What Is Export Finance and How Does It Help UK Businesses?

If your business exports goods abroad, you’ll know the challenges to navigate and the investment needed. Large upfront costs can make managing cash flow tricky amidst economic pressures and rising business costs. Export finance eases the burden on UK businesses and reduces some of the risks of international trade. 

In this article, we discuss the ins and outs of export finance, including different financial products and their benefits, plus the eligibility criteria and documentation required.  

What is export finance?

Export finance is a form of financing designed to help UK businesses export goods and services internationally. Exporting requires significant expenditure before seeing returns, which impacts cash flow and working capital. So, export finance provides access to short-term loans, bonds and guarantees to enable companies to secure contracts, fulfil orders from overseas and mitigate trade risks.

Export finance is sometimes referred to as trade finance – the umbrella term for financial products that also include supply chain finance and invoice financing/factoring.

Trade and export finance can be sourced from banks, private lenders or the UK government’s export credit agency, UK Export Finance, supporting eligible businesses to ship goods worldwide.

Main types of export finance

• Working capital loans: Funds to support working capital needs in exporting, which involve paying monthly loan repayments (plus interest) over a pre-agreed period. Some loans may require business assets as collateral.
• Bonds or guarantees: In many export contracts, overseas buyers will want the seller’s bank to issue a bond or guarantee in return for their payment, securing them in the event of any issues fulfilling your obligations. A form of collateral, such as a cash deposit, is often required.
• Letters of credit: A form of guarantee that ensures the exporting company receives the full amount owed and agreed in the contract on time. The buyer's bank covers any shortfall, reducing seller and credit lender risks.
• Export insurance: Insurance policies that protect seller cash flow, bonds and overseas investments, covering risks of buyer non-payment, unexpected calls on the bonds, buyer insolvency or losses caused by events in foreign countries.

What’s the difference between pre-shipment and post-shipment finance?

Export finance helps businesses cover the costs of preparing and fulfilling goods when exporting overseas. The main difference between pre-shipment and post-shipment finance is that they protect and fund different stages of the exporting process. 

Pre-shipment finance (or pre-export finance) is used to cover the costs of things like:

• Sourcing materials and manufacturing goods for export
• Packaging, labelling and storage of goods ahead of shipment (and meeting international shipping rules and standards)
• Insuring goods against loss or damage
• Transport and logistics
• Licensing and customs accreditation/documentation
• Other operational expenses, such as paying various staff and suppliers

Post-shipment finance (or post-export finance) is used for the following:

• Customs duties, fees and taxes
• Shipping and distribution
• Mitigation of foreign exchange/currency fluctuation risks
• After-sales support, maintenance and customer service
• Export credit insurance (protection against non-payment risks)

How does UK Export Finance (UKEF) support businesses?

The UK Export Finance (UKEF) is the government-backed export credit agency (ECA) and ministerial department helping exporters access working capital and address the risks of international trade. Operating for over 100 years, the agency works with a network of private credit lenders and insurers to help UK companies get the finance they need to operate efficiently.

What does UK Export Finance do?

UKEF’s mission is to “ensure that no viable UK export fails for lack of finance or insurance.” The agency offers various export finance products, including working capital solutions (access to trade loans, development guarantees, bond support and letters of credit) and export insurance policies (covering potential losses, bond demands and overseas investment). These financial solutions enable UK companies to secure international contracts and protect themselves against buyer non-payment.

UKEF also provides buyer finance solutions to help international buyers purchase UK goods and services for their projects, such as its buyer credit facility, direct lending facility, buyer loan guarantees, early project services guarantees and notes and bills guarantees. 

To see the funding in action, UKEF’s website has a range of UK Export Finance success stories, demonstrating how it’s helped companies across different industries to secure contracts, move into new markets and address key challenges and risks.

Accessing UKEF’s funding support 

You can access UKEF’s financing support via the official UKEF website, where you can explore different export finance options, learn who the UKEF can help and apply for the agency’s export finance. Or you can contact your bank – some UK banks can access UKEF’s lending schemes directly.

Key benefits of export finance for UK businesses

Export finance helps UK businesses solve various challenges in exporting goods abroad and overcome barriers to growth and expansion.

Here are some of the main advantages of UK export finance solutions:

• Improving cash flow management – offering crucial working capital to support various operational costs involved in exporting goods abroad 
• Helping businesses to access and enter new markets
• Minimising exporting risks, such as concerns over non-payment from buyers and political/economic change in target markets 
• Enabling companies to be more competitive through greater financial flexibility
• Building buyer and supplier trust and deepening trade relationships 

The UKEF helps businesses receive financial support for exporting goods at low rates and protection that reduces trade risks. 

What are the eligibility criteria for export finance?

You must be registered and operating in the UK, actively involved in exporting goods and services abroad and have a solid financial track record of managing credit responsibly to be eligible for export finance solutions.

