Globally we transport over $10 trillion USD worth of goods each year. For exporters, producing products to sell is just one part of the bigger picture when running their businesses. Often buyers demand bulk shipments which are costly to initially produce, they want to pay on their own terms (which could be risky for the exporter), and require specific instructions for delivery of their shipments. We spoke to Trade Finance Global about why companies export and how exporters finance trade. Cash flow and working capital management are fundamental for exporters, and there are two types that can help export businesses:
Export Finance and Trade Finance
Trade finance concerns the financial support that helps companies trade goods overseas or domestically. This includes Letters of Credit, factoring and invoice discounting, as well as foreign exchange products to mitigate risks of adverse currency movements.
Export finance helps companies actually sell those goods overseas. This can include forms of insurance to protect the seller if the buyer goes default, or a form of bond or guarantee (a deposit to show to a buyer that you’re financially able to produce and deliver the goods):
Exporters and Financing Mechanisms
Finding overseas customers is one of the most challenging elements of doing business abroad, but financing this is also tricky for business owners. Financing a big order for an overseas buyer could put a considerable strain on working capital lines, which is often what companies use to pay for raw materials, contractors, production lines and in delivery, as the buyer not agree to pay until 30 – 90 days after the goods have been delivered. This is where export credit agencies and trade financiers can step in to bridge that gap. By working with regional banks on either end, various trade and export finance facilities can de-risk contracts between the seller and the buyer, as well as guaranteeing payment to the seller so that they can do business with overseas counterparts. Instruments such as Letters of Credit are trade finance instruments which use the security of the goods as a form of collateral / loan for the seller’s bank, which means a seller has peace of mind when delivering goods to a buyer.
Exporting can be very beneficial for a company. Working with other markets can help your company access growth that isn’t available domestically, so opens up new revenue streams and opportunities. By diversifying revenue streams, the core domestic business is protected from reliance on just a few customers. Finally, exporting to other markets opens doors for technological innovation within the company by being more efficient and serving economies of scale. There is always risk when it comes to exporting goods to different geographies, customers who may not be as creditworthy, or perhaps when operating under different legislation, but export finance can help mitigate some of these risks and ultimately help businesses grow internationally and securely. One of the other risks exporters should be mindful of is the contract under which the goods are shipped. It’s always advisable to understand the different IncoTerms, risks associated, and where liability shifts from the seller to the buyer.