Exporting to overseas markets creates an economic opportunity, but it also creates a financing need. An exporter may have to buy materials, manufacture goods, arrange shipment and wait for payment from a buyer overseas, while still needing to pay suppliers, employees, logistics providers and other operating costs. The longer the period between spending cash and receiving payment, the greater the working capital pressure on the exporter.
Export financing helps bridge this gap. It refers to financing and risk mitigation techniques linked to export activity, including financing before shipment, financing against receivables after shipment, and structures that allow exporters to receive early payment while buyers continue to enjoy agreed credit terms. Depending on the product and structure, export financing may support liquidity, reduce payment risk, or both.
Global supply chains work to deliver goods from producers of raw materials, components and end products to buyers across markets. Businesses face uncertainty from economic volatility, geopolitical disruption and counterparty risks. Export financing is not new, but it is evolving with increasing digitalisation, fintech-enablement and emphasis on ESG.
This guide explains what export financing is, the main solutions available to exporters, and some trends shaping its future.
Understanding export finance
When an exporter’s operating cycle (length of time it takes to sell its inventory and collect on its sales) exceeds the credit terms extended by its trade creditors (suppliers), the exporter has a financing requirement.
Financing is needed to cover the gap between when an exporter can turn inventory and trade receivables to cash and when it must pay on its trade payables.
For this guide, export financing refers to the financing of working capital tied to exports, that exporters avail from banks, financial institutions and alternative finance providers (collectively “finance providers”).
The working capital components for trade are inventory (stocks), trade receivables (also known as accounts receivable and trade debtors) and trade payables (also known as accounts payable and trade creditors). The following formulae determine the exporter’s working capital financing requirements:
Inventory + Trade Receivables – Trade Payables
Days Inventory Outstanding + Days Sales Outstanding – Days Payables Outstanding
Working capital financing requirement can be expressed as a number in currency or in days.
The financing required is the net working capital amount and the cash conversion cycle (the difference between its payables days and operating cycle).
This guide covers short-term working capital financing, i.e. financing related to items classified under current assets and current liabilities on the exporter’s balance sheet, and excludes from its scope long term financing techniques that may relate to capital goods or projects.
The methods of financing shown are representative, noting that variations exist. This guide is written from a finance provider’s perspective.
How is export financing different from trade finance?
Trade finance is a broad term given to all the financing techniques tied to both imports and exports. However, the methods of financing are different, and they serve different purposes.
Examples of import financing include issuances of documentary credits and payment guarantees, and loans to pay for imports. Import financing techniques are typically provided with recourse to the importer, meaning it will be responsible to repay the finance provider for any funds advanced.
Export financing caters to the working capital financing requirements of exporters, and serves a combination of liquidity and risk mitigation needs.
Depending on the nature of financing, some types of export financing may be provided on ‘non-recourse’ basis to the exporter. When financing is provided on non- or without-recourse basis to the exporter, the obligor in the financing is a party other than the exporter. For example, when an exporter sells its receivables to a finance provider on non-recourse basis, the obligor and source of repayment to the finance provider are the buyer. In financing with recourse, the exporter is liable to repay the finance provider. Non-recourse financing provides risk mitigation to the exporter for the credit risk of the buyer or the party responsible for payment.
The favourable effect of non-recourse financing may be a reduction of the exporter’s net working capital and shortening of its cash conversion cycle.
It is important when providing any form of trade finance to understand the purpose of the financing, its appropriateness to the nature of the underlying trade, and the source of repayment or settlement.
Who are the key parties involved in providing export finance?
Export financing may be provided by:
- Banks and traditional financial institutions
- Non-bank lenders – factoring companies, specialist funds
- Alternative finance providers – fintechs, invoice finance marketplaces
- Trade credit insurers (which may mitigate risks for financing)
What are the different export finance products?
Export finance may be provided within the framework of either documentary trade finance or supply chain finance. The options for financing are linked to the method of payment that the exporter and the buyer have agreed to transact on.
