One of the biggest concerns in International trade is working capital. The credit issues associated with export-import finance are often complex.
This is true especially in the early stages or if rapidly growing.
When buying goods, sellers want to be prepaid. A bank may issue a Letter of Credit. Small or medium-sized companies have to provide collateral for the bank to issue the LOC. This can become very challenging.
As an exporter sending goods to foreign countries, different payment terms must be complied with. The term could be up to 4 to 8 weeks. This is a long time for exporters to receive full payment. It is an impediment to day to day operations as a working capital deficit. All expenses from manufacturing, wages, shipment, etc., must be covered.
Banks are the traditional form of finance. The terms and conditions are often onerous and may not be viable for mid-sized businesses.
The key point is that banks don’t always offer the best solutions unless the company has security collateral and a good track record.
There are other viable options for export-import finance which businesses can explore:
Banker’s acceptance
Banker’s acceptance (BA) is a negotiable agreement akin to a post-dated check. It is the assurance of payment by the bank. This makes it more authentic.
BA is a great alternative in export-import finance. The payment is guaranteed by the bank of a seller to a buyer within a certain time frame. It is usually issued 90 days before maturity, but it can be later than 180 days.
There are also discounts like a bond. They can be sold in a secondary market for better returns. They can be encashed early without penalty. The only downside is lost interest on full payment maturity.
What makes this more attractive is that the Banker’s acceptance is similar to applying for a short-term fixed loan. The importer must go through credit checks.
Banker’s acceptance is regarded as secure as both the bank and the borrower have the obligation to pay the amount before the due date.
It is a win-win situation for both parties; exporters are assured of timely payments guaranteed by a reputed bank. For importers, it is a swift option if they have trouble getting other forms of finance.
Accounts receivable financing
The seller gets paid upfront before your customers pay. This is a great financing option for small businesses.
Factoring is a common form of accounts receivable financing.
Factoring
Factoring is short-term finance with a long term. It considers the purchase of goods at a discounted price, generally 2 to 4% less than the market value.
Generally factoring covers around 85% of the total outstanding amount. Once both parties enter into the contract, the exporter ships the goods and submits the invoice to the export factor.
The export factor pays the exporter until full payment is received from the importer. The exporter keeps paying interest on the money received from the factor.
The export factor invoices the import factor, taking into consideration the credit risks and potential for non-payment.
The import factor then forwards an invoice to the importer. The importer in turn makes payment to the factor and then the import factor sends the money to the import factor.
It is mutually beneficial to importers and exporters.
Benefits for Exporters
- It boosts international markets by offering finance with the same terms and conditions as local competitors
- It speeds up the payment process and improves efficiency
- Factors manage and monitor the entire supply chain and mitigate the non-payment and credit risks.
- It is a feasible and reliable option especially for small businesses that find bank terms too restrictive.
Importers
- Increases buying capacity
- Facilitates the procurement process by removing obstacles
Forfeiting
This is a great financial support for small to medium-sized businesses. It is a finance method that permits sellers to get paid by selling their medium-term accounts at a discounted price. It is done on a without recourse basis, dependent upon the nature of the contract, country risk, the level of transaction and Letter of Credit.
Forfeiting protects customers from country risks, political instability, and commercial risks associated with exports receivables.
The other major benefit is that an exporter doesn’t need insurance as forfeiting eliminates the need for credit insurance.
Moreover, it is a “without recourse” finance. This means it does not affect the borrowing capacity of exporters. It comes with a host of benefits – Surplus finance, improved working capital and other options in case of insufficient funds.
Export-Import finance provides a lifeline to international trade. It is vital for economies to grow and cross-border trade to flourish. It is always better to have multiple options as Bank finance is not a feasible option for everyone.
Small to medium-sized businesses are the backbone of global trade. They must be facilitated with favorable export-import finance methods. If they have sufficient finance and working capital, businesses can grow.
There are multiple export-import finance options. Consider the best alternative based on individual business requirements. Buyers and Sellers have their own priorities. However, the most important factor is working capital. Always pick the export-import finance that enables swift business operation.
