Exporters face a common problem – it takes a long time to get paid for their sold products.
Payment terms can be long and difficult to manage – even for seasoned exporters. Not to forget the shipping duration, time taken to deliver products, and the additional time needed to check that buyers are reliable and trustworthy.
Adding up all the above considerations can result in a cash flow issue for your exporting business, causing financial strain during the time it takes to get paid.
Export finance is a means by which exporters mitigate these risks.
This article at a glance
Export finance gives exporters a way to mitigate problems faced with working capital from overseas transactions. To put it simply, it’s a cash flow solution for international exporters who are at risk of not getting paid on time when selling to another country.
5 types of export finance
There are five main types of export finance – pre-shipment finance, post-shipment finance, payment collection against bills, letter of credit discounting, and finance against allowances and subsidies.
1. Pre-shipment finance
Funding before shipment of products, also known as packing credit, can relieve cash flow insecurities for exporters. Purchasing, processing, and manufacturing raw materials into end products can cost a lot – pre-shipment finance helps exporters fund these processes.
2. Post shipment finance
Post shipment finance is a special credit or loan that is given out by banks to exporters. Usually, this credit is given against a shipment of products that are sent to overseas buyers. This is incredibly useful for exporters when they are unable to wait for importers to make payment against a large-scale shipment.
3. Payment collection against bills
‘Payment collection against bills’ can also be referred to as ‘export bills under collection’ and ‘financing’ or ‘documentary collection’. It’s a payment method used by exporters when an open account sale is considered too risky, or when the importer opts against a Letter of Credit.
Many banks provide this financing method for exporters. Your designated bank helps you present documents to the importer’s bank and collect payments. Your bank can also offer financing before the receipt of sales proceeds. Using this method ensures that you are still the owner of the goods until the importer pays or accepts the underlying bill.
4. Letter of credit discounting
A letter of credit safeguards the interests of both exporter and importer. The exporter is guaranteed that they will get paid for the goods shipped overseas. The importer must ensure that an order is filled and shipped before they make a payment.
As an exporter, it’s a no-brainer to be given an assurance that you will surely receive payment for the products you sold to an overseas buyer.
It works like this: The importer (or buyer) goes to their bank and establishes a letter of credit. Your bank receives the letter and confirms that it is valid. You proceed with the shipment of your goods, in the knowledge that you will get paid. Once you have completed all terms of your deal, your bank collects payment using the letter of credit and transfers it into your business bank account.
Before you get paid, you must present documents that verify you have shipped your order to the buyer.
That’s when a ‘letter of credit discounting’ comes into the picture. It occurs when your bank offers you an advance for your letter of credit. Simply put, it’s when your bank gives you an advance payment before you complete the shipment process. It’s called a discount because you will not receive the full payment amount, while the discount is the interest your bank earns for providing you with this advance.
Exporters can use letters of credit discounting to their advantage if the exporter in question requires money during the production process.
Another way to use the letter of credit discount is to give your buyer an extended term to pay – this allows the buyer more time to sell off the products before their bank fulfils the letter of credit.
5. Finance against allowances and subsidies
Finance against allowances and subsidies is given out by the government.
In unforeseen circumstances – when there is an unexpected increase in expenditure because of national and international changes – exporters can count on the government to provide subsidies for exports of goods at a reduced price to the importer.
This allows exporters to sell their goods to overseas buyers at lower prices.
Make your payment method simple
When selling overseas, you always have to keep your eye on the foreign exchange rates – they can fluctuate to your disadvantage. Long payment terms can create a afinancial strain on your business. Apart from looking out for the available types of export financing, the profit of your business can also be affected by high forex rates.
Silverbird lets you avoid the high costs and smothering regulations of international trade. We enable you to hold, transfer and exchange foreign currencies online simply by using a single multi-currency account. Make and receive payments in over 30 currencies without fuss.
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Author: Silverbird Content Team
Illustration: Kate Faldina