Certified Trade Finance Professional (CTFP)
Documentary trade finance
Documentary credits (letters of credit)
Documentary credits are used when an exporter requires the security of a bank undertaking to pay. A documentary credit (also commonly known as letter of credit or LC in short) is an issuing bank’s irrevocable arrangement to honour a complying presentation of documents made by the beneficiary of the LC.
As applicant of the LC, the buyer makes an application to its bank to issue an LC to the exporter (which becomes the beneficiary of the LC), based on terms that the buyer and exporter have agreed beforehand.
The ICC rules applicable to LCs are the Uniform Customs and Practice for Documentary Credits ICC Publication No. 600 (“UCP 600”), and they apply when the LC indicates that it is subject to the rules. When the agreed mode of presentation is electronic instead of paper, the applicable ICC rules are the eUCP, which are a supplement to the UCP 600 to accommodate the presentation of electronic records.
The presentation of documents is to issuing bank or a nominated bank. A nominated bank is a bank authorised in the LC to receive a presentation and to honour or negotiate a complying presentation. The nominated bank is often a bank in the exporter’s country.
When a nominated bank is willing to act on its nomination, it may prepay or advance funds on the drawn amount. If the nominated bank is prepared to take the payment risk of the issuing bank, it may finance the exporter on a without-recourse basis. If the nominated bank is also a confirming bank, it would be obligated to provide such financing on a without-recourse basis.
Understand the different types of documentary credits here.
Documentary collections (D/P, D/A)
Documentary collections are used by exporters who wish to utilise banks as intermediaries for the release of documents (which include transport documents) to the buyer. A collection instruction is sent by the exporter’s bank (called a remitting bank) to a collecting bank in the location of the buyer and stipulates either Documents against Payment (D/P) or Documents against Acceptance (D/A).
A D/P instruction requires that the buyer pays for the amount drawn on them before documents may be released to them. A D/A instruction requires that the buyer incurs an undertaking to pay, such as accepting a bill of exchange drawn on them, before documents are released to them.
The ICC rules applicable to documentary collections are the Uniform Rules for Collection ICC Publication No. 522 (“URC 522”), and they apply when a Collection Instruction indicates that it is subject to the rules.
When the agreed mode of presentation is electronic instead of paper, the applicable ICC rules are the eURC, which are a supplement to the URC 522 to accommodate the presentation of electronic records.
For D/A, the exporter is taking the payment risk of the buyer (drawee) after release of documents, as the collecting bank does not undertake to pay on the due date of the buyer’s payment undertaking. There is no provision in URC 522 for a bank to provide financing to the exporter. However, some banks may provide exporters with an advance against D/A acceptance (variously called Export Bill Discounting, Export Collections Discounting, Export Bill Financing, Export Bill Purchase etc.), which will be settled from proceeds of the D/A. Such financing is usually on with-recourse basis to the exporter.
The illustration below is an example of with-recourse financing of an export collection.
Although not provided for in URC 522, a collection instruction could also instruct that documents be released to the buyer against an ‘aval’ or guarantee by the collecting bank or buyer’s bank. Some banks may provide exporters with non-recourse financing based on the aval.
The illustration below is an example of non-recourse financing linked to aval.
If the financing is provided on non-recourse basis to the exporter, the cash conversion cycle of the exporter will be shortened.
Advance payment and advance payment bonds
In advance payment, the buyer pays the exporter prior to shipment. The advance payment may be for a partial amount or the full amount of the purchase. The exporter would have no financing requirement for the advance payment but may be required in some cases by the buyer to provide an advance payment bond or guarantee.
An advance payment bond may be issued by the exporter’s bank, in the form of a demand guarantee or a standby letter of credit. It is an undertaking of the guarantor or issuer to pay on a complying demand or presentation by the beneficiary.
For some transactions, the buyer might require that the advance payment bond be payable by a bank in its own geographic jurisdiction. In such cases, the exporter’s bank may issue a counter-guarantee to a bank in the location of the buyer to issue the guarantee, or issue a standby letter of credit that may be confirmed by a bank in the buyer’s location.
