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What Is Export Finance and How Can It Help?

June 6, 2022

What is export finance? 

Export finance is a short-term funding agreement available to international traders. It allows businesses to access necessary working capital while their funds are tied up in deferred payment terms (also known as 'delayed payments') with overseas customers. 

Many businesses that trade overseas offer deferred payment terms – often up to 120 days – which means that they face a financing gap between the shipping of goods and receiving payment for them. However, they still need working capital to pay their own suppliers or enable growth during this period.

To solve this, exporters may choose to submit unpaid invoices to a financer, which will provide up to 100% of the invoice value immediately in exchange for a small service fee payable once the buyer settles the invoice.

 

How does export financing work? 

A typical export factoring agreement with an invoice factoring provider works in the following way:

  • A business exports goods to overseas customers and raises an invoice with deferred payment terms, often up to 120 days.
  • However, the business needs immediate access to working capital, so submits the unpaid invoice to an export financing provider, using it as security for a trade financing loan.
  • The export finance provider agrees to advance up to 100% of the value of the invoice as an immediate short-term loan, in exchange for a small fee – typically 1-3% of the loaned amount.
  • The overseas buyer pays the invoice within the agreed 120-day window.
  • The business pays back the loaned amount to the export finance provider, plus the pre-agreed service fee.

For example:

ABC Supplier Ltd. exports goods worth £10,000 to its overseas buyer, XYZ Buyer Ltd., and raises an invoice with 90-day payment terms. However, ABC Supplier needs immediate working capital to pay its own bills.

So, ABC Supplier submits the unpaid invoice to an export finance provider as proof of its owed income. The financer agrees to provide ABC Supplier with 95% of the invoice value immediately – totalling £9,500 – in exchange for a fee of 3% of the loaned amount when the invoice is paid. This fee will amount to £285.

XYZ Buyer pays the full £10,000 invoice in 90 days and ABC Supplier repays the borrowed sum to the finance provider, plus the pre-agreed 3% service fee.

The short-term trade financing loan is now paid off and there are no long-term repayment plans or obligations that could affect ABC Supplier’s credit score.

 

What are the benefits of export financing? 

Export credit provides plenty of benefits for international traders, including:

  • Immediate access to finance that would otherwise be inaccessible for up to 120 days. This frees up working capital to invest in other areas, including paying the business’ own suppliers or investing in growth.
  • Businesses are more likely to be approved for export finance than for bank loans as financing decisions are based on their accounts receivable (i.e. owed income) rather than profit projections or forecasts that can often disqualify smaller businesses for traditional loans.
  • Export factoring can be more affordable than a bank loan for SMEs with lower-volume export agreements. Small, pre-agreed fees are typically around 1-3% of the loaned amount, instead of long-term, high-interest repayment plans.
  • Export finance acts as a short-term loan because finances are only qualified against specific invoices. As soon as these are repaid, the loan agreement is settled and there are no long-term repayment terms.
  • Export finance can be an excellent resource for SMEs who have already exhausted their bank credit limit but still need funds.
  • Export finance is flexible because businesses can either pass the responsibility for chasing late payments to the finance provider or keep it in-house and maintain confidentiality.

 

Are there any risks? 

As with any financial service, there are potential risks for the borrower. However, export factoring agreements based on unpaid invoices are straightforward and without long-term repayment terms. 

Exporters looking to avoid any surprises or charges should still be aware of the following:

Export financing comes with service fees – often around 1-3% of the loan value. Businesses accessing export finance need to be able to afford these fees and must be in a position where accounts receivable are greater than accounts payable.

In a ‘recourse’ financing agreement, the business retains responsibility for chasing the customer over late payments. This means it risks defaulting on its own repayments to the financer if its customer doesn’t pay. However, this risk can be avoided by using a ‘non-recourse’ agreement – in which the finance provider acquires the responsibility and costs associated with chasing the buyer for payment.

Unlike domestic invoice financing agreements, export finance also comes with exchange rate risk. Businesses that trade internationally must understand the risks and potential impacts of trading and borrowing in different currencies. The business must factor this into its ability to repay fees for export finance services.

Businesses that understand the risks associated with export finance agreements and which are looking for fast access to working capital can apply for finance with Stenn now.


How to get export financing?

