What is export finance?
Export financing includes:
- Documentary credits
- Bills of exchange
- Letters of Credit
- Forfaiting (purchasing the receivables or traded goods from an exporter)
- Export credits (to reduce risks to funders when providing trade or supply chain finance)
- Foreign exchange
Why is export financing important?
Generally speaking, sellers of goods or services want to get paid as soon as possible, even before they trade, and buyers want to delay payment for as long as possible, to maintain good cashflow and give them time to sell on to their end customers. This inherently means third parties can offer some form of financial guarantee, bridging the finance gap, and ensuring trust between the buyer and the seller.
Much trade is done cross border, increasing risk 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.
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 export finance can be placed in the right way, then it can provide a lot of comfort to both buyers and sellers. An example of this is a letter of credit facility; where company X is exporting to company Y, they want to know that payment will be received for the 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 letters – both parties have comfort knowing that the other will release goods and payment when product is shipped or documents are received. This allows comfort within international trades and structures that promote trust with new counterparties.
The problem 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, product irregularity and no security or insurance, in the case of enforcement.
How can it help?
Export finance is can be one simple finance 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.
Types of export finance include:
- Cash flow from the business or lending
- Trade finance
- An standby Letter of Credit, which may be used as an insurance policy
- Letters of credit
- Confirmations from other banks if required in the cycle
- Structured finance
- 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
- Credit reports
- Details and references of the directors
- Information on assets and liabilities
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 often 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 appear on balance sheets.