Understanding how to price the risk of selling on credit terms can help Kiwi exporters reach global markets in a cost-effective manner.
Exporters can free up cashflow or reduce unnecessary trading risks by seeking the help of specialist trade financiers who understand how to help ease cashflow throughout the entire supply chain.
Freeing up vital cashflow helps exporters keep their financing costs to a minimum to ultimately help reduce the cost of business.
As an example, an exporter with stacks of containers sitting on the wharf awaiting loading and shipment can free up cashflow tied up with the forwarding company by seeking packing credit from the bank. This is particularly useful if freight is a major component of the business cost.
Gavin Haworth, head of trade and supply chain at HSBC, says calling on the advice of banks early can help exporters cover risks and understand costs to ensure those costs are priced into the transaction, not eroded from margins, as is the case if costs are only identified after contracts are signed.
“Very often, businesses are so focused on the sale, they forget that with margins being so compressed, the price may be insufficient to cover the risks they are assuming,” Haworth says.
He recommends getting the help of an experienced trade financier to price or cost large consignments of products to offshore markets. This is particularly true for those exporters that ship irregularly to unfamiliar markets.
“We can help exporters understand the working capital cycle, to ensure they identify risks, costs and put in place an appropriate structure that will maximise profit for their business. The working capital cycle for an international trade is more complex than the traditional domestic sale,” he says, adding that the better a bank understands an exporter’s supply chain, the better it can help structure a cost-effective price for the exporter which can include the trade financing element.
During the last recession, the cost of funding rose in tandem with higher risk profiles associated with overseas buyers facing business downturns in their home environment. Banks are typically shy about revealing the cost associated with issuing letters of credit, traditionally the most secure form of trade financing. Depending on the type of LC (standby, revocable, irrevocable and revolving LCs), they can amount to between 0.5% and 3% of a contract value.
BUYERS WANT BETTER TERMS
Due to the higher cost of obtaining credit during the recession, buyers have been seeking more supplier credit terms. Haworth says in some instances, overseas customers were sometimes happy to pay the cost associated with funding New Zealand purchasers as these were lower than obtaining local funding in their own countries.
“You have to ask yourself ‘what does it cost my business to assume those costs’ and price them into the contract for that term,” Haworth says.
Often an exporter would sign a contract, then seek short-term financing from banks, Haworth says, but is too late at that point to understand if the risks can be covered or if the cost of the sale has been accurately worked out.
A bank presented with an LC from a foreign buyer’s bank would typically be comfortable paying the local exporter up front, based on carrying some of the risks for the duration of the product’s shipment to market, and ultimate payment by the buyer.
CASH UP FRONT
Some exporters only deal with buyers who pay cash up front, or who can present an LC. Some exporters trade on open account but seek cover from trade credit insurers. The cost of trade credit insurance has ballooned over the past 24 months due to the high incidence of defaults on payment from overseas buyers. Costs associated with LCs have also risen during the recession as liquidity in the banking system tightened.
ASB Bank international trade services senior manager Gary Cross advises exporters to present all the information they have to help their bankers efficiently devise appropriate trade credit solutions.
“Stick to your knitting; for instance, don’t compromise risk for return, particularly in regards to foreign exchange or over exposing yourself to credit risk.
“As New Zealanders we are inherently trusting. Companies engaged in international trade need to look past this and ensure that they understand the risk profile of what they are undertaking and ultimately are comfortable with what is put in place to mitigate these risks,” Cross says.
For timber exporting company LumberLink, LCs have been the most reliable form of payment. Tony Johnston, a director of the company, says juggling sending goods to customers and balancing the customers’ need for speedy delivery of goods at the right payment terms has also been a challenge.
LumberLink exports timber regularly to 17 countries and insists on prepayment, part payment of LOC, or cash against documentation. “We don’t ever give ownership of the product until we have the cash,” Johnston says.
Getting banks to support an exporter with trade finance for different parts of a manufacturer’s supply chain is doable if the banks are certain the financing is reaching a customer that has good credit risk, and will help improve the cost of doing business, Johnston says.
SOUND FINANCIALS KEYS
Wool exporting company John Marshal and Co’s managing director, Peter Crone, says trade credit financing is not an issue provided the banks are confident you are dealing with a customer with a sound financial track record.
“I think over the past two years, the biggest challenge [for the wool industry] has been obtaining trade credit finance insurance. Cost of insurance has gone up by over 65%. The government has stepped in to assist in this area [with the Export Credit Office],” Crone says, adding about 75% of his company’s business is done on LC terms.
Cost of trade credit insurance and the tightening of credit insurance terms have featured highly in the past 24 months. The situation is easing somewhat, industry officials observe. However, certain industries are finding it difficult to gain trade credit insurance, particularly the wool and textile industries.
