Finance, at its core, involves money in some way. Those working international finance find themselves dealing with foreign exchange markets, delays in customs, international regulations like capital controls and slow paying customers.
This results in many having to rely on export finance to cover the exchange of goods and services. Export finance refers to one of several ways the shipping of goods overseas or the selling of services on the international market can be financed.
Export finance is a way for businesses to release their working capital or get money to fund their business. Export finance tends to involve selling or borrowing against the value of outstanding invoices, though it can involve loans, as well. Note that many lenders won’t touch export deals or work with exporters because of the perceived risk. This forces customers to seek the few financial products and institutions that will support import and export deals.
What are the benefits of export finance?
One form of export finance is the factoring of invoices or borrowing against the payments your buyers owe you. By essentially funding loans or selling your invoices, you’re raising capital you can then use to engage in more trades. This type of export finance won’t restrict further exports. Your own credit rating or business performance doesn’t matter; it is the quality of the debtor and the odds they’ll pay the debt that determine how much you’ll get for the invoice.
Export finance funded by the sale of your invoices is a simple process. There’s no need for you to pursue collections from the customer, and you don’t have to worry about interest accruing on the debt. Nor do you have to worry about customers paying you as they slowly sell the products you shipped them. You’ll be able to secure cash quickly when you sell or factor the invoice, and the fees involved are up front. You know how much money you’re getting and the price paid for this capital infusion.
Export finance can help you bridge the gap in international trade. For example, many foreign buyers wait until they’ve received items through customs before they pay you. If the product is held up in customs due to paperwork issues or corruption, you don’t get paid.
Export finance can lower the overall risk your business faces when engaging in international trade. While you may receive 70 to 90 percent of the invoice’s value, you no longer face the risk of not getting paid if the product is ruined while stuck in customs or your customer goes out of business.
Import export banks also offer export finance. This is typically in the form of a loan. These loans may pay for raw materials, equipment or finished products for import. It might pay for labor or supplies. Or it may give them the money needed to make payment guarantees or issue bonds to secure their purchase. The downside of import export banks is that they charge interest on their loans, and that debt will compound over time. They often pay for other services, too, such as issuing letters of credit or bonds. If they don’t like your industry or your credit is poor, these institutions won’t talk to you. However, import export banks may talk to you when your own country won’t fund your purchase. For example, an import export bank in a foreign country may allow you to borrow money to export goods from that country to yours because it helps their country’s economy.