Dynamic Business

Second in our series on ‘The True Cost of Exporting’ is the cost of finance, from working capital to performance bonds and money for growth.

Watching interest rates jump and dive in the last 12 months has been an uncomfortable ride for many borrowers, but particularly for exporters who must simultaneously contend with fluctuating exchange rates to retain margins for repayments. The cost of finance is therefore an important consideration in an exporter’s financial plans and something to research to find the right kind of funding for specific needs.

Exporters require loans to pursue international opportunities and to make themselves more competitive. Types of finance include trade finance, supply chain finance, performance bonds and other working capital loans to fund international growth. These facilities allow businesses to continue to trade as they grow.

“There is little to no disruption to working capital or cash flow. Businesses benefit from these facilities by being able to trade as per normal, while opening up sales to new markets,” says Geoff Cox, general manager for Trade and Supply Chain finance at nab. “Exporters often need a mix of pre- and post-shipment facilities. By offering funded lines, clients can offer extended terms to their overseas customers and thereby become more competitive in overseas markets.”

While the current credit crunch is a concern, in the grander scheme of things, banks seem more than happy to lend money to SMEs, provided they can meet standard lending criteria. “We are well placed to finance most transactions,” says Cox. “The falling foreign exchange rates have increased the need for further security when financing some international transactions, but this is subject to our normal terms and conditions.”

He nominates trade finance, also known as pre-shipment finance, as a popular facility for exporters, which can also be linked to other credit lines. “Trade finance is primarily utilised to procure raw materials and/or stock, but can also be used to finance freight and insurance relating to stock,” he explains. “Generally these clients will also look to finance under an overseas bill purchase line. Following shipment, these funds are then used to repay the pre-shipment drawing.”

Most often, financial institutions require an asset as security against working capital and trade finance loans, but as each business is different, there is some flexibility with trade facilities that may depend on the current and projected profitability of the business. Other types of security may also be eligible, for example, the business’ debtors such as with nab’s Trade Assist, which allows exporters to borrow this way, “The client’s international debtor book is insured and used as security. Nab then allow clients to draw up to 100 percent of these funds as pre-shipment loans to assist working capital and cash flow,” says Cox.

And the cost of these facilities? Understandably, it varies depending on your business, your business’ security, your lending institution and the amount you wish to borrow. In addition to a lending or application fee, businesses will probably be expected to pay a margin of the funds loaned, determined by the amount borrowed and your business’ security position. The type of loan may also include transaction fees, for example, when providing a guarantee for letters of credit where direct funding may not be applicable.

The good news is that financial institutions have come to understand the business cycles of SMEs and now offer standard cycles of 180 days for trade transactions, which means your repayments are less of a constraint on your cash flow. In some cases you may be able to talk with your lender about flexible payment terms to suit the specific needs of your business.

Extra security
Exporters with existing credit facilities may also be interested in the EFIC Headway guarantee provided by the government’s Export Finance and Insurance Corporation. Headway is designed for growing exporters that need more money than their current assets allow them to borrow.

“Where the bank isn’t able to accommodate an increase in their facilities, we can certainly provide security to the bank and they will then lend the additional funds,” explains Robert Dravers, EFIC’s director of business development. “If the bank is able to stretch its lending limits and go into an unsecured position, then they don’t need to call on us. It’s only when they do want to see security and that’s the only thing holding them back from approving the additional funds, when they would look for our support.”

Exporters must already have a relationship with one of the nine banks EFIC lists as eligible for the guarantee. EFIC then review the bank’s assessment of the exporter, and the risk factors. “The bank needs to support the application in all aspects other than it doesn’t have security as a fallback. In other words, the bank has to be confident enough that the exporter has cash flow to support the additional debt, that it is not over trading, and that it has a sensible use for the funds,” says Dravers.

Funding from Headway guarantees are generally short term—three, six, nine or 12 months—at an average rate of 4–5 percent per annum or a little more for shorter periods.