The ICC rules applicable to demand guarantees are the Uniform Rules for Demand Guarantees ICC Publication No. 758 (“URDG 758”). For standby letters of credit, the applicable rules may either be the International Standby Practices ICC Publication No. 590 (“ISP98”) or the UCP 600. The choice of rules applies when the undertaking indicates that it is subject to the rules. Each of the three sets of rules mentioned above provide for the demand or presentation to be made by electronic means.
Certified Trade Finance Professional (CTFP)
Supply chain finance and open-account based financing
Supply chain finance (“SCF”) are a set of techniques and practices applied usually (but not exclusively) to the financing of open account trade. They can be classified under two categories:
- Loan or advance-based SCF
- Receivables purchase
We’ll cover each of these categories in turn and the main techniques under each one.
Loan or advance-based SCF
These include:
- Loan or advance against receivables
- Distributor Finance
- Loan or advance against inventory
- Pre-shipment finance
Loan or advance against receivables
Loans or advances against trade receivables may be variously called Receivables Lending, Receivables Finance, Invoice Financing, Invoice Discounting, Trade Receivable Loans, Trade Loans etc.
A finance provider makes an advance to the exporter (borrower), based on the existence of trade receivables evidenced by invoices to buyers, and transport documents. The tenor of the financing corresponds to the tenor of the receivables, and the financing is to be repaid from the export proceeds. The advance ratio may be 100%, or a lower percentage, of the invoiced amounts. Financing is usually on a with-recourse basis, i.e. the borrower is required to repay the loan or advance when due, even if payment for the receivables is delayed or not made by the buyer.
The loan may be secured by the trade receivables, by way of charge, assignment or pledge – the precise nature of the security arrangement will take into consideration various factors such as transferability of receivables (e.g. if there are restrictions on assignment), jurisdiction(s) involved and commercial arrangement between the parties.
Or the loan could be unsecured, with the receivables serving simply as comfort to the finance provider that the borrower has a source of repayment.
Distributor finance
This type of financing may be variously called Distributor Finance, Buyer Finance, Dealer Finance, Channel Finance etc.
A finance provider may enter an arrangement with the exporter to provide financing to distributors of the exporter’s products in its foreign markets. A distributor may require financing for its cash conversion cycle, when its inventory and receivables days exceed its payables days to the exporter.
The finance provider grants a credit facility to the distributor to pay for its purchases from the exporter on the exporter’s invoice due dates and is repaid by the distributor from the proceeds of the distributor’s sales of the exporter’s products.
The finance provider takes risk on the distributor and may create a security interest in the distributor’s inventory and trade receivables. To further mitigate its risk, the finance provider may have certain arrangements with the exporter for stop-supply, buy-back and risk-sharing.
Inventory finance
Loans or advances against inventory may be variously called Inventory Finance, Warehouse Finance, Financing against warehouse Receipts etc.
Many variations in structure are possible for inventory finance. The finance provider finances an exporter for a percentage of the value of its inventory which may be pre-sold (for example, under an offtake agreement) or un-sold, taking the goods as collateral.
If the goods are stored in a warehouse, the finance provider may exercise control over the goods by way of contractual agreements with the warehouse operator and may appoint a collateral manager. The finance provider may disburse against delivery to it of warehouse receipts issued by the warehouse manager or collateral manager evidencing the finance provider’s rights to the goods referenced therein.
In order to effect delivery to the buyer, the exporter repays the finance provider which would then release the warehouse receipts for surrender to the issuers.
The illustration below is an example of inventory finance against warehouse receipts.
Pre-shipment finance
Pre-shipment finance is commonly also known as packing credit and purchase order (“PO”) financing. The basis of financing can be a PO, a sales contract or demand forecast.
An exporter may have cashflow requirements for purchase of raw materials, labour, factory costs and other pre-shipment expenses, prior to delivering on its export order. The finance provider may provide financing for a percentage of the exporter’s expenses and may disburse progressively according to the exporter’s stages of order fulfilment.
