Funding Export Trade

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When a product is sold and shipped abroad it invariably takes longer to get paid. The internet and faster shipment have all played their part in making export markets more competitive, and buyers will always prefer to trade on open credit terms which allow them to have resold the goods prior to paying the seller.

Invoice discounters traditionally preferred to concentrate on funding local trade. Their financing decision was underpinned by available financial information and the confidence of understanding the legal system that should ultimately lead to the debt being collectable. These local basic requirements are not always easily achievable in export markets, giving the financier perceived extra risk. This, together with the additional perils of transfer risk, import regulations or different foreign customs took export sales outside of the skill sets on which they relied and created a reluctance to fund export sales. So, with the adverse cash flow effect and increased risk of export, what are the funding options in the post credit crunch era?

Traditionally the Letter of Credit evolved over many centuries effectively turning a trading agreement into a financial transaction which was readily discounted. Both buyers and sellers have been turning away from this trusted mechanism because of both the high cost and the relative difficulty of administration.

As the receivables finance industry has developed, competitive pressures have led a growing number first to consider and then to seek out, export receivables to fund. Naturally they still have concerns over the additional risk and will almost certainly seek comfort in a trade credit insurance policy. By obtaining an insured credit limit the seller and the financier have the comfort of knowing that the buyer’s creditworthiness has been assessed by the insurer using their local expertise in the export market. The insurer has not only joined them in having a vested interest in the buyer’s ability to pay; through their local presence, they can also assist in the obtaining of payment if required.

The world has not become a safer place for exports over night, but the evolution of information storage coupled to competitive pressure have driven credit insurance underwriters to open up the markets they will cover. Underwriters will probably share your own opinion on North Korea but in reality there are very few markets which are off cover. To find out more contact us