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Corporate finance represents a set of activities that often include the creation of a financing mix. Project and export finance are two specific financing activities that fall under this overarching business activity. Project finance is the capital a company secures to start a new set of business operations. Export finance 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 the individuals working in corporate finance who engage in both activities.
Companies often use a mix of debt and equity capital for project finance. These two financing activities essentially use other people’s money to pay for various business activities. Debt is either bank loans or bonds issued by the company. Equity funds come from stock sales or an infusion of venture capital funds from a corporate entity. Project and export finance differ here as these classic external capital sources do not often have a place in export finance.
Export finance is most often the sale of goods to a foreign entity at an invoice discount. The proper term for this activity is factoring. The seller looks for a foreign business — commonly a wholesaler or even a bank connected to a distribution firm — to sell the goods. A common factoring scenario results in the domestic firm selling the goods at a two to seven percent discount off the invoice price. The foreign corporation is then responsible for selling the goods in the international marketplace; 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 up front for recently produced goods. Manufacturers typically ensure the discount invoice price still provides some profit, albeit slightly reduced. When factoring goods, project and export finance again coincide because the money received for the goods often helps to pay down the initial external funds. In most cases, businesses only use a portion of the cash earned from internationally factored goods to repay loans. Equity financing may not need repayment, making this financing type more favorable for businesses.
Project and export finance may 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 section of its balance sheet, respectively. Export finance results in a cost of goods sold note on the income statement. A special account or disclosure may be necessary to inform stakeholders on this activity. A short note included with financial statements is sufficient for this disclosure.
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