In this complex world of international trade, maintaining the optimum capital structure and choosing the best trade financing options is vital for export success. Exporter presents an export finance update.
Freeing up valuable cashflow demands the utmost vigilance from every busy business owner. And there are no shortcuts to keeping a business’ cashflow running.
In Paul Ding’s case, he leaves no stones unturned when it comes to ensuring the business has a healthy cashflow. He first explored using stock financing when his bank introduced the product. He was all for it.
“Depending how much stock you are carrying, the bank could be offering financing up to 60 or 70 percent of the value of the stock.”
While stock financing served its purpose, Ding soon moved on. There were administrative costs related to using stock financing over the long term, including having an immaculate stock management system.
“It is good if you have a tidy stock system. We found that, often, we were doing (stock) administration for our suppliers.”
He has also used invoice financing which he says allowed his company to access cash in advance ahead of the payment cycle, of either 30 or 60
days. Invoice financing is suited, he says, to businesses with established trading partners.
Ding founded Auckland-based NZ Computer Sales, a wholesaler of refurbished and ex-leased computers and IT equipment which he has since sold off. He has successfully raised money from the Korean stock market, and has bought into a listed company there, KD Media Inc.
He also notes that companies with stock held up by resellers should put pressure on these resellers to free up vital cashflow.
Another useful means to free up liquidity is to offer discounts to selected customers to move stock off the shelves in warehouses.
It is all about trade cycles
For those trading internationally, one of the most reliable and traditional methods of trade financing is the Letter of Credit (LOC) which provides an exporter with a secured form of payment from the buyers’ bank.
Gary Cross, head of Global Trade & Receivables Finance at HSBC New Zealand says the LOC is a time-tested product that has a role in the marketplace.
“The LOC can potentially provide exporters with funding without affecting their bank facilities whilst also being a valuable tool in managing risks associated with international trade,” Cross says.
For Cross, it is essential that banks have a thorough understanding of a customer’s trade cycle so that an appropriate financing solution can
be discussed.
“By understanding when a business is required to pay its suppliers, and when it anticipates receiving proceeds of
a sale, a bank is best placed to address a company’s working capital requirements.
“By looking at how a business structures its finance: the point at which a business has to pay its suppliers and that which it anticipates getting paid, or the funding gap, we can help a business support their working capital needs,” Cross says.
Big businesses in New Zealand have reduced the time they take to pay their bills. Dun and Bradstreet’s latest survey shows the average payment times for businesses have dropped by 1.9 days to 43 days (as at the March 2013 quarter).
Time to lock in the benefits
On the international front a lot of markets are still in the doldrums, says Westpac New Zealand’s head of International Business, Barry Squires says. “Those in the commodity trade are seeing pressure on prices. Customers in some markets, affected by the economic downturn, are finding it hard to get funding.”
Exporters should be looking closely at whether they have the best capital structure going forward, says Squires. “This is the time to look at your borrowings, and see if there is potential to lock in some of the benefits [of a low interest rate environment].
“Most companies are looking at maximising cashflow, looking through their entire supply chain, to see how they can extract maximum value to ensure liquidity stays strong.
“Customers will be demanding longer payment terms, or delaying payments. Look to get the best out of your working capital, everyone is trying to maximise liquidity,” Squires adds.
He highlights the fact that shifts in the physical supply chain can impact the cashflow needs of a business, citing the advent of shipping companies’ slow steaming of their vessels across the oceans as an example.
“Slow steaming means vessels may take about eight to nine weeks for what typically used to be a six-week trip. If you are a chilled product exporter, you have to finance your goods for another two or three weeks.” Squires says in this case exporters have to ensure the changes in the physical supply chain are accounted for in their financing needs.
For entrepreneurs who are constantly on the look out for liquidity and cashflow, seeking capital from investors rather than going to the bank for finance, is one option. This is especially true for companies focused on developing new technologies that take many years to be commercialised.
Izon Science’s executive chairman Hans Van Der Voorn knows only too well the constraints of developing a company whose ongoing research
sucks in huge amounts of capital.
Izon Science makes instruments analyzing nano particles.
Van Der Voorn says the commercial success of Izon Science has made it slightly easier to attract investors but getting sufficient cashflow to fund operations has been a constant challenge for his company.
He has on occasions asked for longer payment terms from suppliers due to tight cashflow.
“We sometimes offer a discount to customers who pay in advance. For distributors, that can be quite attractive, and for us, it resolves any issues of credit quality,” Van Der Voorn adds.
The bigger challenge for the company is attracting longer-term financing. “There is a very limited pool [of investors] who want to invest at the stage where there is a lot of science and product development going on, and where there is negative cashflow. That requires a lot of faith and trust in the company’s leadership,” he says.
