Export financing guide for trade finance and factoring

How export financing works

Export financing gives you working capital to accept larger orders, offer competitive terms and keep production moving. Start by mapping your cash conversion cycle from purchase order to cash in bank. If your buyer wants 30 to 90 days after shipment, you can close the gap with pre-shipment loans for raw materials, then post-shipment finance once documents are ready. Align terms with Incoterms, insurance and freight so the risk sits with the party best able to manage it. Quote in a currency you understand, then hedge if margins are thin. Ask for deposits where possible, or pair a deposit with a smaller discount later to keep incentives aligned.

Documentation quality drives approvals. Your commercial invoice, packing list and transport documents must match the contract line by line. Keep a clean trail for origin, sanctions and end use to pass KYC checks quickly. If you sell on open account, consider credit insurance or a standby instrument to backstop payment. If your buyer prefers a bank instrument, compare a letter of credit service with documentary collection and choose based on risk, speed and cost.

Rates, fees and collateral depend on buyer strength, country risk and your own financials. Improve your case with steady order flow, low disputes and proof of delivery. Strong trade finance services often package funding with document checking, logistics support and currency solutions so you get fewer delays. On a rainy Monday, I helped a small exporter fix a lapsed L/C and ship on time. Build the same habit of early checks, and your deals move faster without surprises.

Know your options beyond bank lines. Packing credit or pre-shipment loans tied to a purchase order fund production, then trust receipts or export bills finance goods until payment. Assignment of proceeds lets you use a letter of credit as collateral without tying up your main line. Export credit agencies can share risk with your bank, which lowers pricing and lifts limits. Build a calendar showing order intake, shipment windows and expected cash dates, then test different finance mixes to hit your target working capital.

Using letters of credit

A letter of credit is a bank’s written promise to pay you if you give compliant documents. It shifts buyer risk to an issuing bank, which is why many exporters pick this path for first orders or new markets. You and the buyer agree on goods, price, shipment window and documents. The buyer asks its bank to issue the L/C. Your bank advises it to you, then you ship and give documents within the stated time. If every detail matches, the bank pays at sight or on the stated maturity. Worried about getting paid?

Structure is everything. Ask for a confirmed letter of credit when the issuing bank or country feels risky. Keep descriptions consistent across proforma, L/C text and invoice. Choose documents you can produce on time, such as a negotiable bill of lading, certificate of origin and inspection report when needed. Timeframes matter, so plan sailing schedules and document release dates before you book cargo. Small edits can avoid costly discrepancies, like aligning partial shipments, tolerances and latest shipment dates with real lead times.

Costs include issuance, confirmation, negotiation and amendment fees, so compare them with open account plus insurance. Sight L/Cs pay on presentation. Usance L/Cs pay later but can be discounted for earlier cash. Transferable or back-to-back structures help when you are an intermediary, while standby letters support performance or payment without changing how you invoice. A good letter of credit service does more than relay messages. It helps draft the L/C, flags weak clauses and pre-checks sample documents so you give documents once and get paid once.

Invoice and supply chain finance

Invoice financing turns approved receivables into near-immediate cash. With factoring, you sell invoices to a financier who advances a percentage, then releases the balance at collection minus fees. With invoice discounting, you borrow against invoices and keep control of collections. Choose recourse if you can take buyer risk, non-recourse if you want the funder to take it for named buyers. Advance rates rise with buyer quality, clean dispute history and strong concentration limits. Prices blend a service fee and a discount rate, which falls as your volumes grow and days sales outstanding drop.

To get ready, set up a notice of assignment, use a lockbox for payments and keep purchase orders, delivery proof and credit notes tidy. Funders will verify invoices with buyers, so ship complete and invoice once. Avoid dilution by training your team to issue credit notes only for real defects and to record them fast. Add trade finance services like credit checks, portfolio monitoring and simple FX tools to keep more of each dollar you collect.

Supply chain finance helps when your buyers are investment grade. You deliver on open account, the buyer approves your invoice on a platform, then you get early payment at the buyer’s stronger rate. The buyer keeps longer terms while you get cash now, which improves your working capital without new debt. Dynamic discounting is a self-funded version where the buyer pays early for a small price cut. Blend these with selective factoring for smaller or long-tail buyers so you cover the whole ledger. Used well, invoice financing and supply chain finance free cash, reduce strain on your line and smooth production through peaks.

Bottom line: Pick the right instrument, tidy documents and use financing to turn confirmed orders into cash fast.