Export Finance with SBLC Backing

Introduction to Export Finance

Export finance plays a crucial role in international trade, helping businesses manage cash flow, reduce payment risks, and expand into global markets. One of the most effective tools for securing export transactions is a Standby Letter of Credit (SBLC). This financial instrument provides a payment guarantee, ensuring that exporters receive funds even if the buyer defaults.

In this article, we will explore how SBLC-backed export finance works, its benefits, and the steps involved in using it effectively.

What is export finance?

Export finance is a form of financial instrument that provides exporters with immediate working capital needed to initiate, sustain, and grow export business. It is available for businesses trading with overseas buyers. The main parties involved include:

• Exporters or sellers: Businesses that sell goods or services overseas and aim to ensure they are paid for the goods they shipped from importers/buyers.
• Importers or foreign buyers: Overseas entities that purchase export goods from sellers.
• Banks and financial institutions: They act as intermediaries and provide international project finance solutions for exporters.
• Export Credit Agencies (ECAs): Government or quasi-government agencies that provide insurance, guarantees, or loans for borrowers to engage with for exporter finance.

When international businessmen want to ensure that the development of goods is affordable and that they’ll be paid on time when delivering goods to another country, they require export finance. Finance for export provides funding to export businesses to help them do business worldwide. It’s a cash flow solution for financing exports to fulfill their manufacturing and other worldwide transaction requirements, such as working capital.  

To fulfill their capital needs, exporters can turn to a wide range of sources of export finance. It is up to you to choose a source of credit that fulfills your demands while also fitting into your long-term financing strategy for your export firm.

Standby letter of credit (SBLC): an overview and how it works

A standby letter of credit means an obligation of the issuing bank to the beneficiary (exporter or bank) to make payment within the specified amount in case the applicant (importer) fails to fulfill its obligations under the main contract.

This requires the beneficiary to provide a certain list of documents, in particular his statement of non-fulfillment of obligations under the contract.

A standby letter of credit is an obligation of the bank, and not by the principal, to make payment upon receipt of the required documents. It is the bank that bears the payment obligation and is the guarantor of the security of the transaction. The party that acts as the principal of a standby letter of credit can be sure that in the event of a default in contractual obligations, the beneficiary will receive payment only after the documents required under the letter of credit are presented.

Standby letters of credit may be issued under the Uniform Customs and Practice for Documentary Letters of Credit (UCP 600) or International Standby Practices (ISP 98).

Export finance vs trade finance vs import finance

Trade finance encompasses a broader range of financial activities that enable domestic and international trade. It includes financing solutions for both imports and exports, such as letters of credit, documentary collections, trade loans, and supply chain financing. Trade finance addresses the financial needs of all parties involved in trade transactions, including buyers, sellers, and intermediaries.

Export finance, on the other hand, specifically focuses on financing and risk mitigation solutions for exporters. It involves specialized products like export working capital financing, export credit insurance, export factoring, and government-backed export financing programs. Export finance aims to support exporters in managing cash flow, mitigating export-related risks, and expanding their global reach.

The key difference between both lies in the direction of the trade flow. Export finance is used when a company requires working capital to sell goods and services overseas, while trade finance deals with both imports and exports.

While both export finance and import finance are integral parts of supply chain finance, they serve different purposes:

• Export finance: A solution that protects the interests of the exporters, allowing access to capital before receiving payment.
• Import finance: Designed to support importers. It helps importers by providing short-term loans or other financial products to cover their expenses to purchase goods from overseas.

How does export financing work?

Oftentimes when you’re exporting overseas, your buyers typically do not pay upfront due to the agreed credit terms. This causes a revenue gap. With export financing, you can access capital before clients pay for the goods purchased. Here’s how it works:

When exporting, you are exposed to potential upfront costs such as production, shipping, and delivery costs. These are usually included in the invoice to your importer.

As importers commonly pay within 30 to 120 days, the payment is not due immediately even though you have already shipped the products.

To overcome the cash flow issue, you can apply for export financing, upon which the financier assesses the buyer’s creditworthiness, financial track record, and the importer-exporter relationship.

Once you’ve successfully passed the credit assessment, you’ll be able to apply for export financing to close the payment gap.

With the approval secured, pre-shipment financing, a type of export finance, is disbursed to the exporter, allowing you to start preparation related to the goods for export.

