As we have told you in other blog posts, a company basically has two reasons why it needs financing: capital expenses (Capex) and operating expenses (Opex). This means that either to invest in your growth or your day-to-day activities, your company needs to have funds.
While every business has some equity and cash flows, financing your operations and growth with these will always be a costly alternative: cash is volatile, difficult to predict, and therefore riskier.
In that sense, a good practice for any business is to resort to financing and, in fact, it constitutes one of the best ways to grow your business, especially when it comes to a company that deals with international clients and markets.
With this in mind, we share with you 5 export financing options that you should know about:
Sources of financing: how to obtain capital for export
Factoring
Far from working like a traditional credit, it is a commercial transaction to sell on credit, but collect in cash.
In this scheme, an institution (factor) advances the payment of invoices that a buyer is going to pay on credit (either 30, 60 or 90 days after the shipment of the merchandise). In that sense, it is one of the fastest and easiest ways to offset the impact of accounts receivable on your cash flow.
Vendor Financing
According to reports from the National Chamber of the Transformation Industry, approximately 8 out of 10 SMEs are financed through their suppliers.
In general terms, it consists of a company negotiating the purchase of the raw material for its production with the commitment of a future payment to the supplier (usually between 30, 60 or 90 days) without interest charges.
One of the reasons why it is so widely used is that this type of agreement consists of a non-banking operation and does not generate financial expenses. However, it also involves risks such as increases that make it more expensive (which can be modified at the provider's discretion to recover the cost of the loan).
Bank credits
They can be simple loans or, for example, revolving loans granted by national banks to companies.
In the first case, we are talking about all those schemes in which the company receives a certain amount of money, with the condition of a promise of payment with interest and a guarantee as collateral.
The second is a line of credit with an established limit, regularly also with a collateral requirement as a guarantee, with the intention that the company use only the capital that is required at the time. In this way, working capital can be financed, although not necessarily at the level required by a growing export business.
The complications that both present is that they are usually expensive lines to finance operations, although they are useful alternatives to invest, increase the return on the assets of your company and save on taxes.
Credit letters
Export businesses have the option of injecting liquidity through the advance payment of term bills of exchange under a letter of credit.
A letter of credit is a document through which the exporter obtains a guarantee that the issuing bank will make the payment for the merchandise sold under the established terms and deadlines.
In this sense, they are also a useful financing instrument, because when there is a commitment to pay (even if the buyer declares bankruptcy), an institution can advance the delivery of cash to the seller.
Forfaiting
Usual in export transactions to qualified countries with a high political and/or economic risk, it consists of an operation similar to factoring, with the difference that, instead of invoices, the financial institution that will advance the payment of the sale accepts letters of change, promissory notes and receipts, as well as negotiable payment instruments, such as negotiable letters of credit held by the exporter.
Which financing is better?
Among the options presented, the answer of the best alternative depends a lot on the capital needs of each company, but also on how it diversifies its sources of capital.
For example, options such as factoring through fintech systems provide exporters with flexibility, allowing them to direct their bank loans toward other capital projects and growth investments.
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