A2 Financing of International Business
Overseas expansion can be very costly for a business. For example, an increase in sales leads to an increase in production which may need an expansion of facilities, equipment and stock. There may be a need for an overseas office, staff and extra payments for customs. A lot of these costs may need to be covered before the revenue from this expansion is received. Therefore it is important to explore the finance available to businesses who expand overseas.
Prepayment by the importer means that the customer of the product makes the payment before the product is shipped or produced depending on the agreement. This means that the supplier does not have to pay for the production and shipment costs in advance. This can have a positive impact on cash flow but may affect the relationship with the customer if they prefer a credit period.
Letters of credit are letters that are issued from the customer’s bank to confirm that they are able to pay an invoice and can do so on time. If the customer then cannot pay the invoice, the bank is responsible for payment. This removes the risk of an invoice not being paid which could be a concern as a business is building a relationship with a new customer.
Export credits are loans provided to overseas buyers of exporters to ensure that they can pay their invoices. This allows a business to export goods and services to overseas buyers without having negative cashflow or risking non payment of invoices. Governments offer this service to support the economic development of their country by supporting their exporting businesses.
Bank loans are amounts of money borrowed from a bank by a business. They repay the loan in smaller installments with additional interest payments. This can allow them to cover the starting costs of international expansion. This allows businesses that are new to operating internationally to start this sooner.
