies, and trade finance providers, and compare their terms, fees, and conditions.
- Prepare your application: Gather the necessary documentation and information, such as financial statements, export contracts, and shipping documents, to support your application.
- Submit your application: Submit your application to the selected export finance provider, including all required documentation and information.
- Review and negotiate terms: Review the terms and conditions of the export finance offer, and negotiate if necessary to ensure that the terms meet your needs.
- Sign the agreement: If the terms are acceptable, sign the agreement and comply with the conditions of the export finance agreement.
- Use the financing: Use the export finance to support your international trade operations and repay the finance according to the terms of the agreement.
What are the potential credit problems for exporters?
Typically, companies asked to send their goods and services overseas can’t charge 100% payment upfront. While this would be the best scenario, competitive markets mean the availability of preferential credit terms has become a critical factor in choosing multi-national trade partnerships.
Many buyers prefer to arrange trading relationships whereby they can pay for goods once they have received them through customs, for example. In this scenario, the exporter has an immediate cash-flow impact and is held hostage to the speed with which something can clear customs.
What is export factoring?
This type of factoring is suited to small and medium-sized exporters that export consumer goods with open account terms.
This is when goods are shipped and delivered before payment is due, typically within 30-90 days. Put simply, a factor or factoring company buys the exporter’s foreign accounts receivables and provides an advance to the business of up to 80% of the invoice value, typically without recourse, where the factor assumes total liability for non-payment.
The facility practically eliminates the risk of non-payment by foreign buyers, allowing the UK exporter to confidently offer open account terms.
Export factoring improves short-term cash flow and boosts the business’s competitiveness in an international marketplace. As part of the process, the factoring company manages credit control and collection services on behalf of the business to allow business owners to focus on business operations.
Factoring foreign accounts receivable is a viable alternative to export credit insurance, long-term bank financing, expensive short-term bridge loans or other types of borrowing that create debt on the balance sheet.
What is UK export finance?
In addition to private finance, the UK government has its own export credit agency, which can offer various forms of finance. Intended to support British company’s ability to export widely, UK Export Finance can help with:
- Credit Insurance
- Overseas Investment Insurance
- Loans or Loan Guarantees to bank
You can reach more about the government’s export and insurance products and services here.
What are the risks of export finance
Risks of Export Finance:
- Credit Risk: There is a risk that the overseas customer may not pay for the goods or services provided.
- Currency Risk: Fluctuations in currency exchange rates can impact the profitability of an export transaction.
- Political Risk: Political instability or changes in government policies in the importing country can negatively impact an export transaction.
- Logistic Risk: Delays or disruptions in transportation, customs clearance, and other logistics can impact the delivery of goods and the success of an export transaction.
- Market Risk: Changes in market conditions, such as changes in consumer demand or competitor activity, can impact the profitability of an export transaction.
- Legal Risk: Differences in laws and regulations between countries can create challenges for businesses engaged in export transactions.