Export or trade finance

Export or trade finance

Three key considerations:

  1. Trade finance is financial support that helps companies to trade either domestically or internationally.
  2. Export finance is finance that helps them sell goods and services overseas, typically by providing advance or guaranteed payment.
  3. Both export and trade finance can include other types of finance – in particular, asset-based finance techniques such as factoring or invoice discounting can form a part of the finance agreement.

What are export finance and trade finance?

Export finance

When businesses export, they need to be sure they can afford to produce the goods and that they will be paid. Export finance helps mitigate risks such as default or delayed payment.

Manufacturers who import raw materials face other challenges. Overseas suppliers want to be paid for materials before shipping, so the need arises for finance to fill the gap between importing the raw materials and the point at which the finished product is sold. That’s where export finance comes in.

Export finance covers a wide range of tools, all used by banks to manage the capital required to allow international trade to take place as easily and securely as possible. Traditional tools are as follows.

  • Bonds and guarantees – if the seller fails to deliver the goods or services as described in the contract, the buyer can ‘call’ the bond or guarantee and thereby receive financial compensation from the seller’s bank. The types of bonds and guarantees include tender guarantees, advance payment guarantees, retention money guarantees, performance guarantees and customs bonds.
  • Letters of credit – these are issued by a bank, guaranteeing that the buyer’s payment will be received on time and for the correct amount, assuming the goods (or services) have been supplied as agreed. If the buyer is unable to pay any or the entire agreed amount, the bank will cover the shortfall. The bank also acts on behalf of the buyer – the holder of the letter of credit – by ensuring that the supplier will not be paid until the goods have been shipped.

Trade finance

Funding that assists businesses in purchasing goods, whether from international or domestic sellers, is termed trade finance.

It is often transactional, with finance only being provided for specific shipments of goods and for specific periods of time. Here the asset being funded against is the goods themselves (as opposed to invoices in invoice finance) and until repaid by the client, the goods belong to the finance provider. The process is supported by letters of credit, bills of exchange and bank guarantees.

Next steps

 
Find the right finance and insurance for your export ambitions at the government-backed Exporting is Great webiste.
 
To explore the other finance options for your business, go back to the Finance Journey tool.

Together on the journey

Access to the right kind of finance at every stage in your growth journey enables businesses like yours to invest, grow and create jobs. That’s why the British Business Bank and ICAEW’s Corporate Finance Faculty, and partner organisations representing finance and business, have created the business finance guide.

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