International trade is a lucrative business that fares well when payments for orders that have been shipped out are consistently received on time. Unfortunately, export businesses in the UK are regularly disadvantaged by longer payment terms. This is a threat also common to local transactions but, in any case, waiting up to three months to receive payment on a completed order or not receiving the payment at all creates cash flow problems that restrict growth and may force exporters to liquidate. This article examines how export finance is designed to help businesses stay afloat by solving their cash flow problems.
Export finance is a specialist trade finance tool aimed at helping businesses operating in the international export market with capital injections whereby the cash is advanced against the business’ unpaid invoices. Overseas transactions can be tricky because once an order is shipped out, the exporter may not receive payment until long after the importer collects the delivery. Export finance helps businesses with the working capital they need to cover this gap. It allows exporters to cement their presence and growth in overseas markets by offering flexible payment terms to importers without facing cash flow challenges on their end.
Cash flow and credit challenges faced by exporters
Exporters have their hands tied when it comes to negotiating optimum credit terms that do not negatively impact cash flow. Due to the competitive nature of the export market, it is almost impossible to demand complete upfront payment from importers before shipment of goods and still retain or increase your overseas customer base. Good trading relationships and multi-national partnerships can only be fostered through tailor-made and flexible credit terms, but in some cases, this translates to significant disadvantages for exporters.
For example, anything can delay payment from slow customs processing to other complications during shipment. The whole process from placement of the order and receiving payment from the importer may end up encompassing a sixth-month period due to this. In the meantime, the exporter requires the funds tied up in that particular invoice to improve cash flow but at any point along the way the importer can encounter financial problems, which means they are unable to make the payment.
When an exporter enters into an international trade deal, the exporter ships the goods, allowing the importer to collect the goods without payment. The importer is only expected to honour the raised invoice after collecting the delivery, but this can take up to 180 days. Export factoring allows exporters, usually SME exporters, to sell their foreign account receivables. This means outstanding invoices are immediately paid for, and exporters can safely accommodate open account terms in their business transactions. Usually, the exporter is advanced up to 80% of the net value of the invoice, and the provider charges them a service and interest fee while also assuming full responsibility for the non-paid invoice.
Benefits of export factoring
- Supplies exporters with cash flow injections to cover the gap between shipping and payment of goods
- Supports growth as exporters can offer competitive and attractive credit and payment terms
- Businesses can hand over credit management and collection tasks to factoring companies, so they dedicate more time to effectively running the business
- It does not show up on the company’s balance sheet as debt unlike other forms of financing such as credit insurance or short-term bridge loans
UK Export Finance (UKEF)
This is an export credit agency run by the UK government. It helps UK-based exporters with credit insurance, loans and overseas investment insurance. This is aimed at promoting the country’s international trade market by reducing the risk of delayed payment or non-payment by overseas buyers faced by many exporters.
How export finance assists exporters
Export finance, also called trade finance, is a multi-faceted finance solution that helps to alleviate cash flow problems and boost working capital by allowing businesses early access to invoice payments after they have shipped goods to buyers. To put it simply, if exporters had their way, they would receive immediate payment once the order is placed; however, in most cases, it is the buyer who gets to delay payment. This means the buyer can afford to first sell the received shipment and protect themselves from insolvency by paying the exporter at a later date.
Trade finance exists to bring stability to export companies during this lengthy trade cycle, so they can offer the expected flexible credit terms without suffering in turn. Furthermore, export finance is not associated with other forms of borrowing and hence, is not recorded on the balance sheet as debt. In a nutshell, export finance can:
- Offer financial insurance and guarantees to exporters
- Cushion exporters from cash flow problems during the long trade cycle and until they receive payment for shipped goods
- Help foster good, working relationships between buyers and sellers
- Enable sellers to offer discounts to buyers as a way of encouraging early payments
- Advance payments that are used for beneficial working capital and cash flow purposes