Export Finance

3. Financing Options

Unless you have negotiated payment in advance, exporting may require additional financing.

While you may be able to use a standard loan or overdraft facility, other options can be more cost-effective and provide access to greater amounts of working capital.

3.1 You can arrange a foreign currency loan or overdraft to borrow the amount of foreign currency you expect to be paid.

• You may be able to use proof of the export sale as security for the borrowing. Your bank may only accept this form of security if it has approved the customer, or if you purchase credit insurance.
• You exchange the money you borrow into pounds sterling to use as working capital.
• You repay the borrowing with the payment you receive from your customer.If the customer fails to pay, you will be exposed to the additional risk that the exchange rate has moved against you.

3.2 You can sell a negotiable bill of exchange that has been accepted by the drawee (eg your customer).

Your bank (or another financial institution) buys the bill from you for a discounted value. The amount the bank pays depends on the currency, amount and term of the bill and the creditworthiness of the drawee.

• If the drawee is not known to your bank as creditworthy, the bill will have to be endorsed (ie guaranteed) by a third party - typically the customer's bank or a government agency. The third party will usually charge for this.
• The effective interest rate your bank charges on the financing will include a margin over interbank interest rates for that term in that currency.Typically, the margin for a bill that has been accepted by a high quality drawee (eg a major bank) will be 1 to 3 per cent.
• The amount you sell the bill for will be paid to you in the currency the bill is denominated in. You can convert the proceeds (see 4.2).

3.3 You can use a bill to arrange additional borrowing. It acts as security for a bank loan or overdraft facility.

This financing can be arranged on a 'recourse' or 'non-recourse' basis.

• With recourse financing, you have to repay your bank if the customer does not make the payment required by the bill.
• 'Non-recourse' financing will only be available if the bill has been accepted or guaranteed by an institution that is acceptable to your bank. Typically, this would be a major bank or a creditworthy government.

3.4 Forfaiting enables you to raise money on major transactions where you will be paid in stages over a longer period.

You draw up a series of bills of exchange with different terms and can then negotiate them all at once.

• Forfaiting is usually used to finance high value goods, such as construction projects.

3.5 An export factor, specialising in collecting payments from overseas, can usually lend you more against an invoice than a bank.

• Export factoring provides up to 80 per cent of the value of each invoice once you issue it.You receive the balance upon settlement.
• Export factoring is generally only available for sales to countries where your annual exports are at least £100,000.
• The finance cost is usually 1 to 3 per cent above a standard rate for an overdraft.