Settlement of the financing may be from payment by the buyer, or by way of converting the pre-shipment finance to a form of post-shipment financing (e.g. Receivables Discounting).
Receivables purchase
Techniques for Receivables Purchase include:
- Receivables Discounting
- Forfaiting
- Factoring
- Payables Finance
Receivables discounting
Also called Receivables Purchase, Receivables Finance, Invoice Discounting etc., Receivables Discounting is a method of financing in which the exporter sells its trade receivables to the finance provider at a discount.
The trade receivables are commercial debt that is owed the exporter by its customers (buyers) and is normally evidenced by invoices issued by the exporter to the buyers. A finance provider acquires the right to be paid from such commercial debt, typically by way of assignment or transfer of the receivables by the exporter to it.
The primary source of repayment for the financing would be the buyer. The exporter may retain responsibility for the collection of the sold receivables on behalf of the finance provider.
Depending on agreement between the finance provider and exporter, financing can be provided on non-recourse basis, or with limited recourse, to the exporter. Trade receivables may be subject to dilution, i.e. reduction in the amount collected due to credit notes, goods return, warranty claims etc., which the finance provider may consider when setting the advance ratio for its financing.
The sale of receivables to the finance provider can be either disclosed or undisclosed to the buyer.
In a disclosed structure, notice of the exporter’s assignment or transfer of the receivables is served on the buyer, and the buyer may be instructed to pay directly to the finance provider.
In an undisclosed structure, notice of the exporter’s assignment or transfer of the receivables is not served upfront on the buyer, and the finance provider may reserve the right to serve the notice later on the buyer, if needed, to be able to enforce its rights on the receivables.
Forfaiting
Forfaiting is without-recourse purchase of future payment obligations represented by financial instruments distinct from the commercial transaction that gave rise to it. Typical financial instruments are bills of exchange and promissory notes, which are unconditional payment undertakings, capable of transfer by way of endorsement or assignment.
The buyer delivers to the exporter signed bills of exchange or promissory notes, according to their contract of sale, for goods or services delivered by the exporter. The finance provider may examine the documents for the underlying trade for which the payment obligations are incurred. The amount of financing is usually for 100% of the value of the payment obligation.
The ICC rules applicable to forfaiting are the Uniform Rules for Forfaiting ICC Publication 800 (“URF 800”), a joint-publication with the International Trade and Forfaiting Association (ITFA), and they apply when the forfaiting agreement between finance provider and exporter indicates that it is subject to the rules.
To accommodate transferable electronic payment obligations (TEPO), ITFA published (in 2022) the Uniform Rules for Transferable Electronic Payment Obligations (URTEPO), which apply when the terms and conditions of the Transfer Agreement for a TEPO expressly states that it is subject to URTEPO.
In some cases, the payment obligation may carry an ‘aval’ by a third party such as a bank, in which case the financing may be provided taking the risk of the aval giver.
Factoring
Factoring involves the sale of the exporter’s trade receivables, represented by outstanding invoices, to a finance provider (a factor) who typically takes over the management of the debtors and collection of the payment.
Financing may be with recourse or without recourse to the exporter. When it is without recourse, the factor provides the exporter with credit cover for the risk of the buyer. A factor finances by advancing up to a percentage of the assigned invoice value, and upon collection of the full debt from the buyer, pays the exporter the balance amount after deducting for all its charges.
In international factoring, an export factor (finance provider to the exporter) may rely on an import factor (a factor in the location of the buyer) to provide credit cover for the risk of the buyer – this is known as “two-factor international factoring”. The export factor will finance the exporter taking the risk of the import factor, rather taking the risk of the buyer.
The invoices assigned by the exporter to the export factor are assigned by the export factor to the import factor. The import factor is responsible to collect payment from the buyer, and in case of protracted buyer default, will pay the value of assigned invoices to the export factor.
