Published : October 4, 2023 , Updated : July 16, 2024

What is Export Finance and How Can It Help SMEs?

What is Export Finance and How Can It Help SMEs?

Worldwide, small and medium enterprises are the backbone of many economies. They play a major role in boosting employment, driving innovation, and, most importantly, contributing to the economy’s growth. But when it comes to expanding into the international market, finances become a major hurdle for SMEs. Securing funds to carry out multiple international exports becomes a hard nut to crack.

But with export financing as a financial solution, not anymore. Navigate through the financial crisis seamlessly with export financing. How? Let’s learn about export finance in this blog!

Key Takeaways!

Export finance is a short-term financial arrangement to meet the funding needs of exporters and suppliers engaged in trade with international importers and foreign buyers.
For small and medium suppliers supplying internationally, export financing has a lot to offer like international growth, quick funds, flexible financing, and more.
Exporters can go to regular banks, or they can try other companies that help with money and paperwork, like invoice factoring companies for export financing.

What Is Export Finance?

Export finance is a short-term financing solution for exporters/suppliers involved in trading with importers/overseas buyers. It enables easy working capital management in the business without suppliers waiting for the invoices to be settled by the buyer.

Why Is Export Finance Needed?

Suppliers involved in trading with overseas buyers are offered deferred payment terms of a period between 90 and 120 days, which induces a financing gap in the entire trading process, thus affecting the cash flow of the business.

In the meantime, the business might get another order that will require funds to begin with and complete the order. In that case, the entities can reach out to a financial institution for funds against their unpaid invoices. The financing company advances a percentage of the invoice value to the supplier deducting the fees.

Export Financing Process: How It Works

Here’s how a typical export financing works:

The exporter ships the finished goods to the importer and raises an invoice for the payment, which is around 90 days.
Now, the exporter might need immediate cash to fulfill another order, so it reaches out to a financing company for an advance short-term loan against the unpaid invoices. This is especially the case with small and medium enterprises with insufficient funds.
The financing company, after some formalities and minimum documents, agrees to advance the exporter the amount as an immediate payment.
The importer now settles the invoice with the finance provider, and the financing company charges based on what was pre-agreed upon between both parties.

Understand Export Finance With an Example

ABC Supplier Ltd sent goods worth £10,000 to XYZ Buyer Ltd and sent an invoice with a 90-day wait for payment.

But here’s the twist: ABC Supplier needed money right away to pay its own bills.

So, what did they do? They handed over the unpaid invoice to a money expert, who said, “Sure, I’ll give you £9,500 right now,” which is 95% of the invoice value. In exchange, ABC Supplier agreed to pay a 3% fee, which adds up to £285.

Now, when XYZ Buyer finally paid the full £10,000 invoice after 90 days, the money expert gave the remaining 5%, which is £500, back to ABC Supplier. However, they deducted the pre-agreed fee of £285.

The result? ABC Supplier got the cash it needed without any long-term loans, and their credit score stayed safe and sound.

Benefits of Export Financing For SMEs

For small and medium suppliers supplying internationally, export financing has a lot to offer in terms of benefits:

International Growth: For SMEs, the international market is a major untapped opportunity for growth. To be able to trade internationally effectively means to capture growth opportunities in the long-run.

Immediate Cash Flow: Suppliers receive instant cash to continue their operations, preventing potential delays of at least 120 days, which can negatively impact business growth opportunities.

Competitive Advantage: When small businesses have access to export finance, they can become more competitive. They can offer better prices, more flexible credit options, and faster order processing to customers around the world. This helps them stand out and do well in the global market.

Business Expansion: These enterprises can use the funds to expand and grow their business.

Invoice-Based Advances: Advances depend on specific invoices rather than the Supplier’s credit record. It makes it accessible for small-scale industries with less strong credit scores.

Flexible Financing: Once the invoices are settled, the short-term loan arrangement comes to an end. It doesn’t get carried forward, unlike traditional loans, passing no financial burden to already cash constrained SMEs.

Efficient Payment Handling: Chasing late payment issues now shifts to the financing company, which allows SMEs to use their resources and human efforts on areas with growth potential.

Challenges Faced by SMEs in Accessing Export Finance

While export finance offers numerous benefits to SMEs, accessing these financial solutions can be challenging. SMEs often encounter the following hurdles:

Limited Financial Resources: SMEs may have limited financial resources and may not meet the stringent requirements of traditional lenders, making it difficult to secure export financing.

Lack of Credit History: SMEs with limited international exposure may not have an extensive credit history, making it challenging to obtain favorable financing terms.

Complexity of International Trade: International trade involves complex regulations, customs procedures, and documentation. SMEs may struggle to navigate these complexities, which can affect their ability to secure export finance.

Currency Risks: Currency fluctuations can impact the profitability of international transactions. SMEs may be reluctant to engage in cross-border trade due to concerns about exchange rate volatility.

How To Get Export Financing?

To get export financing, exporters can look for multiple options, from conventional banks to alternative lenders such as invoice factoring companies. Remember that each lender can have its own requirements and formalities that you must fulfill in order to secure quick funding through export finance.

Credlix helps businesses with exporting. We provide funds to make it easier. With our support, you can increase your exports and meet more buyer orders. We offer hassle-free solutions like invoice discounting and purchase order financing, and you don’t need collateral. It’s that straightforward.

Final Words

Export finance works like a lifeline for small and medium enterprises looking to enter and grow in the international market. It helps them deal with financial gaps, leading to international growth and competitiveness.

Despite so many issues, SMEs can access export finance through various lenders. At Credlix, we empower businesses with flexible, collateral-free solutions, ensuring smoother international trade and expanding horizons. With us as your export finance partner, SMEs can confidently navigate the complexities of international trade and secure their position in the global economy.

Learn More about: Export Financing

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