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Financing Your Export Initiatives The Modern Way

Nov 15, 2007
With 27 countries in the European Union and one of the world's largest trading zones on our doorstep, there's little wonder that more and more companies are turning to export as a means of boosting their business.

Exporting however, isn't a step to be taken lightly and kick-starting an export initiative can be costly. The good news is that with thorough planning and the right finance partner, the rewards can be impressive.

A fundamental challenge facing exporters is cashflow. Demands on funds are huge and it's easy to find them spread more thinly than is comfortable: there's the investment required to seek out potential markets and the need to offer attractive terms of credit in order to win new contracts and customers.

Funds are also needed to finance the growth stimulated by the export drive and all this is going on against a fund-sapping back drop of varying time zones, currencies, languages and trading rules and regulations that may slow down payment and tie up funds for longer than anticipated, leaving the business starved of cash when it needs it most.

Traditionally, exporters have relied on Letters of Credit to help alleviate these pressures and protect themselves when trading with overseas customers. These could be costly to put in place, but worked well when goods were moving slowly and at irregular intervals because they ensured that the exporter would ship within a given timeframe and that the importer would pay the invoice in full by a specified date.

Today the export process is quicker and Letters of Credit are largely outdated. Goods are being shipped faster and documentation often lags behind. Thus, customers are becoming less interested in doing business with suppliers that insist on using Letters of Credit because they have to commit funding to support purchases up front and deal with an excess of paperwork. To be competitive it's essential to be prepared to base your export initiative on 'open account' terms - issuing an invoice on the despatch of goods or services and giving the customer somewhere between 30 and 90 days to pay.

It's not difficult to see how crippling this could be for the exporter. Even assuming he's done his homework - and it's essential to verify the credit-worthiness of potential customers as thoroughly as possible before entering into any overseas transaction - the risks of payment default are much higher than in the domestic market.

But all is not lost. The key is to find the right funding partner and funding mechanism to help alleviate the risks associated with exporting and stabilise the cash flow required to fund it.

Factoring and invoice discounting fit the bill perfectly.

These have been well documented at home; reputable providers tailor flexible funding arrangements to meet the specific needs of clients based on the value of their debtor book, releasing up to 90% of the value of outstanding invoices back to the client immediately and taking responsibility for collecting the debt when it falls due. In the past 12 months nearly 48,000 companies have used this type of funding to help stabilise their cash flow and finance growth. This this is not going unnoticed by the export market.

Increasing numbers of businesses are turning to factoring and invoice discounting to support their export initiatives because it helps them to offer competitive open account trading without the risks. Not only will a good factoring partner investigate the credit rating of a potential customer on your behalf and establish lines of credit, he will assume the credit risk, give 100% protection against write offs, manage and collect overseas receivables and provide immediate cash advances against outstanding invoices.

Too good to be true? Not really. Certainly there's a cost associated with such a facility, but it's a variable expense based on sales volume and those entrepreneurial enough to take the plunge overseas should consider it a fair price to pay for the peace of mind and financial stability it brings to what could otherwise be a high risk strategy.
About the Author
John Mce writes articles for Hilton-Baird who offer free independent advice and has helped over 2,000 UK businesses raise extra capital.
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