Introduction: The potential of Nigeria’s non-oil export sector to drive growth, economic diversification and job creation is well documented. Classified by the Central Bank to include agricultural produce, mineral resources, semi-manufactured goods, manufactured products and non-traditional exports, non-oil export trade is generating sustained interest from many Nigerians; especially in the light of extant macroeconomic realities.
Inadequate financing is however a major impediment to translating these interests into actual trading. Even for those exporters fortunate enough to score willing international purchasers, sourcing the financing to meet large-scale orders can sometimes be difficult especially where the per-payment terms are excluded from the purchase agreements. This article offers new and established exporters alike, valuable tips for accessing the financing options that are available while also exploring the risks that may be attached to each in particular trade circumstances.
Sources of Export Finance: Export finance provides working capital solutions, such as loans, to enable businesses to meet their fiscal or supply chain needs at critical points in the export trade process. The available solutions help exporters bridge the gap between the production, supply and payment stages of the entire process. They could be in the form of working capital, asset financing or term loans and provide the trader with the needed funds to facilitate pre-purchase or pre-payment stages of his entire operation or a particular transaction. They are therefore critical to ensuring that exporters meet their commitments and also seize growth opportunities.
Financial banks are often the primary source of export finance. Many banks in Nigeria offer various trade finance services tailored to the needs of exporters. Also, governmental agencies such as the NEPC facilitate access to various financial incentives for exporters including but not limited to grants.
Types of Export FinanceExport financing is usually divided into 2 stages which are the pre-shipment stage and the post-shipment stage.
During the pre-shipment stage, banks often grant loans to exporters for financing the purchase, processing, manufacturing, and (or) packing of goods before shipment of the goods. Here the banks are usually concerned with the risk of fund diversion and non-performance of the contract between the buyer and the seller. Due to the higher level of risk at this stage, banks usually request collateral to secure the loan. Also, it is usually advisable for the exporters at this stage to have invested a certain stake in their own business and the export transaction itself. A demonstrated commitment through personal investment can increase their credibility in the eyes of financial institutions.
At the post-shipment stage, banks provide loans to exporters after the shipment of goods and (or) before the export proceeds are realized. At this point, banks generally do not require collateral, as the risk of performance or diversion of funds is lower, with the primary concern being the potential repudiation of the contract by the buyer.
It is therefore advisable for exporters at this stage to have secured a reliable mode of payment from the buyer, such as a demand guarantee, letters of credit, or obtained export credit insurance. These instruments assure financial institutions of loan repayment once the issuing bank processes the payment, unlike cash payments, which can be easily defaulted on by the buyer.
Understanding the Allocation of Risks and Liabilities: In export finance, understanding the allocation of risks and liabilities is essential for both exporters and financial institutions, as these transactions expose both parties to significant risks. Financial institutions assume both business and capital risks, prompting them to implement systems to mitigate these risks. This includes thorough credit underwriting, diligent assessment of potential transactions, and ongoing monitoring of current transactions. Exporters should be prepared to provide detailed information and documentation to support their creditworthiness and mitigate perceived risks.
On the other hand, the primary risk lies with the exporter’s ability to fulfil the contract. This includes ensuring timely delivery, product quality meeting specifications, and potential disputes with the buyer. The exporter bears the financial loss if the buyer fails to pay for the goods. Currency fluctuations can pose another significant risk, potentially diminishing export earnings when realized.
Mitigating these risks demands comprehensive risk management strategies, including thorough due diligence on buyers, diversification of markets, utilization of financial instruments like obtaining export credit insurance or guarantee and implementing well-drafted contract are vital steps to safeguarding exporters’ interests. In the event of large orders, requesting for advanced payments to cover the cost of increased demand can help reduce the risk.
Legal Intricacies: Firstly, there has to be an export contract in place between the exporter and the buyer. This export contract serves as the foundation for obtaining export finance from financial institutions. The contract outlines key details such as the quantity, quality, price, and delivery terms of the goods or services to be exported. From a legal perspective, the sales contract must be carefully drafted to ensure clarity, certainty, and enforce-ability of the terms and conditions.
It should address important aspects such as payment terms, delivery obligations, warranties, dispute resolution mechanisms, and applicable law. Financial institutions typically require a copy of the sales contract as part of the documentation process for evaluating the creditworthiness of the exporter and assessing the risks associated with the transaction. The sales contract may need to incorporate financing-related clauses to facilitate the provision of export finance. These clauses may include provisions for payment methods such as letters of credit or documentary collections, which provide financial institutions with greater security and assurance of payment.
Secondly, ensuring compliance with regulatory requirements and international trade laws is paramount for exporters seeking export finance from financial institutions. Exporters must navigate a complex web of regulations, including export controls, sanctions, and other regulations, which vary depending on the countries involved, the nature of the goods or services being exported, and the parties engaged in the transaction.
Lastly, the financing agreement, a pivotal document in securing export finance from financial institutions, delineates the terms under which the exporter obtains financing for their international trade transaction. This legally binding contract outlines essential elements such as the loan amount, interest rate, repayment terms, and any associated fees or charges and specify events of default that trigger the lender’s rights to demand repayment. Exporters should carefully review and negotiate the terms of the financing agreement to ensure they align with their business objectives and financial capabilities.
Challenges in Accessing Export Finance and Possible Solutions: New exporters often face significant challenges in accessing trade finance due to their lack of proven track record. Banks may be hesitant to extend finance to these businesses without a proven history of successful transactions and financial stability.Other challenges include high interest rates and fees, the collateral requirements, the non-longevity of the business, and the lack of meeting the stringent requirements imposed by these financial institutions in terms of appraisal.
New entrants, when faced with these challenges, can partner with other established businesses to leverage their credibility and financial history. Additionally, forming strategic alliances or joint ventures can help new exporters share resources, reduce risks, and improve their chances of securing export finance.
Conclusion: In conclusion, while export finance can be crucial for the growth and success of Nigerian exporters, accessing these funds can be challenging, especially for new entrants in the market. By understanding the available financing options and associated risks, conducting due diligence on buyers and complying with regulatory requirements, exporters can better navigate the complexities of international trade finance.
Written by Akabogu Law
For assistance on any issues raised in this advisory notice, please contact us at +2347043293271; info@akabogulaw.com.
