Methods of financing
On the basis of its financial
plan and the analysis of its capacities of financing,
the company will turn to one or more methods of payment. Generally, they are
offered two major possibilities :
Internal financing 
Internal
financing is the spearhead of all international development, external financing
constituting an extra benefit. In fact, to finance development, the company
must rely on internal financing necessarily, without which, external lenders
are likely to refuse all intervention..
Internal financing consists of :
- self
financing formed by unallocated profits ;
- allocations
for paying off debts, deposits, and stock ;
- income
from transfers of the assets (debts, grounds, buildings, patents, ...).
External financing
A
company undertaking international activities has classic methods of financing
at its disposal to which techniques specific to import and export are added.
For example, credit can be granted to purchasers situated in countries that do
not have easy access to international capital markets or to finance products
destined for export.
We
have chosen to present them to you according to the company's needs, that is to
say, before delivery, during storage or after delivery.
1.
Financing needs before delivery
- Client
deposits (or advances on orders) :
the company can reduce its need for financing by asking for deposits from its
clients. In this case, the clients in part pre-finance the manufacture of the
products they have ordered. Deposits are mainly used when the product or
service takes a long time to produce (principally in the case of equipment).
Often, their sum only represents a small part of the contract's total value
(about 10%).
- Prefinancing
credits :
as
deposits paid by the foreign purchaser are often insufficient, in the majority
of cases, the company must turn towards other financing. Prefinancing credits
are granted by banks to companies during the manufacture of products destined
to be exported. Therefore, they enable the manufacture of exports to be
financed, and in this way, reduce the financial deficit linked to a very large
gap between the manufacture and invoicing. These credits can finance equipment,
factories, employment markets, contracts to be studied, ...
2.
Financing of product stocks
Canvassing
abroad is going to gain orders for the company. To respond to it the company
must set up larger stocks of raw materials, components, as well as finished
products. In addition, adapting products can require specific stocks for
certain export markets. To finance these needs of working capital, the company
can resort to specific financing.
The simplest and most common way of financing stocks
is to obtain the largest payment deadlines. However, resorting to this technique
is conditional on the ability of the company to negotiate. Except for this former
possibility prefinancing credits, such as loans
in foreign currency can be used. Equally, the exporter can lower the cost
of importing raw materials by shifting the payment of fees and taxes by putting
the warehouse under customs
and/or using collection credit.
3.
Financing needs after delivery
Here, it concerns financing credit granted to foreign
clients during the sale of consumer goods or equipment. Companies can turn to
banks or specialised financial organisations.
- Documentary
credit: it corresponds to engaging the purchaser's bank to pay the exporter
against the handover of documents which prove that the goods have been delivered
or that a service provision has been carried out. These documents will then
be transmitted by the purchaser's bank (or to the purchaser's bank) against
repayment, so that the latter can take possession of the goods. Therefore
the seller sets out the payments of his goods as soon as the goods have been
delivered by this mechanism and returns the required commercial and transport
documents to his bank..
- Loans
in foreign currency (or advance in foreign currency) : this deals with
a short term financial credit which enables the financing intervals, caused
by business operations to be covered. The company takes out a loan corresponding
to the sum of the invoice, in the currency of the invoice, rebuilds its income
by selling foreign currency, and subsequently repays the loan with the sum
of the client's debt once they have paid it. Loans in foreign currency has
the advantage of being equally a technique of covering foreign
exchange risks.
- Mobilisation
of effects (or commercial discount) : this is an operation in which a
bank pays to the holder of a commercial
effect, before its due date, the amount of this effect, minus banking fees.
It can be said that the bank anticipates the commercial effect. These credits
enable the exporters who have granted their foreign clients short term deadlines
to receive the sum of their debt as soon as it arises. Despite its relatively
high cost, the mobilisation of effects is a commonly used short term method
of finance.
- Buyer credit
: the bank lends the purchaser the sum of the invoice which the latter
hands over to the supplier. The supplier is also discharged of all non-payment
risks and the corresponding financing charges. The exporter transfers the
client risk to the bank. This form of credit is reserved for the sale of equipment
and to the transfer of technology for relatively important sums.
- Factoring
: by using this technique, the company discharges itself of clearing its client
debts to a factoring company (or factor). This latter takes charge of the
client risk and the repatriation of the debt by charging commission. Above
the security against the risk of non-payment that factoring offers, this technique
also allows debts to be financed. Therefore, the advantages are multiple for
the seller, that is to say financing the guarantee of payment, simplification
of administration, ...
Consult
our technical file to obtain the names of financing organisations in some European
countries.
External financing versus internal
financing
Resorting to a third party (associates or shareholders,
lenders, banks, states, different financial organisations, ...) presents difficulties
in relation to internal financing. We will keep to three of the principle obstacles
to be overcome :
- handling files
is often tiresome
- directors of
small and medium sized companies must be subjected to legal regulations which
are sometimes costly, notably through personal deposits
- this type of
financing does not cover all of the company's activities and notably the most
risky such as launching a new product in the market, protecting a new invention
or a new technique, ...