Export credit agreements are available through a variety of providers, including traditional lenders like banks and alternative lenders like invoice finance providers.

Each financial service will have its own application process. Borrowing through a bank is typically more complex and includes stringent background checks on the business, which is expected to provide in-depth financial information.

Accessing finance through an export credit agency often requires only a few documents – including application forms and unpaid invoices – and the funds are usually transferred within a few days. The repayment period is also short, with all funds repaid when buyer’s payment is made. 


Which companies offer export financing? 

The application and approval processes for export financing will depend on the lender.

Traditional lenders 

Applying for export finance via a traditional bank loan is typically a longer and more complex process than applying through alternative lenders.

This is because banks conduct detailed due diligence checks on the business, including assessing its financial history, assets, ability to pay back previous debts, and more. This often takes months to conclude, making it an inconvenient option for businesses that need immediate working capital.

Plus, traditional lenders require applications to be submitted and reviewed via hard copy, which can further delay the process compared with online applications.

Another consideration is that the repayment periods are typically longer with banks. Alternative lenders, however, offer one-off, pre-agreed service fees, allowing businesses to reap the benefits of a short-term finance agreement.

However, for larger businesses exporting at higher volumes, there are added benefits associated with traditional lenders. As banks can finance higher volume orders, they are also able to offer lower interest rates and fees for those services.

Alternative lenders 

The number of businesses accessing alternative finance is expected to continue to grow in the coming years, with SMEs enjoying the rewards of quick and simple finance agreements that may not be granted by traditional lenders. 

Export financing is just one example of the alternative lending that is now supporting growth and development among new and smaller businesses that may be refused credit by banks.

Exporters offering delayed payments to buyers can apply for export finance through alternative digital financing platforms like Stenn. The process is fully online and simply requires two documents to be signed once invoices are uploaded for approval.

Alternative lenders like Stenn charge small, pre-agreed fees that are paid when the buyer makes full payment of its invoice – so there are no long-term repayment plans that can affect the business’ finances in the future. 

 

Is my business eligible for export financing? 

To qualify for export financing with alternative lenders like Stenn, a business must meet certain criteria. These will often include the following:

  • The business must trade internationally.
  • The business works with delayed invoice payment terms.
  • The business can prove a minimum percentage of its revenue comes from exporting.
  • The business must be able to provide live, unpaid invoices with its application.

However, to qualify for export credit through traditional lenders, the business may have to meet additional criteria, such as:

  • The business must demonstrate a positive credit score.
  • The business must have proof of its ability to repay loans.
  • The business must meet a certain volume of export trade that needs to be financed.

Why partner with Stenn?

Stenn provides invoice financing services – giving exporters the working capital needed to pay their suppliers and invest in growth. So, they no longer have to wait up to 120 days to receive cash for invoices.

Plus, our application process is completely online and only requires two documents to be signed. And funds are then delivered within 48 hours of a successful application.

But don’t just take our word for it, here’s what our customers say:

“We are very much happy with the Stenn service. Everything is fast, and everything is dealt with in a professional and proactive manner.” 

Ramji Lal – Oren Hydrocarbons

For more information on export finance and how Stenn can support you with working capital, contact our friendly team or get financed now.

 

About the Authors

Stenn is a registered member of the ITFA, IFA and WOA. It has financed invoices worth over $7 billion (USD) to date and provides:

  • An online platform for easy applications.
  • Non-recourse factoring (i.e. full protection against non-payment of invoices).
  • Rapid assessments (usually within 15 minutes).
  • Cash advances within 48 hours, with only two documents to sign.
  • Advances of between $10K (USD) to $10M (USD).
  • Fees that begin at 0.65%.
  • Advances on international deals that other companies and banks can’t, or won’t, finance.
  • Services in 74 countries.
  • Reverse factoring (buyers can use Stenn to pay immediately and settle the invoice later with us).

This article is authored by the Stenn research team and is part of our educational series.

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Disclaimer: The above article has been prepared on the basis of Stenn’s understanding of current invoice factoring. It is for information only and doesn’t constitute advice or recommendation. Whilst every care has been taken in preparing this article, we cannot guarantee that inaccuracies will not occur. Stenn International Ltd. will not be held responsible for any loss, damage or inconvenience caused as a result of anything published above. All those applying for credit should seek professional advice when doing so.