Export Financing

Trade Finance is a specific topic within the financial services industry. It’s much different, for example, than commercial lending, mortgage lending or insurance. A product is sold and shipped overseas, therefore, it takes longer to get paid. Extra time and energy is required to make sure that buyers are reliable and creditworthy. Also, foreign buyers – just like domestic buyers – prefer to delay payment until they receive and resell the goods. Due diligence and careful financial management can mean the difference between profit and loss on each transaction.

All sellers want to get paid as quickly as possible, while buyers usually prefer to delay payment, at least until they have received and resold the goods. This is true in domestic as well as international markets.

Increasing globalization has created intense competition for export markets. Importers and exporters are looking for any competitive advantage that would help them to increase their sales. Flexible payment terms has become a fundamental part of any sales package.

Selling on open account, which may be best from a marketing and sales standpoint, places all of the risk with the seller. The seller ships and turns over title of the product on a promise to pay from the buyer.

Cash-in-advance terms place all of the risk with the buyer as they send payment on a promise that the product will be shipped on time and it will work as advertised.

Today, open account terms with extended dating are becoming more common despite the dangers.Trade finance provides alternative solutions that balance risk and payment. 

The two broad categories of trade finance:

  • Pre-shipment financing to produce or purchase the material and labor necessary to fulfill the sales order; or
  • Post-shipment financing to generate immediate cash while offering payment terms to buyers. 

Types of Trade Finance

Trade Finance, Working Capital Loans and Foreign Buyer Financing

Trade finance generally refers to the financing of individual transactions or a series of revolving transactions. Also, trade finance loans are often self-liquidating—that is, the lending bank stipulates that all sales proceeds are to be collected, and then applied to payoff the loan. The remainder is credited to the exporter’s account.

The self-liquidating feature of trade finance is critical to many small, undercapitalized businesses. Lenders who may otherwise have reached their lending limits for such businesses may nevertheless finance individual export sales, if the lenders are assured that the loan proceeds will be used solely for pre-export production; and any export sale proceeds will first be collected by them before the balance is passed on to the exporter.

Given the extent of control lenders can exercise over such transactions and the existence of guaranteed payment mechanisms unique to or established for international trade, trade finance can be less risky for lenders than general working capital loans.

Working Capital Loans

For exporters, working capital loan programs are normally associated with pre-shipment financing. Many small businesses need pre-export financing to cover the operating costs related to a sales order or contract. Loan proceeds are commonly used to finance three different areas: 

  • Labor: The people needed to build or buy the export product.
  • Materials: The raw materials needed to produce the export product.
  • Inventory: The costs associated with buying the export product.

Term Financing for Foreign Buyers

Frequently, foreign buyers don’t have the cash on hand to pay for major purchases. So the buyers ask for extended credit terms and/or financing. Few exporters can manage the cash flow dilemma or commercial and political risks caused by these long-term contracts.

Buyer Credit Programs are often an effective solution that benefits the exporter, their buyer and commercial lenders providing the loans. Programs typically provide loan guarantees to commercial lenders. These kinds of programs benefit all the parties involved. The exporter benefits because they’re paid cash on delivery and acceptance of the product or service. The foreign buyer benefits because they get extended credit terms at markets rates or better. The lender benefits because guarantees, many backed by the U.S. Government, mean full repayment of the loan and a reasonable return on funds loaned.

Trade Finance Products


Once a product has been shipped, that inventory is converted to an Account Receivable (A/R). A list of all Accounts Receivable is maintained on an aging report while the exporter waits for final payment. If there is a need for immediate cash, it’s possible to sell the A/R at a discount. This solution is called Factoring.

Factoring is the discounting of foreign accounts receivable that do not involve drafts as the method of payment. A Factor (an organization that specializes in the financing of accounts receivable) takes title for immediate cash at a discount from the face value. Although factoring is often done without recourse to the exporter, verify these specific arrangements.

Factors typically provide 70% of the face value with 3-5 working days, and assume responsibility for collection from the buyer. After final payment, the Factor will pay the remaining 30% – less a service fee of 4% – 5%.



Forfaiting is the selling, at a discount, of longer term accounts receivable or promissory notes of the foreign buyer. These instruments may also carry the guarantee of the foreign government. Both U.S. and European forfaiting houses, which purchase the instruments at a discounted price, are active in the U.S. market. Because forfaiting may be done either with or without recourse, verify all of the specific arrangements.


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Analysis of the riskiness of trade / territory

Political risk, especially in developing markets is often considered as a significant investment restriction. Companies which are able to manage such risk are better protected against dangerous expropriation, government payment delays, cancellation of import and export licenses. Furthermore, they are able to suggest and implement strategies which help to manage the risks.