UKEF and private lenders will consider the following eligibility criteria before potentially approving and matching businesses with export credit finance:

• Financial health – lenders will assess various accounting statements and financial documents, plus your credit file
• Assets that could be used as security against loans and guarantees
• Business type, size and track record
• Market risks/political and economic stability of your export destinations – UKEF provides a list of territories and its export policy coverage status 
• The creditworthiness of international buyers and payment structures

Note: UKEF outlines specific eligibility thresholds for its different trade finance products, including the percentage of turnover from export sales and the percentage of exported goods or services sourced from the UK. So, check each set of rules carefully.

Costs associated with export finance 

It’s important to understand the various costs involved before building a structured export finance plan and deciding which solutions to use. 

Here are the main export finance costs for your business to consider:

• Interest rates: As with any credit facility, using export finance will mean paying interest on money owed until you’ve completed repayments. 
• Service fees: Based on which type of export finance product you choose, you may be required to pay certain administrative and processing fees.
• Collateral/assets: Depending on your financial situation and the chosen product, you may need to provide collateral to secure a loan or guarantee. 
• Insurance premiums: Costs for export insurance policies covering buyer non-payment and losses from political/economic factors in foreign markets.
• Accreditation and license costs: Certain guarantees require your business to have specific licenses, certifications or customs documentation.  
• Other potential charges: You could be liable for additional charges, such as penalties for late payment and compliance missteps or early repayment fees.

You could view the accumulation of borrowing costs, the level of documentation required and certain eligibility barriers as disadvantages of UK export finance solutions. However, UKEF works with over 100 lenders and insurers to help businesses get competitive credit rates, insurance premiums and finance support.

How risk mitigation works with export finance in international trade 

Export and import finance not only gives UK businesses access to funds to cover exporting costs but also mitigates risks associated with international trade, such as buyers missing payments, currency fluctuations (with certain contracts locking in exchange rates) and political instability in certain countries.

For example, export credit insurance protects businesses exporting goods against non-payment (due or buyer defaults/insolvency), while letters of credit guarantee funds from the buyer’s bank. Also, other policies cover losses that may arise from political issues, including trade restrictions, new laws or even foreign conflicts.

From a finance lender’s perspective, the UK government’s export credit agency and its guarantees reduce risk. This increases credit lending access and fuels UK business growth and expansion into new markets. 

Applying for export finance 

You can apply for export finance by going to the UK Export Finance website’s products and services page, selecting the most suitable option and applying via the contact form. Alternatively, you can apply online via bank and private lender websites that offer export finance solutions.

Documentation required for export finance applications 

Ensure you have the necessary financial details and documentation to speed up the export finance application process and give you the best chance of getting approved.

Here is a list of the typical documents required when applying for export finance:

• Export contracts and invoices
• Financials, such as balance sheets, cash flow reports and bank statements
• Customs/compliance documentation (export licenses, certifications, shipping documents, etc.)
• Credit reports (for assessing seller and buyer creditworthiness)
• Insurance policies and certificates
• General business information and registered status
• Export business plans and projections

Can I combine export finance with other funding options?

Securing export finance can support your global exporting needs, but you may want to combine it with other funding options. Business finance lenders offer various financial products, like short-term business loans or lines of credit, to support SMEs. 

These funding solutions can complement export finance, which is used solely for your exporting needs. Other loans and credit options can support broader operational needs, bridge cash flow gaps, boost inventory to meet seasonal demand or cover temporary shortfalls from economic downturns, unexpected costs or urgent repairs.

Alternatives to export finance

Whether you’re looking for flexible alternatives to export finance or funding options to complement export finance products, here are some alternative solutions to consider:

• Small business loans: Business loan providers like iwoca offer short-term loans for SMEs tailored to your specific working capital and operational needs.
• Invoice finance: A popular option for businesses with various contracts and lengthy payment terms to unlock cash from future client invoice payments.
• Lines of credit: A cost-efficient finance solution to borrow funds up to an agreed limit and use the money as and when needed.
• Trade credit: Commercial relationships where suppliers enable buyers to access required goods and materials and pay for them later.

These are just some of the alternative business funding options to explore, providing the flexibility SMEs require to use capital when and where it’s most needed while managing cash flow and seasonal challenges.

Benefits of iwoca’s flexible business loans

iwoca is a leading business loan provider for UK companies. Our short-term loans help SMEs overcome cash flow challenges, provide quick and easy access to funds and empower business growth. 

If you’re looking for a flexible credit solution to cover your exporting costs and support your wider operational needs, here are the key benefits of our business loans:

• A simple application process requiring minimal documentation, with less onus on your business credit score – we focus on things like your business plans and revenue potential
• Quick approvals and fast access to capital – you can expect a decision within 24 hours, and funds are typically made on the same day
• Flexible repayment terms – you can borrow between £1,000 and £1,000,000 for as little as a day and up to 60 months
• You only pay interest on the funds you use, and there are no fees for early repayment

Explore our Flexi-Loans and see how iwoca can help your business manage cash flow effectively while navigating exporting challenges.  

Sources:

• Export Goods from the UK [Gov.uk]
• Export Finance [British Business Bank]
• About UK Export Finance [Gov.uk]
• UK Export Finance: Leading with Finance (Products) [Gov.uk]‍
• UKEF Products and Services, Who We Support, Success Stories [UKEF’s Official Site]