Finance is even more critical if you are developing products specifically for a market. Often new labels, packaging or additional certifications and approvals are required. These costs all need to be accounted for in your export plan.
You may have to consider debt or equity arrangements to implement your export plan. It is important to get financial planning advice early to minimise any future cash flow and capital difficulties.
Sources of funding
Export finance can be categorised in two types:
- Debt funding ( loans, leases, overdrafts, terms of trade etc.)
- Equity funding (investment capital)
Debt funding
Common sources of debt funding for short and long-term exporting plans are banks and financial institutions. These funds, whether in the form of short or long-term financing, are typically for specific purposes. These could include an overdraft to provide short-term working capital to fund your export plans, or a term loan to purchase buildings, machinery or other assets required to scale up for an export market. Leasing and hire purchase arrangements also fall into this category.
Common forms include:
- Bank overdraft facilities – Overdrafts are useful for short periods. As pre-shipment finance, they can help with purchasing raw materials or processing. Post-shipment they can help you maintain your production programme until you receive payment.
- Term loans – These are usually used for financing capital investment projects, such as setting up new plant or other assets required to scale up for an export market. Terms are generally from six months to five years. Repayment is usually spread over the period of the loan.
Equity funding
Equity funding is a capital investment in a business that usually does not attract interest or have to be repaid. Instead, the investors take a share of the business. They are looking for a good return on their investment and the opportunity in the medium term to on-sell their investment. There are several different types of investors.
- Family and friends – If they believe you have what it takes to export successfully they may want to invest. Make sure you seek legal advice and have agreements in writing.
- Angel investors – high net worth individuals (often successful business people) who either lend you money at the early stages, or take an equity stake. Angel investors generally prefer to invest in areas or industries they are familiar with. If they have expertise and experience in your export market then even better.
- Venture capitalists – manage funds on behalf of institutions or high net worth investors. They will provide more money than an angel investor and will also provide expertise, support, contacts and management help. Funding is usually only offered when you’re more established. They will take a share of your business, and are there to drive a business to sale of all or partial shareholding (i.e. to an eventual exit).
- Corporate investors – will look to buy you out, either in part or in full. Their main reason for this is for synergies they have spotted between your business and theirs or to generate new revenue streams from your products and customers.
Explaining your financials
Make sure you are well prepared when you explain your financials to potential investors. They will ask you questions such as:
- What is your projected gross profit margin on export sales?
- What is your current and projected net profit margin?
- What are your monthly variable costs for exporting?
- What are your monthly overheads (fixed costs)?
- What allowance have you made for distribution and sales costs?
- How have you performed against previous forecasts?
- How does your cost structure scale with increased revenue?
- What assumptions have you made in your forecasts?
As a business owner it is important that you own, understand and control your company’s cashflow and financial position. You will be expected to utilise specialist financial advisors either in house or service providers.
If you need investment, either in the form of debt or equity funding, be prepared for close scrutiny of your business and export plans. Seek advice from accountants and consultants experienced in the area of financial and capital requirements. There is a great deal of useful information, advice and contacts in NZTE’s Investment Ready Guide.
Find out more about accessing trade finance from the International Trade Centre's guide: How to Access Trade Finance: A guide for Exporting SMEs
