Export Finance Products 2017-09-25T14:28:05+00:00

Export Finance

Global Trade Funding offers a wide range of innovative financing for exporters

Export Finance Overview

Trade finance, already a specialized niche within the banking and financial services sector, becomes even more specialized when it focuses on just export finance. Export finance and the broader trade finance are very different than commercial lending, mortgage lending, and other common domestic banking disciplines. Trade and export finance account for the fact that goods are sold and shipped overseas take longer to get paid than it would with a local transaction. Extra time and energy are required to make sure buyers are reliable, creditworthy and properly managed. Export financing is more complicated than domestic banking by an ocean and several thousand miles.

Additionally, foreign buyers, like their domestic counterparts, prefer to delay payment until they receive and resell the goods they’re supposed to be paying for. You can’t blame them, but you can worry about them because they have an ocean between them and you. Due diligence and careful financial management can mean the difference between profit and loss in export financing.

In export finance transactions, sellers want to get paid as quickly as possible, while buyers usually prefer to delay payment, at least until they have received and resold the goods. This is true in domestic as well as international markets. Increasing globalization has created intense competition for export markets. Importers and exporters are looking for any competitive advantage that would help them to increase their sales and flexible payment terms have become a fundamental part of any sales package.

Types of Export Finance

For importers, a consignment purchase is the lowest-risk import trade finance option. With a consignment purchase, the importer does not pay the exporter for the goods until the goods are sold to the importer’s end customer. Not surprisingly, exporters are almost always reluctant and almost never enter into a consignment purchase deal because it likely means delaying payment for the goods or not getting paid in full for the goods at all. Consignment purchase arrangements are regarded by exporters as highly risky, and are therefore rare.

At the other end of the spectrum, cash-in-advance is the riskiest Import Trade Finance option for importers because the importer commits all of the funds up front, with no reliable guarantee that the goods will be delivered. Exporters like cash-in-advance, especially if they too are intermediaries who have to pay for goods in advance of receiving payment for their export. Many exporters offer importers discounts if they will pay cash in advance. It is, nonetheless rare for importers to agree to cash-in-advance terms.

Consignment purchases leave all the risk with the exporter, while cash-in-advance terms leave all the risk with the importer. Somewhere between the two, it is likely that a compromise can be struck to make the deal.

A reasonable compromise might be a down payment, where the importer pays a non-refundable deposit up-front and the exporter ships the goods on the strength of that deposit. The importer then pays the remainder of the cost when the goods are received in good condition.

Many exporters offer open account purchase terms for import trade finance. In an open account arrangement, the importer initially purchases the goods on account, then makes a series of payments to pay the remainder of what is due. In an open account transaction, it is entirely likely that the exporter will charge interest on the outstanding balance.

Open account transactions help importers manage cash flow more efficiently. However, there is still payment default risk for the exporter, since the importer may not make the payments. In open account transactions, the exporter has no security or collateral for what is owed because title ownership of the goods passes from the exporter to the importer when the goods are delivered, and the importer can sell the goods on to customers before making the final payment to the importer. If the importer defaults on the payment, the exporter is unlikely to recover the goods.

Because of this, exporters will usually only enter into open account transactions if the importer is someone with whom the exporter has a long-standing relationship. However, with the growing availability of credit insurance in Import Trade Finance, open account transactions are being more widely used.

Export Finance Costs

The costs of borrowing, including interest rates, insurance and fees will vary. The total cost and its effect on the price of the product and profit from the transaction should be well understood before a pro forma invoice is submitted to the buyer.

Export Finance Terms

Costs increase with the length of terms. Different methods of financing are available for short, medium, and long terms. Exporters need to be fully aware of financing limitations so that they secure the right solution with the most favorable terms for seller and buyer.

Export Finance Risk Management

The greater the risks associated with the transaction, the greater the cost to manage or mitigate the risk. The creditworthiness of the buyer directly affects the probability of payment to an exporter, but it is not the only factor of concern to a potential lender. The political and economic stability of the buyer’s country are taken into consideration. Lenders are generally concerned with two questions:

Can the exporter perform? They want to know that the exporter can produce and ship the product on time, and that the product will be accepted by the buyer.

Can the buyer pay? They want to know that the buyer is reliable with a good credit history. They will evaluate any commercial or political risk.

If a lender is uncertain about the exporter’s ability to perform, or if additional credit capacity is needed, government guarantee programs are available that may enable the lender to provide additional financing.

Export Finance Products

Trade finance generally refers to the financing of individual transactions or a series of revolving transactions. Also, trade finance loans are often self-liquidating—that is, the lending bank stipulates that all sales proceeds are to be collected, and then applied to payoff the loan. The remainder is credited to the exporter’s account.

The self-liquidating feature of trade finance is critical to many small, undercapitalized businesses. Lenders who may otherwise have reached their lending limits for such businesses may nevertheless finance individual export sales, if the lenders are assured that the loan proceeds will be used solely for pre-export production; and any export sale proceeds will first be collected by them before the balance is passed on to the exporter.

Given the extent of control lenders can exercise over such transactions and the existence of guaranteed payment mechanisms unique to or established for international trade, trade finance can be less risky for lenders than general working capital loans.

Accounts Receivable Factoring

Once a product has been shipped, that inventory is converted to an account receivable (A/R). A list of all accounts receivable is maintained on an aging report while the exporter waits for final payment. If you have a more immediate need for cash you can convert your accounts receivable into cash using a trade finance method known as factoring.

