What is Export Trade Credit (ETC) Financing?

Export Trade Credit financing is a financial arrangement that provides funding to exporters based on their accounts receivable from international buyers. It bridges the gap between when goods are shipped and when payment is received, helping exporters maintain healthy cash flow despite the longer payment cycles typical in international trade.

How ETC Financing Works

The ETC financing process typically follows these steps:

  1. Trade Agreement: An exporter and international buyer establish a trade agreement with payment terms (typically 30-180 days).

  2. Shipment: The exporter ships goods to the international buyer.

  3. Financing Request: The exporter submits relevant documentation (commercial invoice, bill of lading, etc.) to an ETC financing provider.

  4. Advance Payment: The financing provider advances a percentage (usually 70-90%) of the invoice value to the exporter.

  5. Collection: When payment is due, either:

    • The buyer pays the financing provider directly

    • The buyer pays the exporter, who then repays the financing provider

  6. Final Settlement: After collection and deduction of fees, any remaining balance is paid to the exporter.

Example of ETC Financing in Action

Let's consider a practical example:

  • A US-based furniture manufacturer exports $100,000 worth of office furniture to a buyer in Germany

  • Payment terms: Net 90 days

  • ETC advance rate: 80%

  • ETC financing fee: 3% for 90 days

Transaction Flow:

  1. After shipping the furniture, the manufacturer submits export documentation to their ETC financing provider.

  2. The financing provider advances $80,000 (80% of $100,000) to the manufacturer.

  3. After 90 days, the German buyer pays the full $100,000

  4. The financing provider deducts:

    • $80,000 (the advanced amount)

    • $3,000 (3% financing fee)

  5. The financing provider remits the remaining $17,000 to the manufacturer

This arrangement allows the manufacturer to access 80% of the funds immediately rather than waiting 90 days, enabling them to finance new production and grow their business.

Types of ETC Financing

There are several variations of ETC financing available:

  1. Export Factoring: Selling export receivables at a discount to a factoring company, who then assumes collection responsibility.

  2. Export Credit Insurance: Not direct financing, but insurance that protects against non-payment and can make other financing options more accessible.

  3. Forfaiting: Selling medium to long-term export receivables (usually backed by bills of exchange) at a discount to a forfaiter.

  4. Supplier Credit: When an exporter extends credit directly to the buyer, then obtains financing based on that credit agreement.

  5. Buyer Credit: When financing is arranged for the foreign buyer, enabling them to pay the exporter upfront.

Benefits of ETC Financing

ETC financing offers numerous advantages for businesses engaged in international trade:

  1. Improved Cash Flow: Access to working capital without waiting for international payments to clear.

  2. Risk Mitigation: Many ETC financing options include protection against non-payment or currency fluctuations.

  3. Competitive Edge: Ability to offer more favorable payment terms to international buyers.

  4. Balance Sheet Management: Some forms of ETC financing can be structured as off-balance-sheet financing.

  5. Simplified Collection: The financing provider often handles the collections process, reducing administrative burden.

  6. Market Expansion: With improved cash flow and reduced risk, businesses can more confidently enter new markets.

Accounting for ETC Financing

Proper accounting for ETC financing is crucial for financial reporting. Depending on the specific arrangement, accounting considerations may include:

  1. Receivables Recognition: How and when to derecognize accounts receivable that have been factored or financed.

  2. Fee Recognition: : Proper classification of financing fees as financial expenses.

  3. Disclosure Requirements: Appropriate footnote disclosures about financing arrangements.

  4. Recourse vs. Non-recourse: Different accounting treatments based on whether the financing includes recourse provisions.

  5. Currency Translation: Handling of foreign currency aspects of the transaction.

Specialized accounting software like Timber can help manage these complexities with dedicated modules for international trade financing.

How to Get Started with ETC Financing

If you're considering ETC financing for your business, follow these steps:

  1. Assess Your Needs: Evaluate your international receivables, cash flow requirements, and risk tolerance.

  2. Research Providers: Look for banks, specialized trade finance companies, and export credit agencies that offer ETC financing.

  3. Prepare Documentation: Organize your export documentation, financial statements, and buyer information.

  4. Compare Terms: Evaluate advance rates, fees, recourse provisions, and additional services offered by different providers.

  5. Start Small: Consider beginning with a pilot program for certain customers or markets before implementing broadly.