The time between placing an order for goods and receipt of the cash in respect of their subsequent resale can put a significant strain on an importer’s resources. Seasonal peaks, long transit times and lengthy credit terms all add to the demands on the importer. It is important that the finance to meet these fluctuations in the importer’s working capital requirements is geared to the terms and method of payment agreed between buyer and seller. This may require a combination of facilities. For example, documentary credit facilities might be required to cover the pre-shipment period whilst post-import finance can be obtained through an import loan.The diagram below is a simple illustration of the trade cycle of a company which both imports and exports. Clearly every company will have their own unique requirements.

Financing the post-manufacture/sale period is an important consideration for any exporter. Most exporting companies sell their goods on terms which typically do not exceed 180 days and where the payment mechanism will vary from Open Account through Bills for Collection to irrevocable Documentary Credit. With longer term transactions, secure payment mechanisms are usually demanded by the seller.Financing export receivables separately from other short term cash requirements makes tracking export-related debts simpler and, by having an identified source of repayment, banking facilities can become more accessible. Whilst some facilities are undertaken with recourse to the exporter, transactions covered by credit insurance or where payment is made via Documentary Credit may be suitable for non-recourse financing.

The method chosen will be influenced by a number of factors:

• The terms of trade
• The payment mechanism
• The availability of export credit insurance
• Currency and Cashflow considerations

Finance for export receivables as well as local sales can be provided by a factoring company who will purchase trade debts for cash providing the exporter with immediate cashflow. Usually a maximum of 80% of the invoice value is paid immediately upon presentation of invoices with the remainder becoming available as soon as payment is received from the buyer.

The term ‘forfaiting’ is derived from the French à forfait which means to surrender or relinquish the rights to something. In return for a cash payment from a forfaiter, an exporter agrees to surrender or relinquish the rights to claims for payment on goods or services delivered to a buyer.

There are several ways in which an exporter can obtain finance under a DC, each depending upon how the DC is payable. Finance under DCs is usually based on inter-bank rates which will be fixed and at a finer rate than other forms of finance such as bank overdraft.There are two ways in which pre-shipment finance can be raised from a documentary credit. The simplest is for the DC terms to include a clause (known as a ‘red clause’) permitting an advance of funds to the beneficiary (exporter) prior to presentation of the shipping documents. In this way, the importer directly finances the exporter.