Export Financing – Financing Export Transactions

Export financing starts after the order from the buyer has been received, the export order has bee accepted, manufacturing for the export order begins, and the shipping documents are issued; and it ends at ports when the goods are cleared. In other words, export finance refers to the financing of the goods from the home port to the foreign port and the inland centers, and remittances accruing from the sale of these goods. Financing of exports is a specialized business demanding the operations of institutions that are engaged in it and have special skills in handling the intricacies of foreign exchange transactions, a network of contracts abroad and a willingness to assume the risks peculiar to it. It follows, therefore, that good financing arrangements are a prerequisite for the success of the export trade.

In export trade, where business dealings are carried on between parties who may be separated by many thousand miles, it is necessary to have a clear understanding of how and when the buyer will pay the exporter for the goods which have been ordered; and it is up to the exporter to indicate the way in which he wants the importer to pay him, i.e., whether he requires prompt payment or whether he is willing to allow credit to the buyer.

An importer may often be attracted by payment terms, which allow good credit rather than by low prices. References should be checked to ascertain whether it is safe to allow credit. If it is safe, it is up to the exporter to decide whether he can afford to give such credit at the prices he has calculated. He may find that he cannot afford to do this; and yet he may also find that his inability to give credit is the only hindrance which prevents him from doing business with certain class of good buyers abroad. The way out may be to borrow money from a bank or any other financial institution to finance such credit.

Basically, the export trade is financed like any other trade. The development of the export business is, in one form or another, a capital investment, and must be paid for by the exporter. The investment is generally made in a less tangible form than in domestic business should not blind us to the fact that it is a capital investment and that it cannot generally be made the object of banking credit. Provision of the necessary funds with which to carry the merchandise from the date of manufacture to the date of delivery should therefore be made plus the provision of whatever credit the exporter believes should and can be extended to the buyer by the exporter. In the case of export trade, credits generally cover specified shipments of merchandise and are represented by documents without which ownership of the merchandise cannot change hands. In this respect, therefore, the extension of credit in foreign trade is not only on a different basis but on a sounder basis than in domestic trade.

Export Financing Channels

The channels for export financing are:

1. By the Exporter Himself. This method is most unusual because comparatively few manufacturers and professional exporters either have sufficient capital or wish to employ their capital in this manner. Even if manufacturers and exporters have ample capital, it is to be doubted whether this is the wisest policy to employ it in this manner. Not only are the interest rates charged by banks comparatively low, not only are the fees for negotiating drafts usually quite small, but in refusing to use the facilities offered by banks, the manufacturer or exporter deprives himself of constant contact with a source of information covering a wide range of countries and subjects which may be of importance to him in deciding whether or not to extend credit in some particular instance.
2. By the Export Middleman. The export middleman, particularly the export merchant or export commission house, finances export shipments. The manufacturer may have his shipments to overseas markets financed by paying the export middlemen a fee. The fee usually charged by a middleman for services of this nature is comparatively high. Credit risks which are not ordinarily acceptable to banks naturally gravitate towards this type of financing. Usually, the middleman turns around and refinances his own drafts through a bank. The manufacturer, therefore, is paying the middle ­man a profit for the use of his credit. If the manufacturer is able to present a reasonably sound financial position to a bank, there seems to be every reason why he should finance his export business direct, provided that he is qualified by experience and training to judge the credit risks involved in the export trade.
3. By Banks. The financing of export shipments is usually done through the discount of documentary drafts by banks.
4. By Importers. When the exporter insists upon letters of credit or cash in advance with the order, he is virtually asking the importer, in the overseas market to finance the transaction. The importer does this either by placing the actual cash in the hands of the exporter or by establishing a letter of credit with some bank. In either case, the effect is the same – the importer has financed the transaction.
5. By Factors. This method is useful to those exporters whose working capital is limited. The factor is a combination of mercantile and banking house which finances manufacturers, exporters, commission houses and selling agents through the purchase and discount of receivables created by sales of merchandise. They are documentary drafts and transactions related to Letters of Credit. Charges for factoring export transactions are generally assessed on a percentage basis. But because little or no cash is required, this type of financing is attractive to many manufacturers and exporters.