Corporate finance includes project and export finance, which use a mix of debt and equity to pay for business operations. Export financing involves factoring, where a domestic firm sells goods at a discount to a foreign entity. Factoring allows manufacturers to receive money upfront, which can be used to repay loans. Project and export finance can also be reflected in a company’s accounting reports.
Corporate finance represents a set of activities that often include creating a mix of finance. Project and export finance are two specific financing activities that come under this global business activity. Project finance is the capital a company secures to launch a new set of business operations. Export financing occurs when a company decides to sell goods in an international country through the use of standard import and export activities. The connection between project and export finance is people working in corporate finance who engage in both activities.
Firms often use a mix of debt and equity for project finance. These two financing businesses essentially use other people’s money to pay for various businesses. Debt is either bank loans or bonds issued by the company. Equity funds come from the sale of stock or an infusion of venture capital funds from a corporate entity. Project and export finance differ here as these classic sources of external capital often have no place in export finance.
Export financing is most often the sale of goods to a foreign entity at an invoice discount. The appropriate term for this business is factoring. The seller looks for a foreign firm – commonly a wholesaler or even a bank connected to a distribution firm – to sell the goods. A common factoring scenario involves the domestic firm selling the goods at a discount of 20 to 20% off the invoice price. The foreign company is then responsible for selling the goods on the international market; Factoring terms often differ based on the types of goods in the deal and the international country.
Factoring goods internationally is beneficial because the domestic manufacturing company gets the money upfront for the recently produced goods. Manufacturers typically ensure that the discounted bill price still provides some profit, albeit a slightly reduced one. In asset factoring, project and export finance still coincide because money received for assets often helps pay off the initial external funds. In most cases, companies use only a portion of the money they earn from internationally traded assets to repay loans. Equity financing may not need to be repaid, making this type of financing more favorable for businesses.
Project and export finance can also have a connection in a company’s accounting reports. For example, companies list their external debt and equity funds in the liabilities and equity sections of their balance sheets, respectively. The export financing results in a note of the cost of goods sold in the income statement. An account or special disclosure may be required to inform interested parties about this activity. A brief note attached to the financial statements is sufficient for this disclosure.
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