Project and export financing: what’s the link?

[ad_1]

Corporate finance represents a set of activities that often includes creating a financing mix. Project financing and exports are two specific financial activities that fall under this general business activity. Project financing is the capital that a company secures to start a new set of business operations. Export financing occurs when a company decides to sell products in an international country through the use of standard import and export activities. The connection between the project and the financing of exports are the people who work in corporate finance who are involved in both activities.

Companies often use a combination of debt and equity capital to finance projects. These two financial activities essentially use other people’s money to pay for various business activities. The debt is bank loans or bonds issued by the company. Equity funds come from the sale of shares or an infusion of venture capital funds from a corporate entity. Project and export financing differ here, as these classic external capital sources often do not have a place in export financing.

Export financing is typically the sale of goods to a foreign entity at a discount on the invoice. The appropriate term for this activity is factoring. The seller looks for a foreign business, commonly a wholesaler or even a bank connected to a distribution company, to sell the products. A common factoring scenario has the domestic company sell the products at a discount of two to seven percent of the invoice price. The foreign corporation is then responsible for selling the products in the international market; Factoring terms often differ depending on the types of goods in the agreement and the international country.

Factoring goods internationally is beneficial because the domestic manufacturing company gets the money upfront for newly produced goods. Manufacturers generally make sure that the discounted invoice price still provides some profit, albeit a slightly reduced one. When factoring goods, projects and export financing coincide again because the money received for the goods often helps pay for the initial external funds. In most cases, businesses only use a portion of the cash earned from international factor assets to repay loans. Equity financing may not require repayment, making this type of financing more business friendly.

The financing of projects and exports can also have a connection in the accounting reports of a company. For example, companies list their external debt and equity funds in the liabilities and equity section of their balance sheet, respectively. Export financing results in a cost of goods sold note on the income statement. A special account or disclosure may be required to inform data subjects of this activity. A brief note included with the financial statements is sufficient for this disclosure.

Smart Asset.

[ad_2]