What is export finance and how can It help SMEs?

What is export finance? 

Export finance is a short-term funding agreement available to Suppliers (Exporters) trading with overseas Buyers (Importers).

Export finance 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 that they face a financing gap between shipping the goods and receiving payment for them.

Suppliers still need working capital during this period.

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

How does export financing work? 

A typical export factoring agreement works in the following way:

• An Exporter ships goods to an overseas Importer and raises an invoice with deferred payment terms, for example, 90 days.
• However, the Exporter needs immediate access to working capital, so it assigns the unpaid invoice to an export financing provider, using it as security for a trade financing loan.
• The finance provider agrees to advance most of the invoice value as an immediate payment.
• The Importer pays the invoice amount to the finance provider within the agreed 90-day window.
• The finance provider then pays the remainder of the money to the Exporter, minus any pre-agreed service fees.

Example of export financing

ABC Supplier Ltd in exports goods worth £10 000 (GBP) to the overseas XYZ Buyer Ltd and raises an invoice with 90-day payment terms. 

However, ABC Supplier needs immediate working capital to pay its bills.

So, ABC Supplier submits the unpaid invoice to a financier as proof of its owed income.

The financier agrees to provide ABC Supplier with 95% of the invoice value immediately - totalling £9 500 (GBP) - in exchange for a fee of 3% of the loaned amount when the invoice is paid.

This fee will amount to £285 (GBP).

XYZ Buyer pays the full £10 000 (GBP) invoice to the financier within 90 days.

The financier then transfers the remaining 5% of the invoice value to ABC Supplier, minus the pre-agreed service fee of £285 (GBP). 

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. 

Benefits of export financing

Export credit provides plenty of benefits for international Suppliers.

• Suppliers get immediate access to finance that would otherwise be inaccessible for up to 120 days.
• They can use the working capital to invest in other areas of the company and its growth.
• They often avoid late payment charges for their own bills.
• Advances are based on the individual invoices rather than the Supplier's credit history.
• As soon as invoices are settled, the matter is closed.
• Export finance is ideal for SMEs (small- and medium-sized enterprises) that need funds but have limited banking facilities or poor credit history.
• Chasing late payments becomes the financier's responsibility (explained further down). 
  

Export finance risks

As with any financial service, there are potential risks with export financing.

Exporters looking to avoid surprises should be aware of the following:

• Service fees - there are service charges with export financing. Usually, this is around 1-3% of the invoice value but may be more. Exporters should ensure fees are affordable.
• Late payments - in recourse factoring, the Exporter is responsible for chasing the Importer for any late payments. Therefore it risks defaulting on its own repayments to the financier if the Buyer does not pay. This risk can be avoided by using non-recourse factoring, where the finance company assumes responsibility for collecting payments from the Buyer.
• Exchange rate risk - trading and borrowing in different currencies present risks for Exporters. It's vital to understand these risks when calculating the payment of finance fees.
  

How to get export financing

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

The application and approval processes will depend on the lender. 

Export finance through a bank or traditional lender

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

Traditional lenders often require applications to be completed on paper rather than online, which can cause further delays.

This is quite inconvenient for small- and medium-sized Exporters that need fast working capital. 

However, for larger Exporters supplying goods at high volumes, bank export finance may be more convenient because banks can often finance higher-volume orders and offer lower interest rates and fees for those services.  

Export finance through alternative lenders

The number of Exporters requesting alternative finance is expected to grow in the coming years.

SMEs can benefit from quick and easy finance agreements that alternative lenders provide but banks don't, especially when finance is offered online.

Alternative digital financing platforms often require only a few documents, including unpaid invoices and bills of lading, all of which can be submitted online.

The funds are usually transferred within two days of a successful application. 

The pre-agreed service fees are often deducted from the final balance payment, meaning the Exporter is not locked into any long-term repayment plans. 

Is my company eligible for export financing?

To qualify for export financing with alternative lenders, Exporters may have to meet certain criteria. 

Finance may be available only to Exporters that:

• Trade internationally;
• Work with deferred invoice payment terms;
• Prove a minimum percentage of revenue comes from exports; or
• Provide live, unpaid invoices with an application.

Check the terms and conditions of the financier you are considering. 

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

• A positive credit score;
• Proof of its ability to repay loans; or
• Evidence of a particular volume of export trade that needs to be financed as a whole, rather than on an invoice-by-invoice basis.

If you are interested in learning more about the content listed above, Stenn has a dedicated FAQ section where you can find more information about our invoice financing services.

We also provide videos which explain the company and the financing process in detail.

About the authors

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

Stenn is the largest and fastest-growing online platform for financing small and medium-sized businesses engaged in international trade. It is based in London, provides financing services in 74 countries and is backed by financial giants like HSBC, Barclays, Natixis and many others.

Stenn provides liquid cash to SMEs within the global financial system. On stenn.com you can apply online for financing and trade credit protection from $10 000 to $10 million (USD).

Only two documents are required. No collateral is needed and funds are transferred within 48 hours of approval.

Check the financing limit available on your deal or go straight to Stenn's easy online application form.
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