Factoring is the discounting of foreign accounts receivable that do not involve drafts as the method of payment. A Factor (an organization that specializes in the financing of accounts receivable) takes title for immediate cash at a discount from the face value. Although factoring is often done without recourse to the exporter, verify these specific arrangements. Factors typically provide 70% of the face value within 3-5 working days, and assume responsibility for collection from the buyer. After final payment, the Factor will pay the remaining 30% – less a service fee of 4% – 5%.

Global Trade Funding has a great deal of information about Accounts Receivable Factoring available for clients and visitors and additionally offers Accounts Receivable Factoring as a service. Visit

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Forfaiting

Similar to accounts receivable factoring, forfaiting is the selling, at a discount, of longer term accounts receivable or promissory notes of the foreign buyer. These instruments may also carry guarantees from the foreign government or other documentary guarantees. Because forfaiting may be done either with or without recourse, verify all of the specific arrangements.

Export Credit Insurance

It is almost inevitable that you will have to extend competitive credit terms to foreign buyers in you are going to grow your international business, which means absorbing more risk. What happens if you don’t get paid? Your foreign customers could go out of business or file bankruptcy, face currency devaluations or foreign exchange problems, run short on cash, or fail to pay you for any number of other commercial or political reasons. You can protect your foreign receivables against virtually all non-payment risks with an export credit insurance policy.

Export credit insurance is an effective sales tool that enables you to extend competitive payment terms without significantly increasing your risk. It can help you penetrate new markets, negotiate larger order quantities, establish or expand distribution, and increase the profitability of your export business. If you finance your receivables, the coverage will also make your foreign A/R more attractive to banks, factors, and other lenders so you can negotiate the most favorable advance rates and loan terms.

Home › Trade Funding Services › Accounts Receivable Factoring.

Forfaiting

Similar to accounts receivable factoring, forfaiting is the selling, at a discount, of longer term accounts receivable or promissory notes of the foreign buyer. These instruments may also carry guarantees from the foreign government or other documentary guarantees. Because forfaiting may be done either with or without recourse, verify all of the specific arrangements.

Export Credit Insurance

It is almost inevitable that you will have to extend competitive credit terms to foreign buyers in you are going to grow your international business, which means absorbing more risk. What happens if you don’t get paid? Your foreign customers could go out of business or file bankruptcy, face currency devaluations or foreign exchange problems, run short on cash, or fail to pay you for any number of other commercial or political reasons. You can protect your foreign receivables against virtually all non-payment risks with an export credit insurance policy.

Export credit insurance is an effective sales tool that enables you to extend competitive payment terms without significantly increasing your risk. It can help you penetrate new markets, negotiate larger order quantities, establish or expand distribution, and increase the profitability of your export business. If you finance your receivables, the coverage will also make your foreign A/R more attractive to banks, factors, and other lenders so you can negotiate the most favorable advance rates and loan terms.

Government Agency Assistance

Several federal and state government agencies offer programs to assist exporters with financing needs. Some are guarantee programs that require the participation of an approved lender, while others provide loans or grants to the exporter or a foreign government.

Government programs are generally aimed at improving an exporter’s access to credit. They are not intended to subsidize the cost of credit. With few exceptions, banks are allowed to charge market interest rates and fees; a portion of those fees are paid to the government agency to cover the agencies’ administrative costs and default risks.

Government guarantee and insurance programs are used by financiers to reduce the risk associated with loans to exporters. Lenders who are concerned with an exporter’s ability to perform under the terms of sale, and with an exporter’s ability to be paid, often use government programs to reduce the risks that would otherwise prevent them from providing financing.

Export Import Bank of the United States (EXIM Bank)

EXIM Bank is an independent federal government agency responsible for assisting export financing of U.S. goods and services. It offers a variety of information services, insurance, loan, and guarantee programs.

Ex-Im Bank operates an export financing hotline that provides information on the availability and use of export credit insurance, guarantees, direct and intermediary loans extended to finance the sale of U.S. goods and service abroad.

Briefing programs are offered by Ex-Im Bank to the small business community. These programs include regular seminars, group briefings, and individual discussions held both within the Bank and around the country.

Small Business Administration (SBA)

The Small Business Administration (SBA) has some services specifically designed to help the small business get started in exporting. The SBA provides financial assistance programs for U.S. exporters. Applicants must qualify as small businesses under the SBA’s size standards and meet other eligibility criteria. The SBA has two main programs to assist U.S. exporters—the Export Working Capital Program and the International Trade Loan (ITL) program.

The SBA programs provide the small business owner with financing aids that will enable the business to obtain the capital needed to get into exporting. This program is designed to help small business exporters obtain financing by reducing risks to lenders. The SBA will guarantee up to 90% of a loan from a private bank. The proceeds from the loan can be used for pre-shipment working capital, post-shipment exposure coverage, or a combination of both.

Term Financing for Foreign Buyers

Frequently, foreign buyers don’t have the cash on hand to pay for major purchases. So the buyers ask for extended credit terms and/or financing. Few exporters can manage the cash flow dilemma or commercial and political risks caused by these long-term contracts.

Buyer Credit Programs are often an effective solution that benefits the exporter, their buyer and commercial lenders providing the loans. Programs typically provide loan guarantees to commercial lenders. These kinds of programs benefit all the parties involved. The exporter benefits because they’re paid cash on delivery and acceptance of the product or service. The foreign buyer benefits because they get extended credit terms at markets rates or better. The lender benefits because guarantees, many backed by the U.S. Government, mean full repayment of the loan and a reasonable return on funds loaned.