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Managing the credit-0000

Bankers have these words of wisdom for exporters going into 2010:   Understand your risks and be in a position to mitigate them.

BY:  Virginia McMillan

Whether the 2008/09 recession has been successfully damped down or is set to reignite and burn more incomes next year, exporters will need to be canny operators.

Most will have made all the obvious efficiencies, says Ian Blair, general manager of business banking at Westpac. “In the year ahead it will be hard to pull out more savings.”

He warns that more small businesses fall over when economies are heading out of a recession than going into one.  “[Many companies] have been hanging on to accumulated equity, but now it is exhausted,” he says.

Costs set to rise

Graham Turley, ANZ’s managing director, commercial, says since the global financial crisis started hitting access to credit, terms of trade and payment flows, business practices have sharpened across most firms. He’s cautiously optimistic for New Zealand’s chances of an export-led recovery but says 2010 will be a tough year, with perhaps a more comfortable 2011/12 in sight.

Kiwibank’s deputy treasurer, Nigel Gaudin, says the next 12 to 18 months will be subdued. The costs of doing business can be expected to rise and interest rates to contribute to this pressure. 

The Reserve Bank says it can’t see a need to withdraw monetary stimulus until the second half of 2010, so variable rates will likely remain low for a while. 

Fixed interest rates are already on the way up as banks’ costs rise amid competition for retail deposits and in response to new liquidity requirements.

At the time of writing, the Reserve Bank said the base business rate was around 10% (down from over 12% two years Managing the credit key takeaways-0000ago), but many SME exporters access cheaper rates via their residential properties. 

James Mitchell, ASB’s head of relationship banking, says only about 30% of his bank’s business customers pay the base rate. He says many are paying in the order of 6%-plus – and rising. “It would be good to retire some debt if your business can do so.”

Most bankers advocate some hedging. One strategy is to fund long term assets using long-term funding, with some amortisation in place, and short-term assets on short-term funding, says Ian Blair.


Kiwibank’s Gaudin explains if businesses identify their thresholds and lock in interest rates and currency so they are not exposed above those thresholds, they don’t have to worry about ups and downs. Kiwibank risk analysis on a client can reveal such thresholds – for example, the impact of a 5-cent rise in the NZ dollar against the US or a 5% rise in the cost of inputs.

BNZ chief economist Tony Alexander says to mitigate exposure to exchange rate movements, an exporter can set up an import business, or source more inputs from offshore. (see “Building a natural hedge to the swinging kiwi” on page 42) “I might fund in the currency of my expected receipts,” he writes in a recent newsletter, “but [would] do this only after careful consideration of how my balance sheet would be affected if and when the NZ dollar next plunges 30 cents.”

ASB’s Mitchell suggests exporters not already in Australia might want to consider it now, as the exchange rate relationship is “about normal”.

To those seeing the US as all doom and gloom, he says it is still a huge market. Americans are still spending and there are always opportunities.

Growth in Asia-Pacific, and ANZ’s presence in 14 Asian markets, combine to make Turley confident that his exporter clients get a good start there.  But, he adds, “we don’t see any market as a no-go zone”.

Bank executives say doing business in tight times requires understanding and mitigating risk. They say they want to see accurate, up-to-date data and be informed of problems on the horizon. They also underscore the importance of knowing one’s customers thoroughly and networking widely to get good advice.

Leveraging the strength of partnersManaging the credit we got mil

Turley stresses the value of strong, well respected partners along the supply chain who know the market and the economy, and can guide and influence.

Blair notes that businesses don’t have to grant terms to everyone. They can aim to keep debtors on a short payment cycle while, wherever possible having an extended time frame for paying their own bills. It may be worth using an invoice-discounting service to get in any sums owed (though this comes at a cost).

Cash flow questions

At BNZ, Bay of Plenty managing partner Mike Frew says there has been a tendency to rely on a single debtor to solve cash flow problems.

A customer may have a history of paying on time and without incident. “However, things can change rapidly and we have seen instances where failed debtor collection has had a severe impact on the business.” He says businesses should ask:

  • What impact will non-payment of this debt have on the sustainability of my business?
  • What impact will a delay in payment have?
  • Am I prepared to take those risks?
  • How can I mitigate those risks?

A letter of credit is one option. “Although there is a cost involved, a successfully executed letter of credit will guarantee payment.”

ANZ’s Hurley says trade finance products accelerate delivery of cash and transfer the risk of non-payment to another party. “We take security over those receivables.” Products are set up on a debtor-by-debtor basis.

Kiwibank international payments expert Reg Gray, too, says businesses are moving away from “open account” trading to products such as letters of credit. He also suggests approaching the government’s Export Credit Office (ECO). After a recent $200-million boost, ECO now has $740 million with which to cover Kiwi exporters’ deals.


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