In the export business – as in business more broadly – maintaining a healthy cash flow is a critical element for success. Cash flow weighs heavily in the equation that determines whether your business can run its purchasing and manufacturing processes at their peak levels, and having a steady cash flow can greatly control your ability to grow.
Unfortunately for exporters, recent changes in world trade conditions have made managing cash flows more difficult. Increased competition between suppliers has meant that overseas buyers are now regularly able to demand, and obtain, ‘open account terms’. These terms mean that shipments are paid for only when they arrive at the buyer’s location – with no reliable guarantee of end payment.
If you are an exporter, this is a poor situation for a number of reasons.
Firstly, shipped freight can be at sea for weeks and even months, presenting long delays before payments are made and consequent trouble for your cash flow.
Secondly, the Australian dollar could move during shipment and before payment, affecting your profit margins and the competitiveness of your goods.
Thirdly, once the shipment arrives, there is no iron-clad assurance of payment being made. For whatever reason, the buyer may reject your product, or suddenly find they are unable to pay. Arranging the return of the goods can be an expensive and time-consuming task.
To circumvent payment delays, you might consider obtaining finance from a bank. Because of the risks introduced by open account terms, however, a number of banks are refusing to fund these types of sales without some form of property or asset security – such as a home or business – on the loan.
Instead, an increasingly popular way for exporters to obtain finance without having to risk their assets is export debtor finance. Often referred to as ‘export factoring’, this is a solution that resolves the problems of impeded cash flow and non-payment in one.
Export debtor finance works by having your overseas customer approved for ‘credit’ by a correspondent at their destination who is attached to your chosen financier.
When your business ships its goods, you simply provide copies of the Purchase Order, Invoice and Bill of Lading to your financier, who gives you 80 percent of the invoice value within 24 hours.
Once the goods arrive at their destination, the financier’s correspondent handles the end transaction, obtaining payment from the buyer locally before forwarding the funds on. When the deal is complete, the financier provides you with the remaining 20 percent of the invoice, less their fee.
If all goes well, the process is concluded. You collected the majority of the invoice value at shipment, and the remainder, less the financier’s fee, at the due date.
One of the great aspects of export debtor finance, however, is that it also secures you against non-payment. If a customer has become insolvent, for example, the financier’s correspondent – having pre-approved ‘credit’ for your buyer – pays what you are owed in any case, much as they would had they provided credit insurance.
Thanks to these advantages, many exporters now prefer this type of finance to the more traditional ‘letter of credit’ method which – with its fees on credit lines, its paper base and complex interactions between multiple financial parties – is seen as inefficient and costly.
Another benefit is debtor finance can be used selectively. There’s no need to deploy it across an entire ledger. If you’re shipping to a trusted buyer over a short time-frame, for example, and you believe your business has adequate cash reserves at hand, you might decide there’s no requirement to engage your financier at all.
If you’re considering an exporter debtor finance provider, there are some questions to ask. Firstly, how strong and experienced is their network of overseas connections? Your business will be relying on these agents (often other banks) to perform credit checks on possible buyers and to chase payment on your invoices. To this end, you should ensure they are reputable. Also, ask what fees will be charged. These can vary with the identity of buyer, or the perceived risk in shipping to a particular country, and you may be able to negotiate better deals.
In conclusion, cash flow can be important for a number of reasons: your business might need fast access to capital in order to fund high growth, or you may need to pay suppliers quicker than your debtors are settling invoices. For export operators, obtaining debtor finance is one strategy that can protect cash flow against the long delays and payment uncertainties caused by open account terms which – for the moment at least – seem destined to remain world trade’s status-quo.
*Rob Lamers is from Oxford Funding. For further information about Oxford Funding, visit http://backend.dynamicbusiness.com/www.oxfordfunding.com.au
*The opinions expressed in this article are those of the author, and don’t necessarily reflect the opinions of DYNAMICBUSINESS.com or the publishers.