Most SMEs would be familiar with cash flow issues, but exporters in particular need to understand how terms of payment and the time cost of money can affect business growth.
Most SME exporters have less available security on their balance sheet, little no equity and find it difficult to get traditional funding from there finance provider, given their concentration on their domestic markets.
Depending on their agreed payment methods, SME exporters have different funding gaps. It is important that the SME exporter agrees with overseas buyers on the appropriate method of payment.
There are a number of methods of payment that an SME exporter should consider, all with a level of risk:
Prepayment: Remittance from the importer/buyer prior to shipment by the exporter/seller.
Documentary credit: Issuance of sight or term documentary letter of credit with payment by drawing under the letter of credit.
Documentary sight bill: Documents against payment (D/P Bill).
Documentary term bill: Documents against acceptance (D/A Bill).
Shipment on open account: Payment by the importer/buyer after delivery of goods.
Many SME exporters find it difficult to obtain traditional funding products from their financial provider because of these risks. In addition, SME exporters need to use their receivable book to access cash flow to grow their business in international markets.
Because exporters are pressured to compete in the international market and to provide the buyer with terms that are competitive in the buyers local market, they are often pressured to agree to open account payment terms—often with extended trading terms—creating cash flow constraints and higher risk of non-payment.
The better debtor
As an SME exporter you need to look at the whole supply chain to assist your cash flow requirements. Generating a strong cash flow in your domestic market can provide working capital to help grow your export market. Debtor finance suits businesses that need a capital injection to fund business growth or meet cash flow requirements and want to fund these objectives on the strength of their business sales.
Debtor finance is a facility designed to give your business access to funds based on the strength of your business credit sales rather than having a limit determined by mortgage-based fixed asset lending. Instead of waiting for your debtors to pay within your normal trading terms (usually 30–90 days), your financial institution will purchase your approved trade invoices and make available a percentage of the face value of those invoices generally within two business days. Your daily available limit will therefore automatically increase and decrease depending on the level of your credit sales and debtor collections. When your debtors pay the invoice, you then receive the balance, less any adjustments.
The benefits are:
Funds access—you borrow money based on the strength of your business sales.
Flexibility—it helps you manage seasonal and day-to-day fluctuations in cash flow.
Convenience—you gain access to funds when you need it against issued invoices.
Relative limits—as your business grows and your debtors grow, so does your facility limit.
Accessibility—you can transfer funds from your debtor finance account into your working account via electronic banking, or by written instruction.
Debtor finance is subject to standard bank credit process and a higher margin applies to any amount in excess of your limit. Be aware that other fees and charges may apply depending on the product offered by different financial institutions.
In most cases, to compete in the international market you need to grant terms to attract new export business so that you are immediately competitive in that market. Overseas buyers expect favourable payment terms and a good product, comparable to or better than what they are able to obtain in their domestic market. In addition, exporters need to deal with foreign currencies, different languages and different exchange controls.
It is also time consuming to ensure buyers’ payments are made correctly and on time. Often your overseas buyers do not want the expense of documentary transactions, such as what happens with traditional trade products, and in effect demand to open account trading with extended trading terms.
Funding your export growth enables you to grow your business, and exposes your products to a greater audience. Export receivables finance (ERF) is a facility suited to businesses that have export or credit insurance and require a capital injection to fund business growth or cash flow constraints, and want to fund this on the strength of their international business sales. This facility has been designed so you have the international money owing to you working more quickly for you.
ERF is a working capital loan facility designed to give you access to funds based on the strength of your international or domestic business sales, instead of waiting for your debtors to pay within your normal trading terms. Financial institutions can make a percentage of your approved sales invoices available to you, provided you have suitable export or credit insurance. The maximum finance term is based on your individual buyer payment terms covered under the insurance policy, which is generally less than 180 days.
Because the facility is able to accommodate both export invoices and domestic sales, it suits Australian businesses that trade in both the domestic and global market. Finance can be provided in a nominated foreign currency or in Australian dollars, at your discretion.
There are a range of draw down options available with ERF, however the standard option is to finance against your outstanding debtor list (a summary of outstanding debtors covered by the credit insurance policy). ERF accommodates most major insurers and does not impact on the relationship you have with your client broker or insurance provider.
The benefits are:
No change to security—it works with your existing finance arrangements so you can increase your access to funds without necessarily needing additional security, equity in your property or financial reporting requirements.
Greater bargaining power—you have immediate access to working capital upon dispatch of your sale under your ERF facility to ensure you are in a better position to negotiate favourable terms with your suppliers and end buyers.
Room to grow your business—your ERF facility limit grows as your business and export or domestic debtor sales grow.
Easy to do business—you can conduct business on an open account to maximise your trading flexibility.
The best feature for smaller businesses is that both these facilities are drawn from sales. As most SMEs do not normally have a large asset or equity base from which to draw security, these facilities are extremely appealing because they do not require fixed securities. Generally, all that is required is:
* Fixed and floating charge given by the borrower;
* Directors’ or shareholders’ guarantee and indemnity;
* Facility agreement; and
* A suitable export or credit insurance policy.
The other main feature relates to relative growth. As the business grows and the debtors grow, the facility limit grows, which provides your business with the cash flow to continue growing your business.
— Geoff Cox is the general manager of trade and supply chain finance and working capital services at NAB and a Dynamic Export panel expert
* The information given in the article is intended as a guide only. Please see your financial institution for more specific information in relation to your business.