How can exporters maintain a healthy cash flow? Three main types of trade financing | Article – HSBC VisionGo
Many exporters have probably faced these cash flow difficulties: overseas buyers may have a longer payment cycle, which results in a slow return of funds and a significant pressure on funding. When the market conditions are less favourable, the buyer may be facing cash flow problems and is not able to pay on time – that brings an exporter an even higher level of risk in the return of funds, especially when trading under a payment after delivery arrangement.
A healthy cash flow is the mainstay of the development of a business. It does not only support the company’s daily operations, but also enables it to capture market opportunities. So what are some of the financing options specially designed for exporters? This article introduces three main types of trade finance that help exporters maintain a healthy cash flow, corresponding to different export methods.
Before going into the details, we hope to help you understand through the following table different export methods, the corresponding types of financing available, and other features such as the risks, costs and collaterals involved.
Payment collection risks faced by exporters
Type of financing
Documentary Credit (DC)
Low. DC is a type of bank credit, so collection risk is relatively low.
Export DC Bill Negotiations
Taking HSBC as an example, customers pay a DC bills document checking fee of HKD550 per set of invoices per DC bill drawn, as well as a HKD bill commission (to be charged if no foreign currency conversion is involved) of 0.25% with a minimum of HKD500. The DC opening commission is also higher.
If the bank has verified that the due dates of the DC and accounts receivable are valid, the bank will not require any collateral, and the exporter will only need to submit to the bank shipping documents and other necessary documents for the DC. The bank will advance a payment to the exporter with reference to the face value of the DC.
Export Documentary Collections
Medium. Collections are commercial credits and rely on the integrity of the counterparties.
However, to protect the interests of the exporter, the exporter’s bank will prompt the importer’s agent bank to issue trade documents for the importer to receive the goods only after the importer has paid, or accepted and drawn up the subsequent payment date.
Financing under Export Documentary Collections
For example, HSBC customers pay a HKD300 handling fee for non-DC bills purchased, and a HKD bill commission of 0.25%, with a minimum of HKD250.
Using Documentary Collections as collateral, eligible exporters will receive a cash advance
Ordinary Accounts Receivable
High. Highly reliant on the trustworthiness of the counterparty
Medium to high.
For example, HSBC customers pay a ledger management fee and an export credit insurance premium. The charges vary according to the circumstances of each company.
With accounts receivable as collaterals, the loan amount offered by the bank may reach a certain agreed percentage of the qualified invoice amount.
In addition, to use Export Factoring for financing, companies are usually required to take out export credit insurance.
Ordinary Export Financing
HSBC customers pay loans handling commission of 0.25%, with a minimum of HKD450, as well as a HKD bill commission of 0.25%, with a minimum of HKD500.
As the payment collection risk may be even higher, the bank may require collaterals in addition to accounts receivable.
Export DC Bill Negotiations: advancing reliable accounts receivable
As the name suggests, this type of financing is specially designed for exporters who collect payment through Documentary Credits (DC). DC is one of the most common payment methods in international trade. In particular, when a seller and a buyer trade with each other for the first time or when they are in their early stage of partnership, they may want to make use of a bank’s DC so that they can have the bank as the guarantor for both parties to ensure a smooth payment and delivery. For more information about DC, please refer to this article: How do Documentary Credits make international payments secure?
However, buyers will usually request for a certain payment cycle. Although the payment collection risks faced by the exporter are relatively low, the exporter must strictly fulfil the terms of the DC in order for payment to be made. This may result in a slow return of funds to the exporter, and by the time the DC is due for payment, the exporter may have missed market opportunities because of a shortage of funds to fulfil orders from other buyers.
In response to this pain point, most banks or other third-party financial institutions have been providing Export DC Bill Negotiations services to help exporters improve cash flows. An exporter will only have to submit to the bank shipping documents and other necessary documents for the DC. The bank will advance a payment to the exporter with reference to the value of the DC, and then send the bill to the DC issuing bank to obtain the remittance.
