Without exception, every country on the globe has some form of export financing or guarantee program. The point of this is to both encourage exports and boost the profitability of domestic firms involved in exporting. The importance of this sort of financing is difficult to gauge, since so much hard currency is earned through exports. Entire economies, such as South Korea or China, are based entirely on exports. In fact a key element in turning third world countries into international economic powerhouses is Export finance.
How Does Export Finance Work?
Export finance is a finance agreement that is similar to factoring, through which money is generated against the cost of unpaid receipts.
It is a form of asset-based finance developed specifically for businesses exporting to international markets.
Effectively, this is a loan through which receipts (in this case of foreign debtors) are used as an advance payment.
Advantages of Export Finance for Exporters
- Gain the competitive edge by offering financing to prospective buyers
- Receive cash payment upon shipment or commissioning
- Does not tie up assets
- Avoid credit, currency and interest-rate risk in the settlement period
- Does not need to use administrative resources to collect the debt
Export Credit Agency finance
This part of Trade Finance’s remit covers the roles of the export credit agencies (ECAs), the development banks, and the multilateral agencies. Their traditional role compliments lending by commercial banks at interest by guaranteeing payments, though some ECAs have begun direct lending facilities.
These agencies have once again become of vital importance to the trade finance market. This is due to the role that they play in facilitating trade, guaranteeing transactions, promoting exports, creating jobs, and increasingly through direct lending. This was especially important during the global downturn when liquidity provided by financial institutions was depressed.
Project Finance vs Export Financing
Project Finance
- Project finance is the medium to long-term financing of projects based upon the projected cash flows of the project.
- The debt is secured by the project assets and repaid from project cash flow with only limited recourse to the project sponsors.
- The predominant sectors for project finance are oil and gas, petrochemicals, mining, metals, power, utilities, transportation and infrastructure.
Export Finance
- Export Financing is a medium to long-term financing provided to corporates, governments and project companies to finance the import of capital goods and services, e.g., equipment for a power station, railway line, telecoms network, etc.
- Export Credit Agencies are government-backed agencies created to support their countries’ exports; an ECA typically provides a guarantee or insurance policy to a commercial bank (e.g. HSBC) for a loan provided to the buyer of the goods.
How Fineon Exchange supports exporters in this respect
Fineon Exchange helps exporters by providing the following services:
- Receivable finance
- Securitization
- Credit Insurance
- Rating & Scoring
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