Watching interest rates jump and dive in the last 12 months has been an uncomfortable ride for many borrowers, but particularly for exporters who must simultaneously contend with fluctuating exchange rates to retain margins for repayments. The cost of finance is therefore an important consideration in an exporter’s financial plans and something to research to find the right kind of funding for specific needs.
Exporters require loans to pursue international opportunities and to make themselves more competitive. Types of finance include trade finance, supply chain finance, performance bonds and other working capital loans to fund international growth. These facilities allow businesses to continue to trade as they grow.
“There is little to no disruption to working capital or cash flow. Businesses benefit from these facilities by being able to trade as per normal, while opening up sales to new markets,” says Geoff Cox, general manager for Trade and Supply Chain finance at nab. “Exporters often need a mix of pre- and post-shipment facilities. By offering funded lines, clients can offer extended terms to their overseas customers and thereby become more competitive in overseas markets.”
While the current credit crunch is a concern, in the grander scheme of things, banks seem more than happy to lend money to SMEs, provided they can meet standard lending criteria. “We are well placed to finance most transactions,” says Cox. “The falling foreign exchange rates have increased the need for further security when financing some international transactions, but this is subject to our normal terms and conditions.”
He nominates trade finance, also known as pre-shipment finance, as a popular facility for exporters, which can also be linked to other credit lines. “Trade finance is primarily utilised to procure raw materials and/or stock, but can also be used to finance freight and insurance relating to stock,” he explains. “Generally these clients will also look to finance under an overseas bill purchase line. Following shipment, these funds are then used to repay the pre-shipment drawing.”
Most often, financial institutions require an asset as security against working capital and trade finance loans, but as each business is different, there is some flexibility with trade facilities that may depend on the current and projected profitability of the business. Other types of security may also be eligible, for example, the business’ debtors such as with nab’s Trade Assist, which allows exporters to borrow this way, “The client’s international debtor book is insured and used as security. Nab then allow clients to draw up to 100 percent of these funds as pre-shipment loans to assist working capital and cash flow,” says Cox.
And the cost of these facilities? Understandably, it varies depending on your business, your business’ security, your lending institution and the amount you wish to borrow. In addition to a lending or application fee, businesses will probably be expected to pay a margin of the funds loaned, determined by the amount borrowed and your business’ security position. The type of loan may also include transaction fees, for example, when providing a guarantee for letters of credit where direct funding may not be applicable.
The good news is that financial institutions have come to understand the business cycles of SMEs and now offer standard cycles of 180 days for trade transactions, which means your repayments are less of a constraint on your cash flow. In some cases you may be able to talk with your lender about flexible payment terms to suit the specific needs of your business.
Exporters with existing credit facilities may also be interested in the EFIC Headway guarantee provided by the government’s Export Finance and Insurance Corporation. Headway is designed for growing exporters that need more money than their current assets allow them to borrow.
“Where the bank isn’t able to accommodate an increase in their facilities, we can certainly provide security to the bank and they will then lend the additional funds,” explains Robert Dravers, EFIC’s director of business development. “If the bank is able to stretch its lending limits and go into an unsecured position, then they don’t need to call on us. It’s only when they do want to see security and that’s the only thing holding them back from approving the additional funds, when they would look for our support.”
Exporters must already have a relationship with one of the nine banks EFIC lists as eligible for the guarantee. EFIC then review the bank’s assessment of the exporter, and the risk factors. “The bank needs to support the application in all aspects other than it doesn’t have security as a fallback. In other words, the bank has to be confident enough that the exporter has cash flow to support the additional debt, that it is not over trading, and that it has a sensible use for the funds,” says Dravers.
Funding from Headway guarantees are generally short term—three, six, nine or 12 months—at an average rate of 4–5 percent per annum or a little more for shorter periods.
Money for performance bonds is another popular form of finance sought by SME exporters, especially those working on projects, such as construction companies. “Businesses would access out bonding facilities when the obtaining of a bond or guarantee from a bank would have significant adverse effects on the availability of their credit facilities or their cash flow,” says Dravers. “Bonds can be a significant financial strain on companies, particularly in markets such as the USA where the bond is usually 100 percent of the contract value. In many other markets it’s often around 10 percent of the contract value.”
Bonds require a more significant risk assessment than Headway, including a detailed assessment of your business’ commercial and financial status and an assessment of the risks associated with the overseas buyer’s ability to pay. As such, Dravers recommends that the bond needs to be large enough to justify the work: “The size of the bond has to make economic sense for the borrower and for us; anything under $250,000–300,000 is getting unfeasibly small.”
EFIC takes between 5–20 percent of the bond’s value as cash security. The exporter pays the fee upfront for the expected term of the guarantee, which can be extended should the project experience delays. With this facility, the fees charged would ultimately depend on the level of risk. “No two situations are identical, so it really does depend on the borrower’s strengths and the project risk, the buyer and the contract and so forth. As a guide, a company could expect to pay 3–5 percent per annum,” says Dravers.
He believes the credit crunch will contribute to a higher number of applications for both Headway and bonding facilities in the year to come as exporters seek extra security for funding. “Whether the banks have the funds could be an issue,” he remarks. “The amounts are not particularly large in the scheme of things. A typical Headway application is generally from $100,000 to $4 million, but usually around $1 million.”
So whether you’re looking for money, or already geared and looking for more, do your homework on the different types of finance available and make sure you keep in mind the cost of that finance weighed against the benefits and opportunities for your business.
Tips for funding finance
- Attain long-term finance for long-term expenses and short-term finance for short-term expenses.
- If you think you might fall behind in your repayments, talk to your lender as soon as possible. They will appreciate that you flagged problems early and will more than likely be able to work with you on a solution.
- Make sure you can remain profitable even if one or two debtors fall through. It’s important to have a financial buffer such as reliable profitability in your domestic market or a diversity of debtors; don’t rely on one customer to come through with payment to fund your debt.
- Ask about risk mitigation when you speak to your lender. They should be able to give you information about potential problems and advise you on strategies to minimise risk with international payments.
- If your debtors aren’t paying on time which is fording you to miss payments, sign up to CreditorWatch to expose bad debtors and be alerted when the businesses you trade with fail to pay.