Payment gaps in the export process can cause havoc with an exporter’s cash flow. Peter Mace examines solutions to help you better manage your export cash flow.
There are many challenges for exporters, from finding a buyer and finalising a contract, through to organising a shipment and getting paid for it. Many of these steps involve costs and invariably there is valuable capital tied up in the process.
For exporters of goods it starts with the purchase of raw materials through to manufacture and delivery. For service exporters, personnel costs and overheads often occupy capital until the completed delivery of the service.
For many exporters the inability to access suitable finance leads to a focus on pre-payment sales. This certainly solves a lot of financing problems and for businesses selling across mediums such as the internet or e-Bay this is often an acceptable option for their buyers. However, for many traditional export sectors pre-payment is not possible and payment terms will need to be offered to secure the sale. Let’s look at finance requirements and some potential sources of support.
Pre-Shipment Finance
Exporters may have financing requirements for manufacturing or preparing goods for export, while service businesses have development costs. Even when suppliers of raw materials or inputs provide credit terms, the interest cost will be included in the cost of materials.
Many businesses try to cover the cost of getting their goods and services ready for export using their working capital. Working capital may be funds available (for the lucky few). However, more often it is obtained from credit facilities provided by banks.
Other financing options available to exporters:
• Supplier credit: using credit terms available from suppliers to finance all or part of the gap, until payment is received from the end buyer.
• Bank finance: talk to your bank about your financial requirements and the support that can be offered. Businesses with a good track record should be able to approach their bank for additional short-term funding to support the preparation of goods for overseas sale.
• ‘Red Clause’ Letters of Credit: where a high level of trust exists between buyer and seller, the buyer can insert a clause in the Letter of Credit that allows an advance payment to the seller (exporter) to finance the preparation of the goods for export.
• Working capital increase: EFIC’s Headway product allows eligible SME exporters to access an additional 20 percent of working capital through their financial institution, by way of EFIC underwriting the additional finance. Applications are forwarded through the exporter’s bank.
• Negotiating a direct, upfront, part payment from the buyer can help to get goods ready for export. This may be appropriate and desirable where the goods are tailored to the requirements of a particular buyer.
• Inventory finance: as goods are prepared for export, an inventory builds up and this inventory represents idle funds until shipment takes place and payment is made. By converting the inventory value (or part of it) into cash, the business has available funds to finance additional production. The goods or inventory may need to be assigned to the financier and will need to be readily saleable stock.
Post-Shipment Finance
Once a shipment has taken place, there should be an invoice (and sometimes a bill of exchange) that will specify that goods have been shipped and an obligation for the buyer to pay an agreed amount at a specified future date. This date may be at the time of shipment, on arrival of the goods, or at a date after the goods have arrived. Again, unless the business has a fluid cash flow, there may be a need to finance this waiting period so the business creditors and staff can be paid and goods can be produced for the next sale.
There are a number of ways this future payment can be protected and the method will impact on whether this post-shipment period can be financed and also on the cost of finance.
• Documentary Letter of Credit. This is a guarantee from the buyer’s bank to pay for the shipment, providing shipping documents conform to the Letter of Credit terms and conditions. Once the documents are checked and found to conform, this is now a bank guarantee (as long as the buyer’s bank is creditworthy) and as such the exporter’s bank should be prepared to advance the amount of the shipment to the exporter, less the cost of interest. (If the exporter has any doubts about the creditworthiness of the buyer’s bank, he can ask his bank to add their confirmation, which is essentially an additional guarantee by his bank on the payment).
• Export credit insurance. Credit insurance mitigates the exporter’s risk of non-payment by the buyer due to insolvency, bankruptcy, repudiation of payment or other, defined commercial reasons. (Non-payment due to a dispute over the quality of goods or services provided is not covered by credit insurance until the dispute is settled in the exporter’s favour). Banks and other financiers may be willing to accept credit-insured receivables as part security for advances to the exporter so that funds can immediately go back into the business. Some of these policies can be ‘assigned’ to the bank or financier, which provides additional comfort to the bank or financier advancing the funds.
• EFIC Headway. Accessing additional working capital through the Headway product might take the pressure off financing the post-shipment part of a sale.
• Trade loans. Banks will advance funds to established exporters with existing borrowing facilities to specifically finance the period from shipment through to payment by the buyer.
• Export debtor finance. Exporters with a sound track record of payment from reliable buyers may be able to establish facilities with their bank so that the bank will discount (pre-pay) the invoice to a certain percentage, pending final payment by the buyer. The invoices or receivables can also be credit-insured for additional safeguard. For many businesses their receivables are one of the largest assets on the balance sheet, so turning these receivables into cash can greatly assist growth opportunities.
Cash Flow Plan
The business should develop a monthly cash flow forecast based on accrued (actual) expenses and real sales revenue (funds actually in the bank account). From the cash flow forecast the business can clearly identify when funds are required, how much and for how long; and which of the listed financing options best suits the funding of any gaps, both in terms of flexibility and cost.
Armed with this information you can confidently approach your bank and seek their support in financing your export sales. Your bank will certainly appreciate the fact that you know how and why your working capital needs a top-up and also how and when the debt will be repaid.
The cost of interest in financing your exports is a real cost of goods sold and so should be included in your product costs, rather than it being deducted from your profit margin.
—Peter Mace is general manager of the Australian Institute of Export.
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