Members of Factors Chain International (“FCI”) may conduct two-factor international factoring based on FCI rules, which include the General Rules for International Factoring “”GRIF”), edifactoring.com rules (for use of FCI’s communications system) and Rules for Arbitration.
Many variations of factoring that differ from the illustrated example exist. The variations include recourse factoring, confidential or non-notified factoring and maturity factoring.
Payables finance
Payables finance is a method of financing for the exporter arranged by the buyer. It is variously called Reverse Factoring, Approved Payables Finance, Supplier Finance, Supply Chain Finance etc.
The exporter participates in a Payables Finance program arranged by the buyer with a finance provider. In such a program, the exporter and the buyer agree on (possibly longer) payment terms, which can be financed within the Payables Finance program. Exporter invoices are approved by the buyer as early as possible, and made available for financing with the finance provider based on the buyer’s undertaking to pay at maturity.
The exporter may request for financing of some or all the approved invoices, and typically assigns the invoices to the finance provider, which then makes an early payment, less interest and charges, to the exporter.
The finance provider is financing the exporter taking the risk of the buyer, based on the undertaking of the buyer to effect payment on its approved invoices and the exporter’s assignment of the buyer’s payables (exporter’s receivables). Such programs are often provided on an electronic platform, when a high volume of invoices and transactions are involved.
What are the benefits of export financing?
Export financing as described in this guide provides the exporter with liquidity for its working capital requirements, and risk mitigation in some cases. The financing could either fund the exporter’s cash conversion cycle (in cases of with-recourse financing), or shorten the cash conversion cycle (in cases of without-recourse financing).
The availability of export financing benefits the buyer as well, as it enables the exporter to perform under their sales contract, enlarges the capacity of the exporter to sell more to the buyer, provides capacity for the exporter to provide credit terms to the buyer, and helps maintain supply chain stability.
Certified Trade Finance Professional (CTFP)
Emerging trends in export financing
Digitalisation and paperless trade finance
Digital trade finance refers to the use of technology and electronic records to support, automate and secure the financing of trade transactions including exports. It replaces or augments paper-based processes with digital tools, enabling faster, more transparent and efficient execution of documentary trade and supply chain finance.
The shift from reliance on paper-based documents to acceptance of electronic records is supported by:
- Industry rules for use of electronic records in transactions, such as the eUCP and eURC published by the ICC
- Legal reform for statutory recognition of electronic transferable records such as electronic bills of lading by adoption of or alignment with the UNCITRAL Model Law on Electronic Transferable Records such as has been done in the UK, Singapore, Bahrain and Abu Dhabi Global Markets
The benefits of transitioning from paper-based to digital trade finance include:
- Greater certainty from speedier execution of transactions
- Environmental benefits from reduced carbon emissions of transporting paper
- Cost savings from printing and forwarding of paper documents
- Quicker access to financing of working capital trapped in export receivables
- Increased scalability of trade finance operations through automation of processing
Beyond industry rules and legal recognition of electronic equivalents of paper documents, developments in system interoperability are supporting digital trade finance by enabling parties on different electronic platforms to be able to transact with each other without all having to be users the same platform.
ESG-linked financing
ESG-linked financing’s goal is to direct the flow of capital toward sustainable and inclusive trade – trade that demonstrably advance environment and social goals – while preventing green- and social-washing. The ICC Principles for Sustainable Trade and Trade Finance offer a framework to assess the sustainability of trade and trade finance. https://iccwbo.org/news-publications/policies-reports/icc-principles-for-sustainable-trade/
In export financing, this can operate in two main ways. First, a transaction may qualify as green or social trade finance where the use of proceeds or the goods financed supports recognised environmental or socioeconomic objectives. Secondly, a transaction can be sustainability-linked, meaning that the financing terms are linked to achievement of sustainability performance targets agreed between the finance provider and financing applicant.
ESG-linked financing can support exporters’ transition strategies, help buyers source more sustainably and give finance providers a framework for disciplined classification, monitoring and reporting of sustainable trade finance.
