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.
A typical export factoring agreement works in the following way:
ABC Supplier Ltd 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.
Export credit provides plenty of benefits for international Suppliers.
As with any financial service, there are potential risks with export financing. Exporters looking to avoid surprises should be aware of the following:
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.
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.
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.
To qualify for export financing with alternative lenders, Exporters may have to meet certain criteria.
Finance may be available only to Exporters that:
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:
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.
© Stenn International Ltd. All rights reserved. Any redistribution or reproduction of part or all of the contents in any form is prohibited other than the following:
Disclaimer: The above article has been prepared on the basis of Stenn’s understanding of the subject. It is for information only and doesn’t constitute advice or recommendation. Whilst every care has been taken in preparing this article, we cannot guarantee that inaccuracies will not occur. Stenn International Ltd. will not be held responsible for any loss, damage or inconvenience caused as a result of anything published above. All those applying for credit should seek professional advice when doing so.