A man of letters, Ralph Waldo Emerson, some centuries ago summed up the subject this way: “Money, which represents the prose of life, and which is hardly spoken of in parlours without an apology, is, in its effects and laws, as beautiful as roses.”
- Where in the world is my oyster?
- So you want to be an exporter
- Case study: Food for wolves
- Look out world, here you come
- Case study: Honey money
- From a place they've never heard of
- Case study: Future perfect
- Damn the torpedoes
- Case study: For the freight hearted
- Putting the intellect into intellectual property
- Taking care of business
- Does it matter where it's made?
Like the rose, exporting has its attractions but if your finances aren’t in place or properly structured you’ll feel the thorns.
Brett Walters is BNZ’s head of working capital services and asset finances; basically he’s the bank’s goto man when it comes to the world of export financing.
As with any other part of the exporting process, Walters says the key is to engage experts and let them help smooth the journey.
“An exporter can have a worldbeating product, but where they can let themselves down is in not doing the homework and seeking expert advice. To think they can be a manufacturer and also a finance house is stretching the boundaries of most businesses.”
Exporters can face significant risks when they undertake international trade, not least the fear of delay or non-payment. Whether you’re a new or long-established exporter, involving the bank can allow you to focus on growing your export business.
As with other sources of knowledge and information, engaging your bank early is essential. Most New Zealand trade transactions are conducted by a bank, says Walters, mainly because of the unsurpassed expertise in matching conventional cash flow with cross-border cash flow. A haemorrhage in any part can be terminal for a business. Getting the sequence and timing of payments in and out is where the bank can be invaluable.
“The reality is that if you don’t get paid you haven’t actually made a sale. That only happens when there is an exchange of the value of the goods for money. In exporting, the finance process is a risk-balancing exercise based around who has control of the goods versus control of the money. What many don’t realise is that when they’re putting a container on a boat they could be putting a large amount of their capital at risk. How they get paid, and when, suddenly becomes very critical to their well being.”
Having the bank involved early in the process will allow better management of the trade cycle, which can be used to an exporter’s advantage when they have outgoing payments as well as incoming funds.
“Post-shipment finance allows you time to sell your goods before you receive payment for them,” says Walters. “This also allows you to offer payment to your supplier on a sight basis rather than using supplier terms where prices are often increased to cover those terms. This could also help you negotiate a lower price. On the other side, pre-shipment finance lets you to pay for goods before they’re shipped, when the method of payment you have agreed with the exporter is 'Pre-payment by Clean Remittance'.
“Structuring this around different currencies and making sure hedging mechanisms are understood before entering into a sales agreement can give the exporter a real competitive advantage plus greater margin on the sale.
“Again, a fair amount of capital can be tied up into each shipment and this is potentially at risk unless the documentation and the deal are watertight. If the commodity prices shift during the transit time, and the contract and payment details haven’t been clearly stated, this gives the foreign-based purchaser the opportunity to renegotiate and even wriggle out of the deal. Similarly a bank will have the knowledge and the contacts to fully optimise any benefits or advantages that exist under various freetrade agreements or other trading covenants.”
With the stakes so high, Walters has no idea why so many potential and existing exporters are hesitant to get information—especially when a bank can also be a source of market intelligence.
“We have many other clients exporting so can look at an individual deal to see how it’s structured, see if it’s best practice for that particular region, and if it’s the best way to structure the cash flow process.
“In the end we are the means to give an exporter a good night’s sleep. The earlier we are involved in the process, the better and longer that sleep will be. When we know what an exporter is trying to achieve, we then work out the best ways to balance risk, which then creates more rewards.
“Those exporters who are succeeding realise they are manufacturers and/or sellers of things. They are not a finance house. Their job is to manufacture it, sell it and then move onto the next deal. We take care of the money.”
Smooth the exporting journey
Export financing is often a key factor in a successful sale. Contract negotiation and closure are important but the whole point of the process is that your company must get paid.
Exporters naturally want to get paid as quickly as possible. Because of the intense competition for export markets, being able to offer attractive payment terms customary in the trade is often necessary to make a sale. The following factors are important to consider in making decisions about financing:
- The need for financing to make the sale. In some cases, favourable payment terms make a product more competitive. If the competition offers better terms and has a similar product, a sale can be lost. In other cases, the buyer may have preference for buying from a particular exporter, but might buy your product because of shorter or more secure credit terms.
- The length of time the product is being financed. This determines how long the exporter will have to wait before payment is received and influences the choice of how the transaction is financed.
- The cost of different methods of financing. Interest rates and fees vary. Where an exporter can expect to assume some or all of the financing costs, their effect on price and profit should be well understood before a pro forma invoice is submitted to the buyer.
- The risks associated with financing the transaction. The riskier the transaction, the harder and more costly it will be to finance. The political and economic stability of the buyer's country can also be an issue. To provide financing for either accounts receivable or the production or purchase of the product for sale, the lender may require the most secure methods of payment, a letter of credit (possibly confirmed) or export credit insurance or guarantee.
- The need for pre-shipment finance and for post-shipment working capital. Production for an unusually large order or for a surge of orders may present unexpected and severe strains on the exporter's working capital. Even during normal periods, inadequate working capital may curb an exporter's growth.