Through this financing method, exporters can use executed contracts to realise sales as soon as possible, move funds around flexibly and re-invest in production quickly, thus allowing them to fulfil other contracts. Or they may use the proceeds to repay other loans to reduce their pressure from loans.
For example, with HSBC’s Export Bill Negotiations, the bank’s trade specialists will help an exporter check the documents of its DC to ensure that all the terms of the DC are met before submitting the documents to the issuing bank. If the required bills and documents are submitted before noon, the payment can usually be credited to the account on the same day.
Financing under Export Documentary Collections: financing at a lower cost
Before introducing this type of financing, you should understand the difference between Documentary Collection and Documentary Credit. As mentioned above, Documentary Credit is a bank credit. As long as the documentation is properly done, the risk of payment collection is relatively low. Meanwhile, Documentary Collection is a commercial credit, which relies on the integrity of both parties to the trade.
When trading through Documentary Collection, an exporter delivers the bill to the bank after shipment, and entrusts the bank to collect payment from the importer. But if the importer defaults on the payment because of undesirable market conditions or the importer’s own financial conditions, the seller will suffer loss from the transportation costs for both ways and from the resale of the goods.
As such, Documentary Collection may be more beneficial to importers and the risk is low to them. On the contrary, exporters face the risks of a long payment cycle and non-payment, which may bring a relatively large impact to the operations of the company if anything goes wrong. Nevertheless, viewed from another perspective, exporters therefore have a stronger bargaining power to negotiate for more favourable transaction terms and pricing.
Exporters can use their Documentary Collection to apply for loans from the bank. Eligible exporters will be able to draw down cash in advance to meet immediate needs and improve cash flows. The company can even re-invest the proceeds right away in order to reduce the impact on the business. When the buyer has settled the bill, the bank will use the payment collected to repay the loan.
Export Factoring: a “piggy bank” that allows accumulation of line of credit
After a buyer and a seller have established a stable trade relationship, Documentary Credit and Documentary Collection will be used less frequently, and payment will mostly be done simply through accounts receivable. The corresponding financing method is the increasingly popular Export Factoring, where the exporter transfers its receivables to the bank in the form of an invoice and applies for a loan.
But unlike ordinary accounts receivable financing, the bank will in general require exporters to buy an insurance, and the bank will help the exporter manage the billing period and follow up on invoice payments. The risks involved in collecting the payment to repay the financing are therefore even lower.
One key feature that sets Export Factoring apart from Export DC Bill Negotiations or Financing under Export Documentary Collections is that the latter two can only provide financing corresponding to the accounts receivable of each invoice, and the line of credit cannot be accumulated over a number of invoices.
Meanwhile, Export Factoring works like a piggy bank, with the total line of credit being the size of this piggy bank: an exporter may continuously “deposit” receivables into the piggy bank, and draw down loan from it anytime. This allows companies to change constantly according to their business development needs, and manage their cash flows more flexibly.
The amount of a loan offered by a bank is generally equivalent to a certain agreed percentage of the face value of the accounts receivable. After the exporter has transferred the accounts receivable to the bank, it may have to issue a transfer notice to the payer (buyer) and request them to make the payment to the bank that has approved the financing. The bank will have a dedicated person to follow up with the buyer on invoice payment directly. The bank will also provide bad debt guarantee services, enabling the exporter to focus on business development.
Many banks also provide multi-currency receivables finance solutions, including RMB, to help exporters reduce the cost of foreign exchange.
But exporters may also face the risk of buyers defaulting and refusing to pay, in which case the bank will claim the loan balance from the exporter. To address this, companies may purchase export credit insurance to protect their interests.
Having understood these three types of trade financing, business owners can choose the payment collection method that suits their business and use the corresponding accounts receivable for financing in order to ensure that the company has sufficient cash flow while waiting for customers to pay, so that they can improve operational efficiency while not having to worry about missing market opportunities.
Reminder: “To borrow or not to borrow? Borrow only if you can repay!”