If your business has customers abroad or is considering exporting for the first time — export finance may be what you need.
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What is export finance?
Export finance is designed to help companies sell in foreign countries.
There are a variety of different products available. Fundamentally, all these products allow businesses to get paid quickly and reduce the risks of international trade.
Export finance — considerations
Export finance is suitable for:
- Businesses that need added liquidity — to export their goods
- Businesses with buyers (importers) overseas — that require finance
- Businesses that need access to funds — in the production or manufacturing phase (pre-shipment)
- Businesses who wish to lessen the risks of trading internationally
Having access to export finance, enables companies to take full advantage of the opportunities selling overseas presents — while at the same time minimizing the risks.
Banks work very closely with Export Credit Agencies (ECAs) and Multilateral Agencies (MLAs) in order to reduce commercial, project and political risks associated with export — as well as structure deals that benefit both exporters and importers.
In Nigeria, the Nigerian Export-Import Bank (NEXIM) acts as an Export Credit Agency. It aims to help Nigerian exporters of goods and services — sell to foreign buyers.
Services offered by NEXIM include insurance and reinsurance — against non-payment by overseas buyers, local and foreign currency loans — to facilitate local manufacturing and subsequent export overseas, and credit guarantees — to allow companies to access international credit (with better lending terms).
How does export finance work?
Businesses that need export finance, will need either pre-shipment (pre-export) or post-shipment (post-export) finance.
If your company needs funds to purchase raw materials or machinery, to enable you to make products for export, you require pre-shipment finance. Pre-shipment finance would typically be available via some sort of working capital loan. These loans are available from several commercial banks as well as NEXIM.
Once your business has the goods required to start exporting — post-shipment financing is required. Post shipment finance is generally concerned with guaranteeing payment, and getting paid quickly — for the goods you export. Your options include factoring, forfaiting, supplier’s credit and buyer’s credit.
Once you identify your funding needs — you must find a suitable lender and make an application. Your application will include details of your business, its trading history, products and services offered — as well as a statement of accounts. If applicable — information on your buyer (importer) will also be required.
Lenders will use these details to assess your credit risk and draft lending facility terms. Any fees and charges, will also be highlighted in any potential offer. Should you be happy with the terms of arrangement — you’ll be able to sign and get the funds you need.
Apart from arranging finance from external sources, depending on your base country, you may be able to claim export incentives. These export incentives may include export subsidies, cheap loans, direct payments, tax exemption and government-financed international advertisements.
Types of export finance
Access working capital loans, to buy capital goods or raw materials — that will enable you to export. Working capital finance can also be used for specific export-related contracts.
A payee (exporter) may sell a bill of exchange to another party (a bank), at a discounted price, in order to get funds prior to the bill’s actual payment date.
Letter of credit (LC) discounting enables you to receive funds, as soon as there is a binding commitment from your buyer’s bank — to make payment on a given date.
With export factoring, banks purchase short-term account receivables — based on goods and services sold to buyers overseas. Invoices sold can be on a recourse or non-recourse basis.
Forfaiting is a means for exporters to sell their medium and longer-term — promissory notes, bills of exchange and receivables. Forfaiting is reserved for capital goods and is non-recourse.
With a supplier’s credit, an exporter can offer its buyers (importers) its goods — with financing included. Subsequently, the exporter sells its claim under the supplier’s credit, to a financial institution — to raise liquidity.
With a buyer’s credit, a bank can give a buyer (importer) a loan — exclusively based on an export contract for the supply of goods and/or services. The bank subsequently pays the loan to the exporter.
Benefits of export finance
- Assists you in selling to foreign markets
- Receive cash payments immediately after shipment
- Variety of insurance products and guarantees that lower export risks — currency, interest rate, transportation and political
Limitations of export finance
- Complicated — can be difficult to understand and choose the right product
- Newer companies may not be eligible for certain products
- Can be costly — need to be aware of profit margins before agreeing to any deal
- You must comply with strict contract obligations
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