In an increasingly competitive global marketplace trading companies rely on finance services to mitigate payment risk, facilitate control over shipments and speed-up working capital. Welcome to the complex world of export finance.
By Glenn Baker.
Exporting is a risky business. Aside from the risk of goods not arriving on time, or damaged, there is the major risk of not getting paid and the issue of financing your export initiatives to begin with.
It’s difficult to know where to start, but considering its increasing importance in the export finance sector, we thought we’d cover trade credit insurance first.
Martin Jones, country manager, New Zealand for Atradius Credit Insurance N.V. believes it’s significant that more banks are asking borrowers to turn to credit insurance as a security net to protect against bad debt.
He says in 2016, they’ve seen a spike in notices of non-payment from their policyholders and an increase in actual claims being lodged.
“These relate in part to buyers in the Middle East, China and South America. There is also some turmoil in Europe over the refugee situation, exacerbated by other political issues.”
New Zealand firms must remain vigilant on what’s occurring overseas and scrutinise large new orders from troubled countries, he advises. “Also be wary when receiving unexpected orders from hitherto unknown customers or customers who would traditionally buy from other global suppliers.”
Jones says Atradius has recently enhanced its services by increasing its online supply of data.
“This helps clients manage their policies more efficiently and provides better insight into the creditworthiness of current buyers and potential buyers. The reporting is in sufficient detail to provide Boards with monitoring reports showing the extent of their current credit risks.”
Not all markets are equal when it comes to facilitating credit insurance.
“Several Asian countries and, indeed, some South American ones don’t make it easy for foreign insurers to set up credit insurance operations there,” explains Jones.
“The prevailing governments believe that by so doing they are protecting local nascent insurers, allowing them local participation in international trade cover.
“To this end the governments set parameters on any foreign insurance cooperation agreements and reinsurance treaties. In many cases the restrictions are counterproductive because there is insufficient expertise among their local insurance operatives to be able to handle the complexities of credit insurance administration.”
Jones offers the following do’s and don’ts on trade credit insurance:
- Do keep an open mind about the benefits that credit insurance can bring to the business. Try not to use cost alone as the reason not to insure, or use cost alone when selecting which company to credit insure with.
- Do adopt a realistic approach to debtor risk. A good payer in the past may not always pay well in the future, especially if it is located in one of the world’s troubled countries.
- Do try to ascertain who your buyers’ customers are; a downstream payment failure can often impact on the buyer’s ability to pay you.
- Do be alert to the changing political and economic environment in your buyer’s country, especially if they impact on the trade flow in and out of that country – for example, import restrictions, foreign currency shortages or devaluations, embargos, etc.
- In difficult trading environments do consider introducing risk mitigation factors such as tighter payment terms, securitisation and credit insurance as a way to protect your cashflow.
- Don’t assume that because you know your buyers well (even socially) they will never fail you.
- Don’t ignore the possibility that there could be another recession around the corner, a political coup, a once reliable buyer failing in business, or a natural disaster.
- Don’t think because you factor your debts that you’re protected from all non-payment risk. A non-payment of a factored debt can still rebound on you.
Jones says Atradius often receives testimony from customers who report that their ‘prompt and ready’ claim payment process has restored their cashflows or saved their business from going insolvent. “The credit insurer acts as an independent assessor of a buyer’s financial strength so it can alert a policyholder to a buyer being potentially a bad payer. This has frequently protected a policyholder from sustaining a loss,” he says.
“Atradius has numerous customers who apply a house rule of not releasing shipments unless an insurance credit limit on the buyer is in place,” adds Jones.
“Also, banks often request their customers to take out a policy as it enhances the financing package and makes them more willing to lend.”
More pearls of wisdom
Greg Fitzsimons is another industry veteran with an in-depth understanding of trade finance. Prior to establishing Export Finance Ltd (EFL) in 2009 he was at ABN Amro Bank for eight years working in asset based and structured trade finance. There he undertook major project financing transactions with NZECO (see sidebox) as well as financing the importation of big ticket capital goods.
“At EFL our focus is on emerging exporters with balance sheet constraints preventing them from taking advantage of growth opportunities. We work with the exporter to prepare applications to their banks for increased working capital through provision of trade finance facilities supported by trade credit insurance, including NZECO,” he explains.
EFL is focused on the exporter’s customers, says Fitzsimons, and how it can make the customer’s balance sheet work for the exporter. “We apply to banks for increased trade finance facilities utilising trade credit insurance, and this work can include financial modelling and preparation of the business plan.
“We manage the trade credit insurer relationship, and we have provided temporary pre-shipment finance facilities to New Zealand exporters pending approval from the exporter’s bank.”
His advice for exporters is to get to know your bank’s trade finance rep and understand what they can do for you. “Learn as much as you can about your customers. Who are you actually dealing with? What is their financial position? NZTE can be very helpful through their in-market presence.”
Dealing with unauthorised agents, is always a potential trap, he says. “Take time to make the right connections.”
It’s true things can go awfully wrong on the finance front without proper planning. Not being careful with invoicing to correct counterparties as per contracts (leaving the exporter unable to make a claim in court or to an insurer) is one example.
However, there are many great examples of sound export finance planning too. Gaining trade credit support for export customers in India, allowing EFL’s Kiwi exporter client to utilise its bank trade finance facility to make increased sales by meeting Indian market payment terms, is one example provided by Fitzsimons.
When it comes to New Zealand’s trade finance marketplace, he believes many exporters don’t realise how much support banks are capable of providing and how little trade credit insurance costs. “And how, when combined with a well prepared application, that bank support can be accessed. Banks generally want to help but they can’t write the exporter’s application for them,” says Fitzsimons.
A word from the bank
As would be expected, HSBC offers a comprehensive range of trade finance products designed to mitigate payment risk, help maintain control over goods shipped and accelerate working capital.
“Our service is delivered by trade experts based locally, who understand their customers’ businesses and the importance of turning transactions around efficiently,” says HSBC’s New Zealand CEO, Chris Russell.
He says HSBC’s distinct competitive advantage is its global network presence in over 70 countries. “We are able to support our clients and provide them with insight into markets where local and regional banks simply don’t have on-the-ground capabilities, visibility or depth of financial insight.”
Asia remains a key region of expertise for the bank, and Russell acknowledges its highly competitive nature for exporters trying to gain a foothold.
“Australasian companies not only face each other trying to gain market access, but also strong competition from many other companies from a multitude of countries vying for their share as well. Our advice is simple; partner with parties who have a long and established history in Asia, who will be able to provide assistance and advice based on their own first-hand experience in the region.”
When trading with China, Russell strongly recommends exporters make the RMB a key part of their foreign exchange considerations. RMB is now the second-most used currency in trade finance, and HSBC forecasts that by 2020 50 percent of mainland China’s trade will be settled in RMB. Benefits for Kiwi exporters of accepting payment in RMB from their trading counterparties in China include streamlining cross-border payments, reduced foreign exchange and interest rate risk, improved liquidity and cash management, and potential financial advantage over competitors not willing to accept RMB payment.