Before exporting, businesses should know how much finance will be required and where they can get it
As international trade involves buying and selling across oceans and borders with varying legal systems and cultures, a range of financial products and services have been developed to allow businesses to trade overseas with confidence. This is known as trade finance. Credit insurance is the overlapping field, covering exporters against the risk they will not be paid for a range of reasons such as political upheaval or simply default.
Before committing to exporting businesses should evaluate how much finance will be required and where they will find that finance from.
When you start exporting for the first time you will probably need to use a range of new financing instruments.
A letter of credit is an undertaking issued by a bank on behalf of a buyer to pay an exporter a stated amount within a specified period, provided certain conditions are met. These generally include receipt by the bank of various documents such as a commercial invoice, transport documentation and an insurance certificate. When the goods have been delivered to the specified location the relevant documents are sent to the buyer’s bank, which will then make the payment.
Forfaiting is a form of credit whereby a bank or other third party effectively buys an export transaction, presented as bills of exchange. The forfaiter now has the contact with the buyer. The forfaiter pays the exporter for the goods – providing security to the exporter – and agrees a payment schedule with the buyer over a period typically between two and five years.
With regard to revolving credit, if a business is established and has good credit and references, it can apply for a line of credit or overdraft from a financial institution and only pay interest on the money actually withdrawn from the credit line. Businesses that are well-established and have good credit history can apply for short- and long-term business loans from banks and financial institutions to meet capital needs.
Invoice discounting and factoring can be used provided the buyer is credit worthy. Up to 90% of the invoice value can be received within 24 hours of submitting an invoice. The balance, less the factor or invoice discounter’s costs, is received when the buyer pays the invoice.
Export credit insurance
The majority of international trade is conducted on ‘open account’ whereby the exporter accepts payment after the goods or services have been received by the buyer. Exporters face greater risks than sellers within the UK, because they may have no previous experience of dealing with buyers or because of political or economic uncertainties – or disasters – in the buyer’s country. It is therefore usual to cover against non-payment or other unforeseen events outside the exporter’s control.
Risks covered might include:
• Credit risk – the risk of non-payment
• Pre-delivery and work in progress in the event that the buyer becomes insolvent or terminates the contract before goods are despatched
• Unfair calling of an on-demand contract or bond calling
• Cargo risk if not covered by the logistics supplier
• Liability risk for public/ product liability or overseas local statutory insurances.
Trade finance and credit insurance requires specialised knowledge. So exporters will almost certainly be dealing with their bank’s specialist trade advisers. Export credit insurance is also a specialized field requiring brokers or insurance companies advising businesses on international risk mitigation. Through their knowledge of the market they can obtain the most appropriate cover at the optimal price.
UK Export Finance is a government department which supports UK exporters by providing risk protection insurance, facilitating finance for exporters and supporting loans to overseas buyers.