The world of international trade finance can seem very daunting to newcomers, with terms like Letter of Credit and SWIFT thrown around casually as if everyone has been an export finance professional since birth. If you’re looking to get started with international trade financing, or if you’re ready to take your export finance game to the next level, this ultimate guide to export finance will help you understand how these complex processes work, and how you can use them to your advantage. Let’s get started!
Introduction
So you’ve been thinking about exporting your goods or services to other countries. In fact, you may even have secured a foreign contract, and now it’s time to talk financing options with your bank or financial institution. The decision-making process for export finance can be confusing, especially if you aren’t familiar with how banks and other financial institutions make lending decisions regarding international trade transactions. This guide will help demystify some of these processes so that you can better understand how to get export finance from your bank or financial institution.
Getting Started
You first need to apply for a bank account with a bank that specializes in export finance or international trade finance, such as HSBC or RBS. After you’ve applied, your application will usually be reviewed and approved within two weeks.
Don’t Make It Personal: As a business owner, you have many options when it comes to financing exports—everything from loans and cash advances to personal credit cards. Keep in mind that business credit cards are different than personal ones because they charge higher interest rates—as high as 20 percent APR (or even higher). This makes them best suited for short-term needs like paying overseas suppliers or traveling abroad for trade shows and events.
Understanding Terms and Pricing
When you start looking at international trade finance as a way to grow your business, one of your first steps will be researching banks and other financial institutions. Here’s how to take advantage of their expertise so you can figure out how much money you need and what your options are when it comes time for implementation. First, understand that there are different types of lenders that specialize in different areas. Most importantly, there is a difference between export finance banks and commercial banks. Export-finance banks specialize in supporting businesses who sell goods or services outside their home country; they have specialized knowledge about international markets and how best to support exporting companies from pre-sale to post-sale. The largest export-finance bank is probably HSBC—which doesn’t mean they’re necessarily going to be your best option! Commercial banks may also offer some level of export financing, but their primary focus is on domestic lending. They might not know all the ins and outs of international trade and how to get a deal done overseas, but they do know how to help you secure financing based on your company’s domestic creditworthiness.
Securing an LC/L/C
To ensure you’re never caught short when it comes to payment for an export order, securing an LC (letter of credit) or L/C (letter of credit) is crucial. What are these? Let’s start with LC. An LC is a special kind of guarantee provided by a bank or financial institution that ensures your company will receive payment from a buyer in another country – even if that buyer’s original bank goes bust. The letter ‘L’ stands for ‘letter’ and ‘C’ stands for ‘credit.’ The letters have been used together since at least 1852, according to LexisNexis UK. In fact, an LC can be traced back all the way to 1797 and Thomas Jefferson during his time as Ambassador to France! But how does it work? Essentially, once you have agreed on a price with your customer, they give their bank instructions to pay money into yours once certain conditions are met. For example, they might instruct their bank to pay $100 into yours once they’ve received proof that goods have arrived safely and been checked for quality. This process helps protect both parties against fraud and other risks associated with international trade.
Types of Credit Insurance
There are many different types of credit insurance available, and each has its own strengths and weaknesses. It is important to understand how each type works in order to select a policy that best suits your business’s needs. For example, if you are concerned about an account receivable from a customer who has gone out of business or filed for bankruptcy protection, you may want to consider purchasing an accounts receivable credit insurance policy. If you have reason to believe that one or more of your customers will not be able to pay their bills on time, then you may want to purchase a commercial invoice factoring policy instead. Factoring involves selling invoices at a discount to a third-party factor (bank) and receiving cash up front. This means that you don’t have to wait for payment from your customer before receiving cash; however, it also means that you need to trust that your customers will pay eventually—which can be risky when dealing with companies located overseas. Another option is to obtain trade credit insurance, which protects against losses due to nonpayment by a foreign buyer. Many exporters choose not to take any risks and combine all three policies into one comprehensive export financing package.
Dealing with Bank Delays
Banks can take forever when processing an export finance. Plan on 3 months, but be aware that it can take up to 6 months (or longer) for some foreign banks. Watch out for errors in your documents—even little errors like spelling mistakes or using a comma instead of a full stop can cause big delays. And if you’re still waiting on funding after 5 months, don’t be afraid to get on the phone and speak directly with someone at your bank. If you’ve already submitted everything they need, they should be able to provide you with more information about what is holding things up. If not, then consider switching banks! There are plenty of other options available to help unlock international trade opportunities.
