Benefits of Export Credit or Finance
In 2008-2009, Germany was initially affected more severely than any other nation by the global economic recession. The sharp decline in world trade was not because of the downturn, but also because it specializes in sectors that were among the worst hit, such as auto manufacturing, machinery, and metal production.
Germany is heavily dependent on exports, which account for one-third of its GDP.
So, now after a decade Germany is steady and ready to export, but how does Export Credit help businesses and save them from bad debts or loss?
Export credit or finance refers to financial assistance extended by banks and other financial institutions to Small and Medium-sized Enterprises (SMEs) or Small and Medium-sized Businesses (SMBs) for the shipping of products outside a country or region. In effect, importers of capital equipment under an export credit system are provided, as buyers, with fixed-term funds at subsidised interest rates.
Advantages for Exporter:
- Receives cash payment upon shipment or commissioning
- Does not tie up assets
- Avoids credit, currency and interest rate risks in the settlement period
- Gains a competitive edge by offering to finance to prospective buyers
Advantages for Importer:
- Acquire private insurance programs at competitive rates
- Can use long-term finance to match expected revenues
- Obtain less expensive financing
- Financing at fixed-rate
An Export Credit Agency (ECA) offers a variety of products and services which are involved in supporting the full range of trade and commercial transactions from short-term commodity exports to long-term capital projects.
The financing can take the form of credits (financial support) or credit insurance and guarantees (cover) or both, depending on the mandate the ECA has been given by its government.
The bank or other financial institution can assist with the financing of capital equipment, machinery, and project-related goods and services. In some cases, an importer’s bank or another acceptable bank guarantees the importer’s payment obligation.
The bank will take a guarantee from an ECA (Export Credit Agency) to provide finance to exporters and make financing as inexpensive as possible. The role of these organizations is to support exports by issuing guarantees for export financing at competitive prices.
Such type of export finance is very secure and customised to suit the financial needs of companies who are in the export and import business. It allows businesses to grow overseas and even increases the company’s trade with large foreign multinationals.
When companies export products or services, long payment terms can often create working capital challenges. The up-front cost of producing, shipping and delivering the goods can be problematic for businesses to manage. Export finance helps businesses to release working capital from cross-border or domestic trade transactions that would otherwise be tied up in invoices or purchase orders and additionally allows exporters that offer extended payment terms (up to 3 years) to be more price competitive.
Export credit is a crucial competitive factor for exporters which increases their opportunities for signing a contract or an agreement. There are several advantages for both importers and exporters in having the bank handle and finance the transaction. It’s always a win situation for both the parties.