Financing refers to the borrowing of money to pay for goods or services. Export financing is a deal that is tied to a specific contract.
It is generally between an importer and exporter, though a specialized import/export bank may be involved. Export financing may pay for goods in a foreign country or the services required to ship it to the destination.
How Does Export Financing Differ from Mainstream Finance?
Export financing is considered riskier than loaning money to someone in your own country. The goods are more likely to be held up in customs until they’ve gone bad. The value of the goods may deteriorate during transit, such as when the refrigeration isn’t properly maintained.
The value of the importer’s money may go down due to currency fluctuations, and capital controls could limit their ability to do business. This increases the risk of foreign firms going out of business. Collecting when someone misses payments is made harder due to them being in a foreign country. This is why most financial institutions won’t deal with companies located in another country that want to import goods from their nation.
This gave rise to government funded import-export banks to help provide capital for foreign businesses to buy goods made in that country as well as specialized export credit agencies.
It also drives professionals to follow export finance news. Everything from currency fluctuations to import restricts affect their business. When you’re dealing with domestic businesses, you don’t care about interest rate hikes in other countries. Export credit agencies track these matters and offer products to manage the risk.
This includes credit insurance, financial guarantees and occasionally direct loans. They also tend to manage risk by only lending for the short term; it is rare for a contract to last more than 12 months. They limit their own risk by only covering up to 85 percent of the contract value and not lending money or insurance contracts that have too much risk.
They may not offer loans or credit guarantees for entire business sectors. On the flipside, they provide assistance in filling out import/export paperwork and ensure each side meets various compliance obligations.
This can include tax laws, social standards like labor laws and environmental standards. OECD standards are generally the minimum the deal has to meet.
How do export finance contracts vary from conventional ones?
If you are dealing with professional export financiers, they’ll offer lower interest rates than domestic banks because they can mitigate your risk and theirs. They will assist with paperwork, and they can recommend specialists when their expertise is required. Translators would be one such example.
They may leverage the product as the collateral for the loan or accept other collateral as security for the loan. They can also leverage other financial sources to help raise money. This can help their clients get around rules limiting currency conversions or capital controls.
They can assist firms going through bankruptcy or a cash flow crisis. If the ECA is not allowed to cover certain markets or countries, they may be able to direct you to private lenders who will finance the deal.