Mitigating risks of non-payment
For those trading in troubled international markets, trade credit insurance is a sure way to mitigate the risks of non-payment. And now is an opportune time for those who have not explored trade credit insurance. Trade credit insurers have dropped their premiums as the appetite for writing new business has returned. Premiums have fallen by about 20 percent from 2010 levels.
Neil Bhikharidas, from Aon Trade Credit, notes that trade credit insurers have ample capacity to provide cover due to the relative stability of the recent claims situation.
However, he expects the current market’s softer premium to be adjusted, either in the fourth quarter of 2013 or the first quarter of 2014.
He and other insurers point to some significant insolvencies seen in the local market, especially that of construction company Mainzeal and large printing company Geon Group, which are beginning to unsettle the market.
QBE New Zealand’s manager for trade credit, Michael Kayes, points to the need for exporters to constantly review the dynamics of their business and the associated risks.
Kayes says under the current tough trading conditions, exporters are looking further afield than their traditional markets. The highly competitive markets overseas also mean buyers are seeking new suppliers and better payment terms.
Exporters have to protect themselves not only from non-payment but political risks and contract repudiation. In the latter, for example, when prices for perishable produce fall, buyers may decide they don’t want delivery of the goods. In this case, the risk is not that of non-payment, but that of a contract being repudiated.
The recent hold-up of Kiwi meat products at Chinese ports have highlighted the cross-border trading risks that extends beyond non-payment, Kayes says.
Trade credit insurance provides cover for political risks but there is a stand-down period (of 180 days) before a claim can be lodged, he adds.
Yoke Har Lee is an Auckland-based business writer. Email [email protected]
Exporters embrace NZECO products
The NZ Export Credit Office is slowly but surely gaining the attention of first-time users of export credit products aimed at helping exporters secure trade in the wider global market.
NZECO’s manager Chris Chapman says some 40 percent of exporters getting the office’s support this year are new clients. This, he says, is a direct result of ongoing efforts to raise awareness of trade credit insurance’s role for exporting.
Over the past 12 months, presentations about the merits of export credit insurance have been made to exporter groups in Whangarei, Auckland, Tauranga, Hastings, Napier, Nelson, Blenheim, Christchurch and Dunedin.
Since its formation, the NZECO has issued policies amounting to $1.5 billion for 82 exporters covering trade with 60 countries. It has experienced strong demand for its short-term credit products to insure against the risk of buyer non-payment, as well as to access additional trade finance from their banks, Chapman says.
In a recent example, the NZECO extended a loan guarantee to support a US$2.5 million short-term working capital facility for the G Tech Group, a company making decanter centrifuges for multinational oil and gas customers.
The company and its bank, BNZ, approached the NZECO to provide the guarantee which would enable G Tech to increase manufacturing and have stock of decanter centrifuges available on-demand by its US customers.
The company’s manufacturing process involves highly skilled labour and third party products from New Zealand and offshore suppliers. This sometimes results in a long working capital cycle of up to 210 days.
According to Chapman, the government last year fine-tuned two of NZECO’s products.
The first was to extend the period of the NZECO’s term guarantee, to 36 months from 12 months.
The other change allows the NZECO to issue performance guarantees directly to foreign government and public agency buyers.
“These improvements were agreed to as part of the Business Growth Agenda to support exporters,” says Chapman. “As an example, NZECO recently issued its loan guarantee to enable an exporter to receive additional bank lending to help fund their working capital during the delivery of a 25-month project in the Middle East.
“The NZECO also recently extended its US surety bond arrangement with Liberty Mutual to cover the Canadian surety market as well,” Chapman says.
To expand trade with China, the NZECO now has the Chinese renmenbi as an approved currency where it can underwrite its policy in.
Renminbi settlement may provide pricing advantage
New Zealand exporters have been reaching out to export to China but are still cautious about offering settlement in the Chinese Renminbi (RMB) currency.
Gary Cross, HSBC NZ’s head of Global Trade & Receivables Finance notes that about 11 percent of China’s cross border trade settlements are currently transacted in RMB and its gathering momentum.
“Our advice to Kiwi exporters is to explore the benefits that settling in RMB may offer,” Cross says, adding that exporters may be able to avoid the currency fluctuation premium often factored into pricing when settling in currencies other than the RMB.
The RMB is currently the 14th largest payments currency accounting for a 0.56 percent share in global payments – reflecting the currency is underutilised as a payment currency. It is also the third largest letter of credit based trade settlement currency, at four percent global share, according to HSBC’s research.
China has currently the world’s second largest GDP but already commands ten percent of global trade, making it the world’s largest trading country.
In 2009, China started internationalising its currency, allowing five Chinese cities trading with Hong Kong, Macau and ASEAN to settle trades in the RMB. Within a year, this was expanded to 20 cities, applicable for trades with all countries in the world.
Currently, all enterprises in China with an import/export license can settle trades with their counterpart using the RMB.