Once you ship them to the foreign buyer as per the agreed terms, you may apply for post-shipment financing to bridge the gap between shipping the goods and receiving payment from the buyer.

The foreign buyer makes payment according to the agreed terms, which could be immediate payment, a letter of credit, or deferred payment terms. Payment is made directly to the financing institution if it involves a letter of credit or if the accounts receivable were sold to the financier.

Depending on the agreed terms, you then repay the financier which includes repayment of the principal amount and any interest or fees. Once all financial obligations are fulfilled, the export finance transaction is closed, completing the trade cycle.

Steps to Use SBLC for Export Finance

1. Agreement with the Buyer

Before initiating an export transaction, the exporter and importer agree on using an SBLC as a payment guarantee. The terms, including the amount, validity period, and conditions, are outlined in the contract.

2. SBLC Issuance

The importer applies for an SBLC from their bank, which then issues the SBLC in favor of the exporter. The SBLC is sent to the exporter’s bank for verification.

3. Verification & Shipment

The exporter verifies the authenticity of the SBLC before shipping goods. Once confirmed, the shipment is made according to the agreed-upon terms.

4. Submission of Documents

After shipment, the exporter submits the necessary documents (e.g., bill of lading, invoice, insurance certificate) to the bank for processing.

5. Payment Settlement

If the buyer fulfills their payment obligation, the SBLC remains unused. However, if the buyer defaults, the exporter can claim payment from the issuing bank under the SBLC terms.

Challenges & Considerations

While SBLC-backed export finance offers significant advantages, there are some challenges to consider:

• Cost of Issuance: Banks charge fees for issuing and maintaining SBLCs, which can impact overall profitability.
• Bank Reputation: The credibility of the issuing bank is crucial; some financial institutions may not accept SBLCs from lesser-known banks.
• Legal & Compliance Factors: Exporters must ensure compliance with international trade regulations and SBLC terms to avoid disputes.

What are the types of export finance?

1. Pre-shipment finance: You can leverage this finance option for any funds that you can access before exporting goods to a buyer. Examples include Export Packing Credit for production, manufacturing, and packaging of goods for export and Raw Material Financing to purchase raw materials for production. It covers expenses such as raw materials, production costs, manufacturing and packaging. 
2. Post-shipment finance: This financial assistance is provided after the shipment of goods has been made to bridge the gap between the time of shipment and when payment is received. This provides exporters with liquidity and working capital to fulfil financial obligations and manage cash flow. As an exporter, you can present your export bills such as an invoice to a bank who then pay a percentage of the value upfront. They will then collect the full payment once it’s due. 
3. Discounting letter of credit: This is a loan against a letter of credit as it comes with a payment security from the issuing bank. It minimises the risk of non-payment and guarantees payment to you if specific conditions are met. 
4. Finance against allowances and subsidies: Check on some of the government subsidies and allowances in the countries you’re exporting to as certain countries will offer subsidies to exporters to sell their goods at lower prices to importers.

Benefits

When doing business overseas, there are plenty of benefits export finance can offer you. Export financing offers immediate access to working capital, flexible repayment options, and enhances your cash flow. Additionally, it provides insurance against non-payment risks, offering protection against buyer insolvency and other commercial risks.

Risks

However, keep in mind some potential risks with export financing services. Risks include late payments, especially with recourse factoring where you’re responsible for payment collection. Non-recourse factoring can help mitigate this risk, as it involves a financial arrangement where businesses sell their invoices to a factoring company, which then assumes the responsibility for collection, allowing exporters to obtain immediate cash. 

Additionally, currency risks due to exchange rate fluctuations can impact your financial projections when trading in different currencies. This risk can be mitigated with forward contracts, allowing you to lock in an exchange rate for a specific date in the future, regardless of fluctuations in the currency market. 

Conclusion

Using an SBLC for export finance provides a secure and reliable way to mitigate payment risks, enhance credibility, and facilitate international trade. By understanding how SBLC-backed financing works and following the correct procedures, exporters can confidently expand their global reach while safeguarding their financial interests.

If you’re an exporter looking to secure international transactions, consider leveraging SBLC as a powerful financial tool to enhance your trade operations.

Since the incorporation of General Credit Finance and Development Limited in 1973, we’ve been the trusted choice for businesses globally, offering tailored financial solutions to Ensure smooth transactions, secure payments, and business growth.

Website: https://www.gcfdl.com  ||  Email: info@gcfdl.com

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