VIDEO: Development Finance – The Role of Export Credit Agencies, Trade Credit Insurers and Development Banks8th April 2020 / 0 Comments
Export Finance – Your TFG Guide for Exporters
When companies export products or services, long payment terms can often create working capital challenges. The up-front cost of producing, shipping and delivering the goods can be tricky for businesses to manage. Export finance helps businesses release working capital from cross-border or domestic trade transactions, that would otherwise be tied-up in invoices or purchase orders (for up to 180 days). Export finance is specialist finance that can help a company to grow and increase trade.
Popular Export Products
Cars and Vehicles – One of the biggest exports globally, we’re experts in trading automobiles, working with car dealerships and fleet management services
Raw Materials – From tobacco to spices, gold to bronze, commodities represent a large proportion of our trade finance portfolio
Electronics – The circuit board, software and hardware markets have benefited huge growth as a result of consumer demand, find out about our electronics offering here
Finished Goods – Our innovative structuring capabilities allow us to put together complex finance structures, even if the end goods are finished
Soft Commodities / Grains – We’ll work with traders and producers to help them increase their trade flows in the jurisdications they’re operating in
Metals – From scrap metal to alloys, we help traders and distributors access trade, receivable or PO finance for iron, steel and non-ferrous metals
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Export Finance – Useful Guides
A trade bill, also known as a bill of exchange, is an agreement in funds will be paid at a specific time in the future. It is usually used by a buyer to purchase a product from the supplier, with the payment guaranteed at a later time. A bill of exchange is usually referred to as being issued and/or endorsed (accepted) by non-bank entities. An example will be where there is an agreement to pay for a product in the future and a bill of exchange is drawn on and accepted by a trader; showing a commitment of payment for goods at a later date. Payment can be received earlier if a third party financier discounts the future amount to be provided.
What is a Letter of Credit?
Letters of credit (LCs), also known as documentary credits are financial instruments, issued by banks or specialist trade finance institutions, where payment is made to the exporter on behalf of the buyer if the terms specified in that LC are fulfilled.
What is forfaiting and how can it help exporters?
Forfaiting is the purchasing of receivables or traded goods from an exporter.
How can FX products help exporters?
The volatility of currencies can significantly impact a business’s trading margins and revenue, particularly when trading cross-border, and when suppliers, manufacturers and supply chains charge and buy in different currencies. Find out how you can mitigate risk and look at your export strategy through currency products here.
Frequently Asked Questions
How does Export Finance work?
There are several different types of export finance, so structuring varies, depending on which product is most suitable for your business. Often the supplier will request a Letter of Credit or a Bank Guarantee, which is financial security of payment to reduce non-payment risk once they deliver the product or ship the goods. In other cases, the customer might not pay your company for up to 90 days after the product has been received. Once the invoice has been issued, receivables or invoice finance can be used to advance payment. The gap until payment is received is bridged by a financier. Export finance is generally secured, that is, a financier will use the goods or products, the invoices, future cash flow, or the company as security for advancing cash.
Why is export finance important?
Generally speaking, sellers of goods or services want to get paid as soon as possible, even before the trade, and buyers want to delay payment for as long as possible, to maintain strong cash flow and provide the buyer time to sell on to their end customers. This means that third parties can add value by offering some form of financial guarantee, bridging the finance gap, and ensuring trust between the buyer and the seller.
Much trade is done cross-border, which can increase the risks involved when importing or exporting goods.
Exporting goods to another country or domestically to a new buyer is inherently risky. Therefore a growing company will want to mitigate some of these risks and also structure their finance in such a way as to allow sustainable growth.
What problems do companies face when exporting?
When a company is growing, it is very difficult to finance in the right way and have the correct processes in place. We aim to assist in that journey and in the event that it is suitable, we have found that export finance can provide significant comfort to both buyers and sellers in a transaction. An example of this is a Letter of Credit (LC) facility; where company X is exporting to company Y. Company X wants to know that payment will be received for its goods. A Letter of Credit facility is set up by the buyer and seller’s banks. On the basis of the conditions specified in the LC, both parties have the comfort of knowing that the other will release goods and payment when a product is shipped or documents are received. This product is used within international trades and structures to promote trust with new counterparties.
The problems that many businesses face are simple distrust or lack of understanding in relation to their counterparty. In the event that there is sometimes blind trust or the incorrect mechanisms in place, then there may be goods sent with non-payment, dispute, internal problems and/or product irregularity, with no security or insurance in the case of enforcement.
How can exporting help a business?
Export finance can be one simple financial instrument or several different facilities which can be structured to ensure some form of financial guarantee and establish trust between a buyer or seller. Whether it is a guarantee of payment from a customer when goods are exported, the advance payment of a transaction so that goods can be produced, or the discounting of invoices from clients to avoid 30-180 day payment delays, export finance can help reduce working capital problems.
Other types of export finance include:
- Cash flow from the business or lending
- Letter of Credit (LC), including Standby Letters of Credit (SBLC), which may be used as an insurance policy
- Confirmations from other banks if required in the cycle
- Cash against documents
- Financial instruments – bonds/prom notes
- Insurance backed facilities
Export Finance: What are the requirements?
Export finance is looked at and reviewed on a case by case basis. Generally, a financier would ask for the following in an application:
- Audited financial statements
- Full business plans
- Financial forecasts
- Statement of Accounts
- Credit reports
- Details and references of the directors
- Information on assets and liabilities
- History of the company
What are the benefits of export financing?
Export finance helps businesses grow without having to take on other investment such as equity investment, which could involve giving away a share of your company, having additional shareholders and could limit the way you want to grow. Export finance facilities are generally standalone from existing bank facilities, so are often available to those with current overdrafts or loans. Some export finance facilities, such as Letters of Credit, might not get in the way of existing facilities, nor do they always appear on Balance Sheets.