Export

Export finance for small businesses

Marcelino Castrillo | 27 April 2016 | 8 years ago

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Smaller firms should be prepared to overcome hurdles when accessing export finance
Businesses need access to finance to export successfully. Here, we round up the best ways to raise that money.

Exporting goods and services can bring significant opportunities for companies of all sizes. By tapping into new markets and new revenue streams, companies can access a larger customer base and grow their business. Importantly, these opportunities are not limited to large corporations.

According to research published last year by FedEx, 53 pre cent of UK small and medium-sized enterprises export, whilst 72 per cent expect their export revenues to grow in the coming years.

But selling goods overseas also brings with it challenges, from language and time zone differences to customs procedures and export controls. Costs can also represent an obstacle, particularly for smaller businesses with limited resources.

As well as investing in the process of identifying and researching new markets, companies need to consider the costs involved in fulfilling and shipping orders.

With most international trade taking place on open account terms, exporters are typically paid after goods have been received by the customer, which can result in significant cash flow pressures and can act as a barrier to growth.

Sort out the finance first

In many cases, companies may wish to obtain finance in order to support exporting activities. Export finance is a generic title to the funding of exports, explained CEO of Trade & Export Finance Mark Runiewicz. He said the area can be broken down into categories, such as short-term funding of up to six months, medium-term funding of six months to two years and long-term funding of over two years. ‘sMEs are often looking for short-term funding: the majority of finance they need will be up to 90 days following shipment, he added.

Types of export finance

Export financing can take a number of different forms, including letters of credit, export factoring, working capital facilities and supplier and buyer credits.

A letter of credit is an instrument used to mitigate trade risks for both buyer and seller. Issued by a bank, the letter of credit guarantees the exporter will be paid once specific documentary conditions have been met. This can be particularly useful when an exporter is trading with a new customer for the first time.

Instead of waiting for up to 180 days for customers to pay invoices, sellers can opt to receive payment earlier by factoring their invoices. Factoring allows trade to be carried out on open account terms and assists especially where there are short-term sales of products and in times when there may be risk of non-payment, commented James Sinclair at Trade Finance Global. It also allows protection against the payment risk of a buyer and so preserves cash flow, he added.

Other types of export finance include pre-export finance, as well as facilities such as those offered by UK Export Finance (UKEF). UKEF offer working capital facilities, supplier credits and buyer credits, said Geoffrey de Mowbray, CEO of Dints International and co-chairman of the British Exporters Association.

both the working capital and supplier credit facilities will take into account the firm’s balance sheet, whereas a buyer credit facility typically looks towards the end debtor’s balance sheet, this is often advantageous to smaller exporters who do not have a significant balance sheet, de Mowbray explained.

How to access export finance

Smaller firms can certainly access export finance, but they should be prepared to overcome hurdles. Export finance options are available to smaller firms, but it can be challenging for them if they don’t have experienced staff or external advisors who can complete the transaction successfully, said de Mowbray.

Runiewicz added that SMEs can access export finance through banks or chambers of commerce, adding that the internet is a useful source of research. A carefully worded question would offer up a useful list of providers, he says. Most pitfalls in obtaining finance can be overcome with good due diligence. You need to ask how well you know the buyer and whether you can obtain secure payment terms or credit insurance on them. Above all, try not to give credit.

Accessing finance is always potentially challenging for smaller firms or those that have only started trading recently. But the pool of possible lenders may be larger than expected, and it may be worth considering non-bank lenders. In order to secure funding, small businesses should make sure they have access to experienced advisers as well as having a realistic understanding of the likely challenges and time scales involved.

Act early

Export finance can take time to arrange, so arrangements should not be left to the last minute. It is important that export finance is considered at an early point in the transaction and not once the contract is signed, de Mowbray said. It remains a challenge and our members have had more success where they have either gone for contracts that can demonstrate the potential to scale the contract or consolidate the offering with other suppliers.

While challenges will doubtless arise, small businesses should not be deterred from seeking funding that can be invaluable as a means of supporting growth. As Sinclair concluded, The beauty of an export finance transaction is that, depending on the structure, the end customer is guaranteeing payment. If the seller is a reputable business, export finance may be easier to access than many people imagine.

Read on for an expert view of the export landscape for small business owners in 2016.

Topic

Export

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