What is export finance and how can It help SMEs?

Export finance is oxygen for businesses daring to play on the global stage – especially when navigating the treacherous world of late payments. The complexities of international trade can suffocate suppliers, and overdue invoices only tighten the grip.

Late payments are a widespread problem.

‍Barclays research reveals the stark reality: 58% of UK small businesses grapple with overdue invoices.

For mid-sized businesses? A shocking 94%.

And this isn't exclusive to British businesses.

Across the pond, 49% of invoices issued by US companies become overdue, as reported in the AP Automation Tracker.

This reality isn't a delay; it's a chokehold. Cashflow stagnates, growth withers, and dreams die.

Now, amplify this struggle on a global scale. Imagine the impact of late payments from overseas buyers. This scenario is where export finance becomes a necessity.

What is export finance? 

Export finance is a short-term funding agreement for suppliers (exporters) trading with overseas buyers (importers). Export funding allows suppliers to access working capital while they wait for buyers to pay invoices.

Suppliers that trade overseas frequently offer deferred payment terms – sometimes exceeding 120 days – which means they face a financing gap between shipping the goods and receiving payment for them. In the meantime, sellers still need working capital during this period.

To solve this, suppliers may submit unpaid invoices to a finance provider (financier) that will advance a percentage of the value and pay the balance (minus a service fee) once the buyer settles the invoice. 

How does export financing work? 

Here's how export financing typically works, using invoice factoring.

1. Goods shipped, invoice issued

The exporter ships goods to the overseas importer and issues an invoice with deferred payment terms, such as 90 days – giving the importer time to receive and sell the goods before payment is due.

2. Bridging the cashflow gap

The exporter, seeking immediate cashflow to manage operations, partners with an export financing provider and "assigns" the unpaid invoice to the financier.

3. Upfront payment

The financing provider advances a significant percentage (often 80-95%) of the invoice value to the exporter as an upfront payment.

This cash injection allows the exporter to cover immediate expenses and reinvest in their business.

4. Importer payment

The importer pays the full invoice amount to the financing provider within the agreed-upon timeframe (e.g., 90 days).

5. Final settlement

After receiving payment from the importer, the financing provider releases the remaining invoice balance to the exporter minus a pre-agreed service fee.

Example of export invoice financing

Scenario: Artisan Threads, a US-based textile company specializing in handcrafted fabrics, receives a $75,000 order from Parisian Chic, a renowned fashion house in France. Artisan Threads ships the fabrics and invoices Parisian Chic with 60-day payment terms.

To fulfill a surge in upcoming orders, Artisan Threads needs immediate capital to purchase raw materials, pay artisans, and invest in new weaving equipment. Waiting 60 days for payment from Parisian Chic could strain their production capabilities.

Artisan Threads connects with Global Trade Finance, an export financing provider. They submit the $75,000 invoice from Parisian Chic to Global Trade Finance, which assesses the transaction and the importer's creditworthiness.

Global Trade Finance approves an 80% advance on the invoice value and wires $60,000 to Artisan Threads within 48 hours. They agree on a 3% service fee, deducted upon final settlement.

Parisian Chic fulfills their payment obligation, wiring the total $75,000 to Global Trade Finance within the 60-day timeframe. Global Trade Finance then releases the remaining 20% of the invoice amount ($15,000) to Artisan Threads minus the agreed-upon service fee of $1,800 (3% of $60,000).

Outcome: Artisan Threads receives a total of $73,200.

The upfront funds allow them to maintain a healthy cashflow, meet production demands, and invest in their growth.

The transaction is complete, without lingering debt financing or impacting Artisan Threads' credit score.

Export finance benefits

Export funding provides plenty of benefits for international suppliers.

• Accelerated cashflow: unlock immediate access to funds tied up in outstanding invoices
• Strategic investment: fuel business growth by injecting working capital into new equipment, marketing campaigns, talent acquisition, and more
• Improved financial stability: avoid late payment penalties on your expenses, maintaining a more robust economic foundation
• Simplified transactions: enjoy a clean and efficient process – once the invoice is settled, the transaction is complete, with no lingering obligations
• Greater accessibility: open doors to essential funding, even for small businesses with limited banking history or credit challenges
• Outsourced collections: shift the responsibility of chasing late payments to the financing provider, freeing up your time and resources

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Access working capital without taking on debt. Discover the benefits of invoice financing for your export operations.

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Export finance disadvantages

As with any financial service, export financing has potential disadvantages and risks. Exporters looking to avoid surprises should be aware of the following:

• Service fees: export finance involves service charges, ranging from 1-3% of the invoice value, but potentially higher. Assess these fees to ensure affordability
• Late payment responsibility: while non-recourse factoring shifts the burden of non-payment to the financer, recourse factoring leaves the exporter liable for unpaid invoices
• Exchange rate volatility: trading and borrowing in different currencies exposes exporters to fluctuations in exchange rates

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Don't let risks derail your export ventures. Read our guide about types of international trade risks and how to mitigate them.

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How to get export financing

Export credit agreements are available through a variety of providers. These range from traditional lenders like banks to alternative financiers like invoice factoring companies. 

The application and approval processes will depend on the providers. 

Export finance through a bank or traditional lender

Applying for export funding through a bank is more complex and often includes numerous background and due diligence checks. These procedures involve assessing financial history, assets, and ability to repay. They can take months to complete.

Traditional lenders require businesses to complete applications on paper rather than online, which can cause further delays.

This process is inconvenient for small- and medium-sized exporters that need fast working capital. 

However, exporters working with high volumes may find bank export finance more convenient. Banks are well-suited to finance such orders and can provide lower interest rates and fees.

Export finance through alternative financiers

The number of exporters requesting alternative finance will grow in the coming years. Time Finance reports that invoice financing is the most sought-after choice among alternative financing options, with 32% of intermediaries predicting it will be the top choice for B2B businesses looking to stabilize their cashflow.

Non-bank credit alternatives offer a key advantage: quick and straightforward agreements, often online, that many banks don't provide.

These digital platforms usually require only a few documents, such as unpaid invoices and bills of lading, submitted entirely online. Funds can arrive within two days of approval.

The funding company deducts pre-agreed service fees from the final payment, so no long-term repayment plans exist.

Is my company eligible for export financing?

While specific criteria vary, you must demonstrate a consistent international trade track record, work with deferred invoice payment terms, and provide proof of export revenue.

You also must submit valid, unpaid invoices as part of the application process.

Traditional lenders have additional requirements, such as a positive credit score, proven repayment ability, and a substantial volume of export trade that needs financing overall.

But there's a better way. Stenn understands the fast-paced world of global trade. We offer flexible financing options designed for exporters on the move.

Fast approvals. Straightforward terms. Your time is too valuable to waste on outdated financial systems.

Access export invoice financing with Stenn – and discover what happens when your capital keeps pace with your ambition. Get funded. Get growing. It's time.