Export funding has become a very important and effective tool that has allowed companies to trade overseas without the usual hefty complications, one of which being the financial risks.
Admit it. We all hate risks and we’d do everything in our power to avoid them. The thing is, exporting and diving into the international market is tough business. It’s not for the weak and it demands so much that it may appear extremely taxing. However, businesses know that when done right it can lead to endless opportunities, expansion and growth that is simply hard to ignore.
Now, what are the types of financial risks that export funding helps shun away? Let us all find out by reading the following list.
1. Credit Risk – Investopedia defines it as “the risk of loss of principal or loss of a financial reward stemming from a borrower’s failure to repay a loan or otherwise meet a contractual obligation.” In other words, it occurs when the buyer or importer misses or fails to pay up. Delays are by itself already numbing. Absence on the other hand screams nightmare.
2. Currency Risk – This arises from the change in price of one currency against another. Trading overseas mean that one will sell goods and receive the payments thereto via the local currency of the exporter. Over time, these fluctuations can create losses especially when certain economies abruptly surge up or down.
3. Liquidity Risk – This is the risk that the entity could no longer meet its short term obligations, often due to the inability to convert a security or hard asset to cash without a loss of capital and/or income in the process. Importers are known to defer payment up until goods have been delivered or until they have been resold. This can create a liquidity issue for the exporting company as its cash will be locked up in their invoices. When this grows to a certain degree, it will put a strain on the cash levels and thus affect liquidity. Export funding helps remove this by allowing companies to advance the value of such invoices even before actual payment is administered.
By minimizing or even eliminating credit, currency and liquidity risks, export funding allows companies to better maximize the benefits of the trade. This reduces if not removes the fear of having to face these threats that could in a way hurt the business to a crippling degree.