02 July 2015

Export finance terminology explained

A straightforward explanation of 4 of the key export finance terms that new exporters are likely to encounter

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Exporting can present risks as well as fresh opportunities, not least because exports from the UK are often sold on credit terms. However there are several ways to manage your finances and reduce risks when you are selling goods or service overseas.

What is a trade cycle?

Every business transaction has its own trade cycle – at its simplest, it’s the period between receiving an order and getting payment. For exporters, however, managing that trade cycle can be challenging, both logistically and financially. Shipping, customs and local regulation can lengthen trade cycles; and, of course, time is money. By establishing what their trade cycle looks like, a business can understand where the pressure points arise. What’s more, fluctuating interest rates and exchange rates mean that exporters may have to take steps to actively manage their trade cycles in order to ensure that their transactions remain profitable.

What is a letter of credit?

One of the most popular methods for settling international trade transactions, an export Letter of Credit ensures that you receive the agreed price for the goods or services you provide to an overseas buyer. By using a Letter of Credit, the seller knows, usually before manufacture or shipment, the precise terms and conditions which must be met in order to obtain payment and when that payment will be received. It is provided by the buyer’s bank — for a fee.

Also known as a documentary credit, Letters of Credit offer a guarantee to the seller that they will be paid, provided they comply with the terms of the credit. They also reassure the buyer that no payment will have to be made until they receive the goods. Some countries insist that importers have Letters of Credit. However, you’ll only receive payment if you keep to the terms of the credit, which may include providing documents compliant with the terms, such as a shipping confirmation.

What does open account mean?

Open Account payment terms – or open credit – mean that overseas buyers don’t have to pay for your goods or services until they have received them, usually within 30-90 days. This facility can help exporters secure more sales overseas but it is not without risk so it may be worth arranging credit insurance when you use Open Account terms. Your invoice must set out the credit term – the point, after delivery, when payment must be made. You should also agree the currency and method of payment in advance to avoid complications and minimise risk.

What is a guarantee?

Guarantees are used when doing business overseas to secure performance or other obligations. They provide the beneficiary with access to a sum of money should the principal (applicant) fail to fulfil contractual or other obligations in respect of an underlying transaction, contract or order. A bank guarantee is separate from the commercial contract on which it may be based.

Many countries offer export finance guarantees to help their own businesses trade overseas with confidence. UK Export Finance is the UK’s official export credit agency. It helps exporters by underwriting bank loans offered to overseas buyers of UK products and services. It can also help exporters to raise tender and contract bonds; access working capital finance; and secure confirmations of Letters of Credit.

UK Export Finance considers applications for guarantees on a case-by-case basis. It also offers overseas investment insurance to UK companies that invest abroad. This covers your company against loss resulting from political events such as war or legislation changes.

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