Choosing the right export finance solution
The choice of export financing solution depends on a number of factors, which include:
- Is bank intermediation required in the trade transaction?
- The payment terms between the buyer and the seller
- Is risk mitigation required by the buyer or the seller?
- Is financing required by the buyer or the seller?
- Is it episodic or continuous?
The buyer may have requirements for:
- Credit terms from the seller
- A demand guarantee or standby to cover seller’s performance risk
- Documents, e.g. certificate of origin, transport documents, insurance documents
- Right of set off payment against debit notes or credit notes
The exporter may have requirements for:
- Payment undertaking from a trusted third party (e.g. a bank)
- Conditions for release of title documents to the buyer
- Protection against buyer non-payment and insolvency
- Financing to provide credit terms to the buyer
If a buyer requires credit terms from the seller and certain documents, and the exporter requires a payment undertaking from a bank and financing to provide credit terms to the buyer, the parties may transact using a documentary credit where the exporter may be paid before maturity by a nominated bank or a confirming bank when it makes a complying presentation.
If a buyer requires credit terms from the seller on open account, and the exporter requires protection against buyer non-payment and insolvency and financing to provide credit terms to the buyer, the options for the exporter include:
- Factor its receivables with an export factor prepared to provide credit cover and funding (the export factor may work with an import factor, or directly underwrite the buyer).
- Sell its receivables under a Receivables Discounting arrangement with a finance provider that is prepared to purchase the receivables on non-recourse basis.
- Procure trade credit insurance for protection and factor its receivables on a with-recourse basis or take a loan against the receivables.
Frequently asked questions about export finance
- What is the difference between trade finance and export financing?
The ICC defines trade finance as a financial service facilitating the real economy enabling businesses to finance, monetise, risk mitigate and settle trade flows, thus supporting the movement of goods and/or the performance of services regardless of maturity, both internationally and domestically. This definition includes export financing, which for the purpose of this article, has been defined as the provision of financing or risk mitigation, or both, linked to export activity.
- What are common examples of export financing?
The most common examples of export financing are financing within documentary credits, loans or advances against receivables, receivables discounting, and factoring. The other examples described in this article are also practiced to varying degrees across markets.
- Can small exporters access trade finance?
Yes, exporters regardless of size can access trade finance and export financing. However, there are trade finance gaps that represent unmet needs for trade finance, which according to multilateral development banks (MDBs) like The Asian Development Bank, disproportionately affect small and medium enterprises (SMEs). Support by some governments, export credit agencies and MDBs by methods such as credit guarantees and loans to financial institutions have supported better access to trade finance for SMEs.
- How do fintechs improve export financing?
Financial technology providers (fintechs) innovate with digital technologies to solve specific problems in financial services including trade finance and export financing. Many apply specialist knowledge of technologies such as blockchain, application programming interface, cloud computing and artificial intelligence to provide solutions that make trade finance more efficient, secure and scalable.
In export financing, examples include automation tools for document examination and compliance screening, solutions for the creation and transmission of electronic records including electronic bills of lading and negotiable instruments, and fraud detection such as duplicate financing. These specialised solutions may be deployed by finance providers for their own operations, or on an industry-wide basis where common utilities, shared platforms or network effects are needed.
- Is non-recourse export financing risky for lenders?
Certain types of export financing are by nature without recourse to the exporter. Examples include the honour or negotiation of an LC by a confirming bank, factoring with credit protection and non-recourse receivables discounting, which include risk mitigation for the exporter. The obligor in such transactions is not the exporter – it is the issuing bank in an LC, and the account debtor or buyer in factoring and receivables discounting. The finance provider underwrites the credit risk of the obligors, and structures its financing based on enforceability of its rights on the obligors under applicable law or industry rules.
In many instances, the credit standing of the obligor may be higher than the exporter’s. The non-recourse financing arrangement is typically subject to conditions, which if breached allows the finance provider to have recourse on the exporter.