2. Delays due to documentation issues. It’s important to ensure all your documentation is correct before submitting it to your bank—including spelling, grammar and punctuation errors. Even if you have all your paperwork ready, there are often long delays while banks check their records against each other before issuing funds – so plan ahead by giving yourself enough time for these checks to be completed before contacting them again. The best way around these delays? Make sure you get everything right in advance!
3. Delays due to lack of information or communication from your bank. If you haven’t heard anything from your bank after submitting a funding request, don’t just sit back and wait! Get on the phone and speak directly with someone at your bank about what might be holding things up. They should be able to provide you with more information if there are delays in processing. If not, then consider switching banks – there are plenty of other options available to help unlock international trade opportunities.
4. Delays due to holidays or weekends. Banks often close for holidays or weekends – so if you’re waiting for funds that have been approved but not yet released by your bank, make sure you factor in time for these closures into your planning process.
Opening Your Account
In order to secure financing from an export finance company, you will need to open a trading account. Most companies will ask for a copy of your company’s bank statement or credit report as evidence that you have sufficient capital reserves. Once they’ve reviewed these documents, they can normally open your account within 24 hours (or just a few days if there are any issues). The majority of companies charge a one-off fee for opening an account. Some also charge a monthly service fee, while others only do so when you make use of their services. It is worth shopping around to compare different companies and find out what fees they charge before deciding on which firm to go with.
Planning for Contingencies
Just because you have a contract doesn’t mean that everything will go according to plan. As an export manager, it’s your job to recognize potential barriers and contingencies before they arise, and take precautions accordingly. If something goes wrong with one stage of your supply chain, who will pay for repairs? Will another company step in if a trade partner stops fulfilling its obligations? How much are those costs going to be? You need to know all of these things—and more—before signing on any dotted lines.
Fees and Costs Section
Exporting is a great way for American companies and entrepreneurs to diversify their business, but it can also be risky if you’re not familiar with all of its intricacies. To make sure you have a clear picture, read our ultimate guide to export finance, which covers things like how international trade financing works and how you can get funding without collateral. If you’re looking to start exporting or just want to learn more about how it works, check out our post on what exporters need to know about taxes. And finally, if you want to really dive into international trade and export financing, consider enrolling in an online course or getting some hands-on experience by working with an expert. There are lots of ways to go about learning about export finance, so make sure you choose one that fits your needs!
Other Options
Invoice Discounting, Factoring, Letter of Credit, Bank Guarantee and more. Exporting is a huge industry; some people might say it’s becoming bigger than ever. However, exporting is only as effective as your ability to finance your trade. If you’re thinking about exporting your products overseas and need help financing those exports, here are five ways that can help you unlock the potential of international trade! Read on to learn how.
1) How to Finance Export with an Import/Export Line of Credit – A line of credit is one way for small businesses looking to export their goods overseas by increasing their available credit limits or using their accounts receivable as collateral. With a line of credit, small businesses can get immediate access to cash in times when they don’t have enough working capital or may be waiting for payment from customers who have placed orders abroad.
2) How to Finance Export with Factoring – Factoring is another option that allows you to finance your exports by selling your invoices at a discount and receiving funds immediately. This type of financing works well if you are having trouble collecting payments on outstanding invoices and need money quickly.
3) How to Finance Export with Invoice Discounting – Invoice discounting is similar to factoring but has different terms. The main difference between invoice discounting and factoring is that invoice discounters provide loans based on a percentage of your outstanding invoices instead of 100% like factoring companies do.
4) How to Finance Export with Bank Guarantees – Bank guarantees are another common method used by exporters who want help funding their international trade activities. Essentially, banks guarantee your bank account will remain solvent even if you fail to pay back your loan.
5) How to Finance Export with Letters of Credit – Letters of credit are issued by banks or other financial institutions and allow importers to purchase products from foreign suppliers without paying until after delivery. Using letters of credit to finance your export business ensures buyers receive what they ordered and sellers get paid promptly. If you’re thinking about exporting your products overseas, it might be worth looking into these five ways that can help you unlock the potential of international trade! Read on to learn more about how each financing option works and how it could benefit your business!