Export and Import Finance: Strategies, Benefits, and Key Considerations

Import financing helps cover the costs of buying goods from foreign sources. Whereas export financing helps facilitate the sale of goods across the border. 

Continue reading to know about export and import finance in detail, along with how it works and its importance. 
 

What is Export Finance?

Export finance allows exporters access to funds to address cash flow problems due to the long wait for invoice payment. Buyers often pay within an agreed-upon payment term of 30 to 120 days.

Export finance allows businesses to overcome shortages in working capital and continue producing goods before receiving payment from customers. This gives them a steady cash flow, helping them manage their production expenses smoothly. 

Simply put, export finance—a cash flow solution—ensures that exporters can continue producing and exporting goods while getting cash against a due export invoice.

What is Import Finance?

Import finance streamlines the supply chain by providing buyers with the necessary funds to purchase goods from overseas. Importers often need to cover expenses while waiting for the arrival of these goods, and import finance helps bridge this gap between purchase and delivery.

Businesses can participate in import financing using the following two ways:

• Purchase Order (PO) Finance: Businesses use this facility to finance the purchase of goods specified in the purchase order. Importers can use the funds to cover production expenses for the goods mentioned in the PO.
• Import Loan: An import loan is issued when an importer wants funds to obtain materials for items not backed by a purchase order. The imported goods act as collateral in this case. Importers may need these materials to increase inventory safety margins, meet peak season demands, or shorten the trade cycle.

How Does Export and Import Finance Work?

Export and import finance addresses the payment gap between exporters and buyers, who often request extended payment terms ranging from 30 to 120 days. This time lag between the shipment of goods and the receipt of payment can create cash flow challenges for exporters.

Export financing helps businesses tackle this problem. Just like post-shipment supply chain finance, in export finance, supply chain players act as both importers (buyers) and exporters (sellers). 

Here is a step-by-step breakdown of the process:

• The buyer sends a purchase order to the exporter
• The exporter needs to procure raw materials
• The exporter (now an importer) seeks import financing against the purchase order
• Financier verifies the documents and grants the fund
• The exporter issues an invoice to the buyer as per the agreed terms
• The financier advances the invoice amount to the exporter

Importance of Export and Import Finance

Export and import finance facilitates international business trade by ensuring faster payments and optimising working capital.

Here’s why export and import finance are crucial for businesses:

• Managing Cash Flow: Export finance bridges the gap caused by extended payment terms in international trade. It also helps exporters meet their financial obligations by ensuring they receive funds on time.
• Strengthening Supply Chains: Import finance allows importers to procure goods and raw materials promptly, while export finance supports exporters in fulfilling orders without delay. This helps strengthen the supply chain and foster smooth trade relationships.
• Minimising Risks: Various tools, including credit assessment of buyers, insurance, and trade finance instruments, helps minimise the risks associated with international trade.

Here are some benefits of export and import finance for exporters:

• Security of Payment: Exporters are assured of receiving cash advances from the financier, reducing the risk of non-payment by buyers.
• Pre-agreed Fees: The pre-agreed fees protect both parties from interest rate fluctuations during the settlement period.

Similarly, here are the benefits of export and import finance for importers:

• Increased Financial Capability: Importers can take on more orders and pay advances to their suppliers, accelerating the business cycle.
• No Need for Equity Investment: Importers can access financing without equity, angel, or private investments.

Frequently Asked Questions

What are the types of export finance?

The five different types of export finance are pre-shipment finance, post-shipment finance, export finance against the collection of bills, deferred export finance, and export finance against allowances and subsidies

What are the benefits of export finance?

Export finance helps businesses in various ways, including cash management and protecting them against exchange rate fluctuations

What are the advantages of import finance?

Import financing provides businesses greater flexibility, enhances their cash flow, increases their creditworthiness, reduces default risks, etc.