Author: Gary Hemming CeMAP CeFA CeRGI CSP
20+ years experience in business loans
Export finance is used when businesses have significant upfront costs that can tie up cashflow whilst waiting for payment.
Export financing can help mitigate the risks of delayed, or non-payment, and ensure that your business can maintain liquidity without having to pause new business operations.
What is export finance and how does it work?
Specifically export finance refers to a range of financial products that offset some of the risks involved with overseas trade.
When selling abroad there can be long periods where cash is tied up and also issues such as fluctuations in currency, changes to trade policies and also issues relating to the certainty of payments when dealing with unknown parties.
There are several different types of export finance. The key ones are:
1. Export credit insurance (ECI): This type of insurance that covers the risk of non-payment by a foreign buyer. It can be put in place to cover one specific trade, or apply to a portfolio and last for up to five years.
Export credit insurance gives the seller confidence that they will receive payment as it minimises the risk of default from the buyer. Even buyers with a good credit-rating can experience unforeseen difficulties and so this type of insurance is helpful for those who want to minimise the risk of non-payment.
2. Letters of Credit (LCs):
A letter of credit is issued by a bank. It is a guarantee that the buyers will pay the seller the correct amount and that this payment will be made by an agreed date.
In the event that the buyer cannot make the payment, the bank would then make the payment. This gives absolute certainty to the seller that payment will be made.
3. Export factoring, also known as invoice financing: This is an arrangement where invoices are sold to a third party financier or factoring company at a discount. The financier pays immediately for the invoices and then the debt transfers to them to collect from the foreign buyer.
Invoice financing can help a business maintain cash flow if payments are outstanding for a long time and money is required urgently.
4. Working capital loans: Working capital loans are loans that help businesses fulfil overseas contracts and orders; whether this is to finance the production of goods or to cover the period between shipment and payment. Working capital loans can be secured against assets and this includes invoices.
Who can use export finance?
Export finance can be used by a wide range of organisations including small and medium sized businesses (SMEs), corporations and charities; it is designed to be flexible and accessible. It is a useful tool to help mitigate risks and ease the burden of trading abroad.
Businesses looking to use export finance will, however, need to be established and have a trading history.
Much like other types of trade finance, such as supply chain finance and import finance, any company that trades overseas can consider export financing.
What are the pros and cons of export finance?
Here are some of the key pros and cons of export financing
Advantages
Export finance has several key advantages, it can remove much of the uncertainty of trading overseas knowing that payment will be made even if the unexpected happens and a buyer defaults.
It can help grow an international customer base and support a business venturing into new markets.
Disadvantages
As with any financial arrangement it is imperative to weigh up the advantages and disadvantages of using export finance before you enter into an agreement.
It is recommended that you speak to a financial advisor that specialises in export finance and has a strong track record in the commercial finance market.
What other types of finance should I consider for my company?
When seeking working capital finance, there are numerous options to fund your company and enhance your cash flow.
These can be categorised into business loans, invoice finance, asset finance, and business revolving credit facilities such as business overdrafts and credit cards.
Business loans provide a straightforward way to borrow funds, divided into two main types: unsecured business loans and secured business loans.
A significant benefit is that fast business loans can be arranged swiftly, often within 24 hours, making them ideal for urgent funding needs.
Invoice finance enables you to unlock funds from raised invoices that are yet to be paid, making it perfect for businesses with delayed payment terms. This financial product can be divided into invoice factoring (also known as debt factoring) and invoice discounting.
The primary distinction lies in who handles credit control. Confidential invoice discounting allows you to borrow without notifying your customers.
Asset finance helps you raise funds to purchase or lease an asset, also referred to as equipment finance, as it is frequently used to finance new business equipment.
Frequently Asked Questions
How quickly can I get funding?
The funding process usually takes two to three weeks on average, depending on your circumstances.
We will support you through the process and have many years of experience working with a range of specialist brokers throughout the country to find the right match for our clients.
Can you help if I have bad credit?
Yes, poor credit isn’t necessarily a barrier to obtaining import finance.
We work with a range of lenders and seek to understand your business and your so we can match you with the right provider.
Do you work with multiple funders?
Yes, we can structure transactions with one or multiple providers to give you the funds you need.
There is never a ‘one size fits all’ solution and so make sure to work with finance specialists who seek to thoroughly understand your business and your needs.
If you are considering import finance then speak to one of our specialists for a free callback and introductory discussion.
