Export financing is a cash flow solution for exporters. Export Finance facilitates the commerce of goods internationally.
The seller agrees on the payment terms of the cross border buyer. Thus, there is a cash flow issue. The supplier ships the goods overseas while the payment will be received at a later stage. (See the example below)
Export finance allows the businesses that sell products to another country to get access to working capital before their clients pay for the products purchased.
How Does Export Finance Work?
A client (call it the buyer) makes a purchase order from the exporter.
The buyer and the seller agree on payment terms. The export finance payment terms are usually between 60 to 90 days.
The payment terms can be as short as 30 days or as long as 120 days. Sometimes even longer but not too common.
The exporter bills the buyer with extended payment agreed to the date. Then, he ships the goods sold.
This sales to revenues gap mean that even though the exporter already sold and shipped the products, he will not receive the payment until the invoice is due.
At this point, Export Finance comes to play.
To overcome this cash flow issue, the exporter decides to apply for export financing.
Firstly, the exporter transfers the invoice to an export finance service company (the financier).
The export finance provider exchanges the invoice with funds.
The financier gives the exporter a substantial percentage of the total purchase. The export financing company will receive (and may collect) the payments once due.
The buyer is responsible for paying the lending company directly instead of the exporter.
By doing so, the trade finance company can deduct the administrative fees, control payment flows. In addition, controlling payment flows allows the financier to estimate better the risk involved in the transaction.
Then, the lending company transfers the remaining balance to the exporter.
How Much Does Export Finance Cost?
Calculating the Export Finance costs is complicated because it takes into account several variables.
Some are quantifiable: easier to compare and contrast. For example, the invoice amount (the contract value), payment terms, Incoterms, just to mention few.
Other variables examined are more qualitative. They are used to assess the business relationship between exporter and buyer that goes beyond volumes and growth.
In order to have a more accurate risk assessment, some lenders use Export Credit Agencies. They provide detailed information on a case by case examination.
Export Credit agencies can become helpful when doing credit checks, due diligence and risk assessment. Their service allows export financing providers to check the creditworthiness of the parties involved.
More data inputs allow a better assessment of the risks involved in each transaction.
Better risk assessment allows the lending company to provide better rates.
Given the increasing default stories in trade finance, Credit Insurance companies are reluctant to cover certain export finance products.
For this reason, traditional lenders are not able to finance capital to export activities. Thus, some companies do not have access to trade finance products. For example, small companies are less likely to access financing than larger corporates.
What Companies Provide Export Finance Products?
Traditional lenders (banks and factoring company) and alternative financing companies (FinTech players) can provide export finance solutions. They differ in a few aspects:
Export Finance With Traditional Lenders
Usually, their requirements are a bit more stringent than alternative lenders.
Major pain points:
- The onboarding time for export finance is long and tedious. It would take up to 3 months to cover the bureaucratic aspect of it.
- Banks usually run a thorough and lengthy due diligence. Although required by law, this process could be expedite with automation and integration of AI. However, banks are happy to sit on their legacy software.
- Moreover, all the documents are still exchanged in paper format. Hence, the delays in the onboarding.
Then why should consider traditional financiers at the first place?
- The volumes traded are large thus financing cost is lower
- Wide margins on sales side
- The applying company is structured in a traditional way with many layers of decision making stakeholders.
Some multi-national corporates like Samsung and Coca-Cola can apply for Export Finance with traditional lenders. HSBC export finance Hong Kong can onboard such corporates due to their large volumes.
Export Financing With An Alternative Financier
In recent years, FinTech companies have accessed the trade finance ecosystem. They joined the big banks and traditional lenders, competing down to their “Tech” core of the business.
Alternative funding companies demand less stringent requirements compared to traditional lenders. Hence, broadening the credit accessibility to small and medium size corporates.
Alternative lenders can provide working capital in a shorter time. The onboarding usually takes only a few weeks. During this time, the credit team assesses the case of the applicant.
Once the onboarding is completed, the applicant can receive a more detailed price and can access funds.
Lastly, alternative lenders exchange all the documents and signatures electronically. Thus, making communication with the parties more efficient and less invasive.
Export Finance With Velotrade
We provide a wide range of trade finance products, including export finance.
When providing you with a quotation, our pricing also reflects the creditworthiness of the debtor and the length of the commercial relationship. Our pricing also reflects the length of the commercial relationship.
Some of our benefits:
- We don’t lock businesses into long-term contracts. Our clients decide how many invoices to sell and when to use our service.
- We do not require collateral assets to support your application.
Corporates don’t need to own any high value assets to attain funding!
If you want to know more about our services, contact us. We’ll guide you through the process of export financing and invoice factoring.