Export Finance or Trade Finance

IEOM

Commonly used interchangeably, these terms do not exactly refer to the same thing. For businesses trading across borders, it's important to know the available financing options to support the purchase of goods and to mitigate the risks of producing goods for export.

Export Finance

Commonly used interchangeably, these terms do not exactly refer to the same thing. For businesses trading across borders, it's important to know the available financing options to support the purchase of goods and to mitigate the risks of producing goods for export.

What are export finance and trade finance?

Trade finance is financial support that helps companies to trade either domestically or internationally.

Export finance is finance that helps them sell goods and services overseas, typically by providing an advance or guaranteed payment.

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.

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 export finance tools

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.

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