Expanding internationally brings opportunities but also new risks: longer payment terms, exchange rates, and unfamiliar debtors. This article explains which financing instruments can help.
Many technical suppliers in the Brainport region already operate internationally, simply because their customers do too. For other SMEs, taking the step into export or international expansion is new, raising questions that rarely arise with domestic growth: how to bridge longer payment terms, how to insure against non-paying foreign customers, and how to manage exchange rates.
This article discusses the key instruments involved in international growth. For broader financing questions around growth, please refer to the page on growth finance.
Why international growth is financed differently
With exports, working capital requirements often escalate: production and dispatch take place before payment is received, and international payment terms are frequently longer than usual in the Netherlands. In addition, the creditworthiness of a new international buyer is harder to assess than that of a familiar domestic customer.
This combination of higher working capital demands and greater payment uncertainty means standard financing is sometimes insufficient, bringing supplementary instruments such as export credit insurance and factoring into play.
Export finance: what it involves
Export finance is an umbrella term for financing structures specifically tailored to international trade, such as order pre-financing, bank guarantees for foreign buyers, and finance based on export receivables. Some banks offer dedicated products for this, and Atradius Dutch State Business, operating on behalf of the Dutch state, also plays a role in larger, higher-risk export transactions.
For small and medium-sized export orders, it is often more practical to look at existing instruments such as working capital finance and factoring, applied to the specific circumstances of international receivables. Consult RVO for an up-to-date overview of schemes relevant to exporting SMEs.
Credit insurance: protection against non-payment
Credit insurance covers the risk that a customer, domestic or foreign, fails to pay due to insolvency or protracted default. For companies doing business with international buyers for the first time, this is an instrument to mitigate debtor risk without needing to carry out exhaustive credit checks per country and client yourself, as the insurer handles this as part of its service.
Moreover, credit insurance can enhance the bankability of your receivables: a bank or factoring company takes a more favourable view of insured receivables because debtor risk is partially mitigated.
Currency risk: what to watch out for
- Invoicing in foreign currencies carries the risk that the value in euros drops between the date of invoicing and receipt of payment
- Forward exchange contracts with the bank can hedge this risk for a specific amount and date, at a price set by the bank based on market conditions
- Invoicing in euros wherever possible is the simplest way to eliminate currency risk, although this is not negotiable in every market or with every client
- Large, one-off orders in foreign currencies warrant particular attention, as exchange rate fluctuations can have a disproportionate impact on profit margins
- DNB and your bank can provide background information on exchange rate trends, but we deliberately make no forecasts here
Working capital in international growth
Beyond specific export instruments, the fundamental challenge in international expansion often comes down to working capital: how to bridge the period between purchasing or production and eventual payment by the overseas buyer. Factoring of export receivables, potentially combined with credit insurance, can provide a solution here, as can a standard working capital facility tailored to longer lead times.
To gain a clear picture of the required working capital headroom, it is advisable to prepare a cash flow forecast beforehand that takes into account the longer payment terms customary in the target market, rather than assuming domestic timeframes.
Calculation rationale: additional working capital requirements for export
Compare the average payment terms of your domestic clients with the expected terms in the new export market. The difference in days, multiplied by the projected average daily turnover in that market, provides an indication of the additional working capital required for international expansion.
Add any additional inventory or transit days to this, as international logistics often entails longer lead times than domestic deliveries. This figure serves as a starting point for discussions with your lender regarding the size of facility required, rather than an exact forecast.
Concrete next steps
- Map out the customary payment terms and commercial practices in the market you intend to expand into
- Assess whether credit insurance is appropriate for the scale and diversification of your expected overseas debtors
- Discuss the options for forward exchange contracts with your bank if you anticipate invoicing in foreign currencies
- Consult RVO for up-to-date schemes and support for international enterprise
- Prepare a cash flow forecast that accounts for longer payment terms, and discuss the outcome with your lender before accepting your first major export order
Frequently asked questions
- What is the difference between export finance and standard working capital finance?
- Export finance is tailored to the specific risks of international trade, such as longer payment terms, currency risk, and unfamiliar overseas debtors. In practice, existing instruments like working capital facilities and factoring are often adapted to this export setting.
- Is credit insurance mandatory for exports?
- No, it is not compulsory, but rather a tool to mitigate debtor risk. In addition, it can improve the bankability of your export receivables with a bank or factoring company.
- How do I prevent losses from exchange rate fluctuations?
- Invoicing in euros avoids currency risk altogether, but is not always feasible. Alternatively, you can enter into a forward exchange contract with your bank to hedge a specific amount at a fixed rate.