• 3 MIN READ
What Is Export Finance?
February 2, 2024
Exporting goods and services is not the easiest way to do business, but many companies still do it. One of the most significant challenges for them is the receipt and distribution of finances. A business owner may have questions: What if a foreign buyer only pays for the goods in three months, but I need the money today? How can I avoid issues with paying salaries, and how should I adjust cash flows?
Let’s find out what export finance is, how the government supports exporters, what the risks and benefits are, and how to make cross-border payments more quickly and easily.
What Does Export Finance Mean?
Export financing provides cash flow to exporters to do business in the global market. It is used to meet the production and transportation needs and facilitate global trade. Export finance is broadly classified into two categories:
- pre-shipment finance
- post-shipment finance
Pre-shipment financing means that the buyer pays the seller before the goods are shipped, which helps exporters buy raw materials and pay for labour before they transport anything to the buyer. Pre-shipment helps sellers cover the costs associated with producing and preparing goods for export. This option is more convenient, and it helps sellers maintain cash flows and ensure smooth operations.
Post-shipment financing comes as soon as the goods are delivered to the buyer. This option works well for regular deliveries and is favourable to the buyer but may not always be convenient for the exporter. Exporters may face a waiting period before receiving payment, which means they will need to make sure they have the necessary funds to continue operations and begin new projects.
Read also: What Is Transfer Pricing?
Typically, the buyer pays within the agreed payment period, from 30 to 120 days. To keep the payments from being an issue, there are various instruments that allow business owners to manage cash flows and secure their money when trading internationally. These include:
- Letters of credit
- Bank guarantees
- Export credit insurance
- Payment collection against bills
These measures help exporters cope with cash flow problems arising from the sale of goods abroad. Export finance also includes medium- to long-term loans used to finance projects such as infrastructure construction in developing countries and is often backed by export credit agencies (ECAs) or financial institutions like banks.
Government Incentives for Export Finance
Exporting goods is profitable both for companies and the state. Here’s why:
- You will develop your market, which usually leads to a significant increase in revenue. If you have more customers, you will earn more.
- It may be profitable for you to sell certain goods abroad because there is a greater demand for them; hence, the prices are higher.
- You can utilise production at full capacity. If the market has grown, you can both produce more profitably and sell excess products.
- In 2022, the UK’s exports of goods and services totalled £838 billion. The UK exports crude oil, cars and financial services, and the income from exports is much needed for the country to keep the economy stable.
As it is beneficial to export, the government is introducing numerous initiatives to support exporters. Governmental support can not only make domestic products competitive and encourage businesses to explore international trade but also ensure that they have enough money and are secure enough to operate successfully.
Export credit agencies have the same goals as the government. They provide financial support, insurance, and loan guarantees to companies exporting goods and services, mitigating the risks. The support from ECAs is particularly important for exporters operating in unstable or new markets.
What Is UKEF?
UK Export Finance (UKEF) is the UK Government’s export credit agency. UKEF is strategically and operationally linked to the Department for Business and Trade and is the operating name of the Export Credit Guarantee Department (ECGD). Recently, ECGD celebrated its 100th anniversary as the longest-running ECA in the world.
The agency supports UK exporters and project developers receiving UK exports. It aims to organise international cooperation so that exporters are supported, relationships with different countries are developed, environmental goals are sustained, and human rights are protected.
Additionally, UKEF works with banks to offer medium and long-term financing tailored to each enterprise’s needs. In recent years, the agency has increased its support for green infrastructure and clean energy projects to help the UK contribute to global sustainable development.
What Initiatives Help Exporters?
Small and medium-sized enterprises face unique challenges in obtaining export financing. SMEs may lack the collateral required by lenders to secure loans, have limited credit history, or lack the necessary knowledge or resources to export. They need tailored financing solutions and government support to overcome barriers.
To address the challenges faced by SMEs, UKEF provides export finance managers who help navigate trade finance and credit insurance. It offers products to unlock working capital, such as cash facilities or contingent obligation facilities and provides buyer finance for contracts over £500,000. SMEs can even get coverage for not being paid for export contracts as a part of the Insurance against loss program.
