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Exporters can free up cashflow by tapping into various trade finance tools provided by the banks and other lending institutions.
From the time of the ancient Babylonians, promissory notes or the ‘promise to pay’ has been a powerful tool for leveraging cashflow. New Zealand exporters can free up vital cashflow for their business by tapping into various forms of trade finance tools offered by the banks and other lending institutions.
Whether they are letters of credit, factoring arrangements, export credit guarantees or trade credit insurance, an exporter can do well to explore the range of international trade financing facilities on offer.
An exporter should always be mindful not to rush into pricing a substantial export order without securing the input of their bankers. This is to ensure the exporter can have the benefit of their bank’s expertise to help mitigate risks associated with pricing the order.
Cashflow cycle
One issue often underestimated by businesses when they begin exporting is the impact on their cashflow cycle, according to Gavin Haworth, ANZ New Zealand’s head of trade and supply chain.
An extended timeframe for delivery, additional costs for warehousing, shipping and customs; new relationships with suppliers or customers and different currencies are just some of the issues that can cause an exporter’s existing cashflow cycle to unravel, he says.
Once the sale has been made, the fundamental issue for all businesses – that of either not being paid or not receiving goods – is exacerbated when operating internationally, Haworth adds.
The most secured form of international trade financing tool used is the letter of credit (LOC). The LOC has been used for more than 100 years and historians believe its origins date as far back as ancient Egypt.
An exporter with access to a LOC has a secured form of payment (from the buyer’s bank). There are various types of LOC which carry their own terms and conditions. An irrevocable LOC gives the best protection – it means neither the exporter nor the buyer can alter the terms without prior agreement.
Power of letter of credit
Gary Cross, head of trade and supply chain at HSBC New Zealand, says the LOC is as relevant today as it was 100 years ago, allowing an exporter to manage risk of non-payment by the buyer, manage political risks and associated business risks.
The LOC provides a useful trade finance tool without affecting an exporter’s risk profile, Cross says, adding that exporters work with various pressure points on their working capital requirements. It costs, typically, between 0.5 percent to five percent of the trade to use the LOC facility.
Some exporters sell their products or services on an Open Account basis, meaning their goods are shipped to the buyers with a 30-, 60- or 90-day payment cycle.
Open Account trading carries the risk of payment default. In New Zealand, exporters selling on Open Account terms often seek trade credit insurance to protect against potential payment defaults. The global financial crisis has caused trade insurers to shrink their appetite for new risks, although this year has seen trade insurers returning to the market.
Deputy treasurer at Kiwibank Nigel Gaudin’s advice is for exporters to avoid the potential trap of having goods sitting half way around the other side of the world with no prospect of money arriving in
the bank.
“We think exporters should take the time to understand the end-to-end process and not be shy about talking to experts if their knowledge of an area isn’t that good,” says Gaudin. “The classic insight ‘any sale is a gift until you have been paid!’ holds true.”
Export Credit Office
The government-run Export Credit Office is another useful resource for exporters – they can tap into the ECO’s various products: pre-credit guarantee, short-term credit guarantee, contract bond guarantee and working capital guarantee.
The ECO has been stepping in to provide co-cover with private trade credit insurers when the latter shrunk back business; or when banks have reached their risk limits on a certain client, country or industry.
The ECO’s manager Carmen Moana says there has been a notable increase in demand for performance guarantees, for instance, due to cautious overseas buyers still experiencing tough domestic economic conditions.
Exporters, she says, should tap into the ECO’s products as a means to offer better terms to keenly-contested projects or products and services.
So far, the ECO has provided funding of $1.16 billion to local businesses of which $466.83 million went to export credit guarantees, and $455.10 million to short-term trade credit guarantees.
For exporters with large trans-Tasman business dealings, having a unified cash management platform to manage two currencies can be useful. The ANZ has introduced a web-based cash management product called ANZ Transactive. This platform allows an exporter to transact both the Australian domiciled and New Zealand domiciled accounts using a single platform.
According to ANZ’s Gavin Haworth this product helps simplify and streamline exporters’ cash payments and cash management operations.
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Around 20 percent of all international trades from New Zealand are with Australia, and of those trades, about 80 percent are paid for through open accounts – that is, the same invoicing payment system that is used for domestic accounts, Haworth says.
“One of the most significant cost-saving features within ANZ Transactive is the ability to transfer funds between your Australian domiciled accounts and New Zealand domiciled accounts as an account transfer, rather than as an international funds transfer. This significantly reduces the cost associated with international transfers and makes it much more cost-effective to maintain trans-Tasman account balances,”
he adds.
The ANZ Transactive allows exporters to configure their own approval options that are aligned with the company’s processes.
Financing offshore work
For most Kiwi companies exporting their services, raising financing for their overseas projects remains a huge challenge.
Ian Mellsop, managing director of Marinescape, a world leader in large aquarium concepts, says: “Because of the small size of the New Zealand finance market [in global terms] and our remoteness, getting Kiwi finance for overseas projects is almost impossible for small private companies’ projects.
“We were particularly fortunate in our Thailand project where we persuaded a very large Singapore company to join with us and invest in Thailand. Their banking connections enabled them to provide the bank funding.
“In another example, our Malaysian partners were so impressed with our service they joined us in Vietnam [in a project] and got backing from the Malaysian version of the export credit scheme,” Mellsop says.
Depending on where you are trying to raise money, up to five percent of a project’s cost can be spent on getting a proposal on the table of a local bank, Mellsop says, adding that, for example, Korea and Japan have very high thresholds for approving financing.
Marinescape was able to gain the ECO’s credit guarantee to help an aquarium buyer to raise debt funding for 17 million Euros (NZD$29.32 million) to build a 120 metre-long ‘SeaTube’ in Istanbul, Turkey.
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