Glossary of Business Credit Terms

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Export Financing

What Is Export Financing?

Export financing refers to the financial assistance provided by banks and other financial bodies to businesses to sell and ship products outside a region or country.

The Importance of Export Financing for Small Businesses

When a business exports good to another region, say the China, payment terms can be extended and difficult to manage. Add the time it takes to receive payment to the time it takes to ship and deliver the goods overseas. So it takes time to get paid. Also, additional energy and time are needed to check the creditworthiness of buyers and obtain references. Simply put, everything about an export process is extended. Even with financial management and careful time planning, export can place a substantial financial strain on small businesses. The time it takes to conclude an export process will determine if you will make a profit or loss. This is where export financing comes in; export financing is a critical factor in export.

What Is Required to Obtain Export Financing

Export financing enables both small and big businesses to extend their reach to a broad audience. If your company require export financing, it's essential that you understand some documents required by financing bodies. These documents are must have documents and are expected to qualify for virtually all export finance assistance. This financial assistance is made available at different export stages.

Financial bodies or institutions grant advances or loans to exporters in a bid to finance the purchase of products, processing, and packaging of goods before shipment. Financial institutions grant this loan to exporter’s right from the day of shipment to the day the exporter realize proceeds from the export deal.

The Advantages and Disadvantages of Export Financing

Export financing is a critical factor for businesses that exports goods and it may increase their chances of landing a contract. Export financing benefits both exporters and importers in a variety of ways:

Advantages of Export Financing for Exporters

  • Export financing gives them a competitive edge by providing funding to intending buyers.
  • Receive payment upon commissioning or shipment of goods.
  • Avoid credit and risk in the interest rate during the settlement period.
  • Doesn't require administrative resources to pay the debt.

Advantages of Export Financing for Importers

  • Importers can use long term export financing to match revenues with expenditures, thus allowing for efficient cash flow.
  • Export financing gives importers financing that is less costly than local funding that is often subject to restrictions.
  • Obtain fixed rate financing and be sure of the rate of future payments.

Disadvantages of Export Financing

  • There are limitations and exclusions. Export financing may not be available for exporters in all situations. Financial bodies may have strict policies for some goods or shipments to some countries. Also, when financial bodies provide export financing, the finance may not cover the amount of the purchase. For instance, a business who requests for export finance of $2 millionr may only be eligible for $1 millions.
  • Exporters may take advantage of export financing and sign export contracts with higher risks and rewards.

Tips for Export Financing

As an importer, it's vital that you get export financing right. Here are some tips for export financing:

  • Seek help from export experts, bankers, and trade financial experts.
  • Explore government loans and grants.
  • Know the loans and grants available in your local area.
  • Protect the proceeds from your export from non-payment risk by signing up with Export Credit Insurance.

The Bottom Line

Export financing provides a way for a business to receive working capital especially from an overseas transaction that may be hidden in invoices for a long time. Export financing is specific as it is tailored to meet the financial needs and demands of businesses that export products. More importantly, it helps business to grow in another region and also boost trade with large foreign corporations.

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