Jan 23, 2021

What is Export Finance?

While exporting goods has several benefits, most small- and medium-sized business owners think they cannot compete in the world market.

The export industry is primarily made up of small and medium-sized companies. These companies make about 97% of export companies, most of them having an average of 20 employees. However, only a small percentage of these businesses manage to sustain their export business, mostly to one country.

These facts indicate how the export market has not been exploited, and small- and medium-sized companies are not performing as desired. Export finance is a crucial competitive factor to help these companies increase their opportunities in the global market.

Financing companies take all the risks in international trade, they are however guaranteed by the Small Business Administration up to 90% on export loans they advance.

Explore Here to know more about trade finance.

How does export finance work?

The small- and medium-sized exporters cannot afford to wait for the goods to be delivered to the buyer and further to resell the goods.

The payment terms in an international trade range 30 days to 120 days, adding the number of days the goods will take at sea to cover over 10,000 miles to reach the customers.

Large exporting companies may continue operations with such situations, but small- and medium-sized may not manage to have funds tied up in an invoice for long.

First, payment terms exceed credit terms, and exporters have to find other means to pay creditors, which causes cash flow issues. Second is the risks involved with international trade; the exported goods are more likely to go bad, or their value may deteriorate before reaching the client. The importer may also delay payment beyond the payment terms or go out of business.

This is where export finance comes in!

Export finance addresses the following issues faced by small- and medium-sized exporters:

  • How they finance the production of goods for exports
  • How they determine payment terms with the importers and how to identify and deal with risks involved
  • How they offer terms without risking their balance sheet or going against their credit policies

Lockstep understands that you need to offer your buyers the best terms to stay competitive in the market. That is why our export financing aims to protect you through the whole process and provide pre-and post-shipment cash, enabling you to extend favorable terms to your customers. Additionally, we help you maintain a sustainable shipping practice!

Pre-shipment finance

The client enters into a commercial arrangement with the exporter, agrees on payment terms, and places an order.

Using the purchase orders, the exporter can obtain financing to facilitate the production and export of goods and services. Pre-shipment financing helps with working capital to cover the purchase of raw materials, processing and overhead costs, storage, and transport of goods.

Through our sustainable supply chain financing, you can rest easy knowing that you have the liquidity to accept new orders, grow your international brand name, and effectively compete in the global marketplace.

Post-shipment finance

Every exporter wants to be paid as soon as possible for their goods or services. On the other hand, the buyer aims to delay payment for goods or services for as long as possible to get time to resell the goods.

Because the exporters want to maintain good business relations with the buyers, they end up getting the short end of the trade deals as they have to agree with clients’ payment terms.

As an exporter, you cannot sit on invoices while creditors are on your neck! Supply chain financing helps free up working capital trapped within the global supply chains. This way, you can let the buyer have the full payment terms, racking up more sales, at the same time, paying up your suppliers on time.

Lockstep further rewards your green shipping choices. Read more on how you benefit from choosing environmentally safe shipping methods with our Green Score.

Export terms of trade

Before agreeing to a buyer’s orders, clearly understand the payment terms you are entering, including the risks, costs, business implications, and payment time. Also, do not use a one-size-fits-all payment term, you should negotiate different terms based on the trade circumstances.

Cash in advance

Cash in advance is the most preferred payment method by trades as there is no risk involved, and the exporter can use the client's money to finance the production of the same goods for the client.

However, this method is the riskiest and the most expensive for the buyer as they are paying for goods with no assurance of production or shipment.

Cash in advance has negative implications for future business relations but can be used for small non-repetitive orders such as sample sales.  

Open account terms

Open account terms are the opposite of cash in advance, where the exporter finances the production and shipment of goods and takes all the risks involved.

On the other hand, the buyer prefers this payment method as they make payment after 30 to 120 days after receiving the goods. The buyer avoids any costs or risks involved and can pay the exporter from profits made from his goods.

Open account payment terms are best for improving recurring sales and business relations.

Lockstep's sustainable supply chain financing enables you to ease your terms and offer your buyers favorable open account terms, improving trust and creating a market for your goods.

Documentary collections

Documentary collections terms use banking channels to control production, delivery, and payment of exported goods.

The exporter submits the invoice, bill of lading, and the collection letter to his bank, who then forward these documents to the buyer's bank. The buyer's bank will release the documents once the buyer makes payment and can collect the goods at the port.

Documentary collections terms favor both parties as the exporter has control over the goods until they are paid for while the buyer only pays for the goods only when he receives them at the port.

However, it is the most expensive method as both banks will impose fees as well as tie up both the seller and buyer’s available credit.

Letter of credit

Letter of credit is an improvement of documentary collections. Letter of credit shifts payment, country, and corporate risks from the buyer to the banks.

The buyer's bank issues a letter of credit to the exporter's bank pledging to pay for goods requested by the buyer, provided they meet the required standards. The exporter's bank can advance funds to help finance export goods' production against the letter of credit.

A third party, a confirming bank checks on the letter of credit standards against the documents provided by the exporter and confirms that the exported goods comply with required standards. The confirming bank then pays the exporter’s bank and request payment from the buyer’s bank.

Advantages of export finance

Advantages for exporter

  • Enjoy a competitive edge in the international market by offering favorable terms to buyers
  • Receive payments as early as when closing the shipment container
  • Early settlement to suppliers
  • Avoid bad debts or using administrative resources to follow up payments

Advantages for buyer

  • Enjoy long-term payment terms enabling them to generate revenues on imports before paying
  • Obtaining goods without using expensive loan financing which may be subject to restrictions
  • Building trust as the buyer will already have confirmed the quality of goods before paying

Export finance with Lockstep

Do your need incomparable export financing?

  • Improve your cash flows by closing the gap between paying your suppliers and being paid
  • Release funds tied up on outstanding invoices
  • Stay on top of your shipments using our inventory tracking systems while you concentrate on pursuing bigger opportunities and growing your international brand
  • Get rewarded for green shipping practices

Our export financing:

  • does not depend on how your business is performing,
  • has no restriction on your export sales level, and,
  • considers the quality of your buyers, not the credit rating of their countries

Contact us today to know more about our export finance. Our team will guide you through our sustainable export financing services.

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