What’s more, UKEF has announced its first-ever invest-to-export loan guarantee, which secures investment and has expanded its auto-inclusion scheme, providing fast-track access to trade finance products.
Banks and non-banking financial companies (NBFCs) also offer a range of services required for export financing. Their role in providing capital, facilitating transactions, and providing advisory services is indispensable for exporters. The most vivid example is a bank guarantee. Bank guarantees are a promise by the bank that the exporter will fulfil its contractual obligations. If the exporter fails to fulfil them, the bank covers the losses. They can be used by businesses of all sizes.
Regulatory Framework Governing Export Finance
Export finance is governed by a complex web of international regulations. Businesses must comply with when they go global or sell goods and services abroad. Since compliance is necessary to operate legally and ethically in the global market, it is a must for UK companies. Learn more about the regulatory framework:
- from the HM Government’s Export & Investment Guarantees Act (EIGA)
- from the OECD articles devoted to export credits
- from the UK strategic export controls guidance posted on gov.uk
- and on the UK Export Finance (UKEF) website
Knowing and following the laws and regulations in the country where you are trading is crucial for your company’s success. It’s also important to comply with the Treasury Department’s Office of Foreign Assets Control (OFAC) programmes, which cover countries and foreign nationals restricted for foreign policy and national security reasons.
Risks and Challenges
You may wonder, “Why should I think about additional funding, instruments, and government assistance if I have decided to export goods? Is it so difficult or risky to do so?” Most likely, the answer is that it is worth paying attention to all the proposals and support measures. Let’s look at the risks exporters face and how they can be mitigated.
Exporters wishing to avoid surprises should also be aware of the following:
- There are service fees for export financing, usually 1-3% of the invoice amount, but can be more.
- The exporter is responsible for chasing the importer for any late payments. It runs the risk of defaulting on its obligations to the financier if the buyer fails to pay. To avoid this, you may use non-recourse factoring.
- Trading and borrowing in different currencies carries risks for exporters. If the price of the currency you borrowed in jumps dramatically, you will have to pay more than you planned.
How Payrow Helps You Do Business Internationally
Export financing is essential for businesses engaged in international trade because it allows them to sell their goods and services to other countries. The government, ECAs, banks and financial institutions are of great help if you need financial support or expert advice. As a FinTech company, Payrow also strives to help businesses go global.
Payrow has a track record of working with a variety of commercial organisations involved in international trade. If you are an exporter of goods or services and make cross-border payments, our team is here to support your business.
You can simplify accounting, automate routine processes, make payments to entities in countries around the world, and accept funds in different currencies with our advanced and user-friendly technology. On our website, we can help connect buyers with sellers and expand your customer base with just a few clicks.
Contact us today to learn more about our services and get a customised quote. Let Payrow help you simplify international transactions and drive your business to success.
How does export finance benefit UK companies?
UK companies that trade internationally increase their market coverage, which usually leads to an increase in revenue. If they need financial support to start exporting or begin new projects, they may turn to export finance. Export credit agencies and banks offer medium and long-term financing, loans, insurance, guarantees, and payment collection against bills to help exporters operate and develop.
What are the key differences between pre-shipment and post-shipment finance?
Pre-shipment financing means that the buyer pays the seller before the goods are shipped, and it is preferable to exporters. Post-shipment financing comes as soon as the goods are delivered to the buyer, and it is more favourable to the buyer.
What role do banks play in export finance?
Banks provide capital, facilitate transactions, and provide advisory services. They offer loans on favourable terms to help exporters develop their businesses. Also, bank guarantees help exporters receive money even if the buyer fails to fulfil its obligations, which ensures the safety of the sellers.
How does UK Export Finance (UKEF) support businesses?
The agency supports UK exporters and project developers. It helps organise international cooperation, collaborates with banks and financial organisations to provide financing, and develops its own products. UKEF has a particular focus on the concerns of small and medium-sized enterprises. It provides consulting services and offers niche products such as invest-to-export loan guarantees and auto-inclusion schemes.