Following risks, amongst others, have to be considered by responsible investors, funding entities and executive management when preparing strategic and business plans. It is imperative that they are considered at all phases of their implementation.

London Market offers risk analysis of the territory, state or particular region within the country, so that the investor / exporter can identify and manage all the political and credit risks relating to the transaction.

Also researching the consumer-base of market is very important. Businesses that invest time researching the consumer-base for their products increase their chances of succeeding in the international marketplace. Researching potential markets can help you specify market segments, identify where your product is most likely to sell, determine both domestic and international competitors and establish a fair market price for your product. 

Conducting a systematic market search takes time, but normally pays off in the long run. Considering many of the factors involved with exporting in the beginning will save you from misfortunes in the end.

Political risk

The current international political situation often makes the process of international and investment transactions difficult. A primary risk factor is a unstable political environment, especially in developing countries where there is the threat of war, revolution, strikes or other riots.

Furthermore, the main policy instruments which threaten the property and also the very existence of economic are expropriation, confiscation, and revocation of licenses, changes in price regulation and the inability to repatriate the profits.

The protection of employees is also important. An increasing threat of kidnapping people is becoming an instrument of worldwide terrorism. International insurance markets offer an effective solution to these problems. The solution to the threat of terrorism is insuring the risks that simplify the decision making process and enable the fulfilment of objectives, despite the adverse conditions of the current political and economic environment.

High-quality insurance with a high international rating also allows financing of a particular project by banks or an equity investor.

Political risk insurance is specialized insurance for companies doing business or conducting operations in foreign countries. The insurance addresses the business exposures to loss faced by these companies as a result of governmental action either foreign or domestic.

London Market provides consulting and advisory services in the area of financial services and risk management. London Market has expertise in the areas of export finance, cross-border investment and international transactions, including strategic credit/political risk management.

Sources of political risk


Hostile attitude of neighbouring countries

Racial, religious problems

Political instability

Changes in government, more centres of power

Overloaded economic climate


Populist politics

Risks distorting global stability


Weakening role of dollar and euro

Increasing price of oil and strategic resources

Overheating of China´s economy

Growing pension and fiscal crisis in many Western countries

Racial and religious issues

Weakened investor confidence

Asymmetric distribution of a social wealth

Various pandemic threat

Credit risk

Credit risk is the possibility that either one of the parties to a contract will not be able to satisfy its financial obligation under that contract. The classic example is that of one commercial enterprise extending credit to another enterprise or individual. Many insurance arrangements, especially finite risk programs, also involve varying degrees of credit risk—on both sides of the transaction—depending on the financial stability of the parties.

Export credit insurance is an effective sales tool that enables you to extend competitive payment terms with confidence. It can help you penetrate new markets, negotiate larger order quantities, establish or expand distribution, and increase the profitability of your export business. If you finance your receivables, the coverage will also make your foreign A/R more attractive to banks, factors, and other lenders so you can negotiate the most favorable advance rates and loan terms. 


Insurance of non-payment risks by the contractual party (state or private entity)

Addresses the risk of non-payment caused by a protracted default of the obligor, bankruptcy, civil war, riots, currency transfer limitations or inconvertibility.

The key point for investors and exporters is that the product allows for an easier access to the bank financing because it covers the risks which are often difficult for banks to manage. Fulfilment of the requirements guarantees the effective risk reduction according to Basel II.

Investment risk (country risk)

Investment/country risk can be characterized by the term such as; confiscation, nationalization, deprivation, currency inconvertibility, war risk or any other political effect on trade or investment including the breaches of contracts by the host government. It concerns usually the projects in field of mining industry, infrastructure, energy industry, manufacturing, retailing and distribution.

Property risk (fixed assets)

Property risk of fixed assets can be insured in the same way as investment risk, or as a complement of the standard model- all risks.

Property risk (current assets)

Property risk of current assets encompasses mobile devices, equipment, machinery, means of transport, supplies of commodities and other mobile assets. It is used a similar coverage as in case of investment risk but with a specific adaptation related to a nature of the insured property.

Risk of non-performance of contract (thwarted contract)

The insurance covers the situation, when the proper performance of the contract is thwarted by political risks. This product is often the part of coverage of credit risk.

Bond risk

An exporter or importer is obliged to provide an offer, advanced payment or guarantee. There is the risk that the recipient would not meet the conditions of the contract whether on its own or as a result of a political superior power. Banks issuing bonds may insist on proper coverage of credit risk of their clients.

Bond risk

An exporter or importer is obliged to provide an offer, advanced payment or guarantee. There is the risk that the recipient would not meet the conditions of the contract whether on its own or as a result of a political superior power. Banks issuing bonds may insist on proper coverage of credit risk of their clients.



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