Most SMEs would be familiar with cash flow issues, but exporters in particular need to understand how terms of payment and the time cost of money can affect business growth.
Most SME exporters have less available security on their balance sheet, little no equity and find it difficult to get traditional funding from there finance provider, given their concentration on their domestic markets.
Depending on their agreed payment methods, SME exporters have different funding gaps. It is important that the SME exporter agrees with overseas buyers on the appropriate method of payment.
There are a number of methods of payment that an SME exporter should consider, all with a level of risk:
Prepayment: Remittance from the importer/buyer prior to shipment by the exporter/seller.
Documentary credit: Issuance of sight or term documentary letter of credit with payment by drawing under the letter of credit.
Documentary sight bill: Documents against payment (D/P Bill).
Documentary term bill: Documents against acceptance (D/A Bill).
Shipment on open account: Payment by the importer/buyer after delivery of goods.
Many SME exporters find it difficult to obtain traditional funding products from their financial provider because of these risks. In addition, SME exporters need to use their receivable book to access cash flow to grow their business in international markets.
Because exporters are pressured to compete in the international market and to provide the buyer with terms that are competitive in the buyers local market, they are often pressured to agree to open account payment terms—often with extended trading terms—creating cash flow constraints and higher risk of non-payment.
The better debtor
As an SME exporter you need to look at the whole supply chain to assist your cash flow requirements. Generating a strong cash flow in your domestic market can provide working capital to help grow your export market. Debtor finance suits businesses that need a capital injection to fund business growth or meet cash flow requirements and want to fund these objectives on the strength of their business sales.
Debtor finance is a facility designed to give your business access to funds based on the strength of your business credit sales rather than having a limit determined by mortgage-based fixed asset lending. Instead of waiting for your debtors to pay within your normal trading terms (usually 30–90 days), your financial institution will purchase your approved trade invoices and make available a percentage of the face value of those invoices generally within two business days. Your daily available limit will therefore automatically increase and decrease depending on the level of your credit sales and debtor collections. When your debtors pay the invoice, you then receive the balance, less any adjustments.
The benefits are:
Funds access—you borrow money based on the strength of your business sales.
Flexibility—it helps you manage seasonal and day-to-day fluctuations in cash flow.
Convenience—you gain access to funds when you need it against issued invoices.
Relative limits—as your business grows and your debtors grow, so does your facility limit.
Accessibility—you can transfer funds from your debtor finance account into your working account via electronic banking, or by written instruction.
Debtor finance is subject to standard bank credit process and a higher margin applies to any amount in excess of your limit. Be aware that other fees and charges may apply depending on the product offered by different financial institutions.
In most cases, to compete in the international market you need to grant terms to attract new export business so that you are immediately competitive in that market. Overseas buyers expect favourable payment terms and a good product, comparable to or better than what they are able to obtain in their domestic market. In addition, exporters need to deal with foreign currencies, different languages and different exchange controls.