Trade finance is a crucial tool in paving the way for international business. Not only does it open the opportunity for risk mitigation, it offers importers a solution to cash flow challenges and exporters the required capital to fund their expansion.
The goal of import finance is to improve the purchasing power of importers by giving them the option to defer part or all of their purchasing costs until they realise a profit from sales.
Import finance is frequently combined with a letter of credit arrangement to simultaneously offer the importer both greater flexibility and protection against risk factors.
The buyer will apply for an import finance transaction with a finance institution. Once approved, a letter of credit or telegraphic transfer will be initiated, and the seller will produce and ship the ordered goods.
The seller will be paid by the buyer’s bank and an import bill will be created. Once the goods are cleared and reach the buyer, the import bill will be repaid from debtor finance proceeds. The buyer can then clear the debtor finance on agreed terms.
An estimated 93% of internationally active Australian businesses are involved in export.
In scaling up operations for export contracts, Australian SMEs typically experience a sharp increase in manufacturing, capital and shipping expenses, the latter often being considerable given Australia’s relative geographical remoteness from larger international markets.
Long payment terms can further exacerbate their working capital challenges. Delays of up to 180 days for cross-border transactions are commonplace.
Using export finance, sellers can receive funding against invoices raised on overseas customers. There are two major benefits here for the exporter. This removes the barrier of tied-up working capital and alleviates transitional financial pressures.
It also means the exporter can trade on open account terms (usually utilising export credit insurance for added security), thus reducing a critical barrier to international sales.
Export finance is often offered as part of a comprehensive package of services, known as export factoring With this package of services, rapidly available export finance is provided against invoices. Additionally, collections and international bookkeeping services can be built into an export factoring service, making it an excellent option for SMEs just starting out with exporting.
The Australian Trade and Investment Commission also offers limited Export Market Development Grants (EMDGs) to Australian exporters. The scheme covers part of the expenses incurred on eligible export activities. You can learn more about EMDGs here.
While the world is becoming increasingly interconnected, small and medium sized enterprises in Australia face unique challenges in accessing international markets.