How to mangage cash flow when exporting

Payment gaps in the export process can cause havoc with cash flow. Peter Mace examines solutions to help you better manage your export finances.

There are many challenges for exporters, from finding a buyer and finalising a contract, through to organising a shipment and getting paid for it. Many of these steps involve costs and invariably there is valuable capital tied up in the process.

For exporters of goods it starts with the purchase of raw materials through to manufacture and delivery. For service exporters, personnel costs and overheads often occupy capital until the completed delivery of the service.

For many exporters the inability to access suitable finance leads to a focus on pre-payment sales. This certainly solves a lot of financing problems and for businesses selling across mediums such as the internet or e-Bay this is often an acceptable option for their buyers. However, for many traditional export sectors pre-payment is not possible and payment terms will need to be offered to secure the sale. Let’s look at finance requirements and some potential sources of support.

Pre-Shipment Finance

Exporters may have financing requirements for manufacturing or preparing goods for export, while service businesses have development costs. Even when suppliers of raw materials or inputs provide credit terms, the interest cost will be included in the cost of materials.

Many businesses try to cover the cost of getting their goods and services ready for export using their working capital. Working capital may be funds available (for the lucky few). However, more often it is obtained from credit facilities provided by banks.

Other financing options available to exporters:

Supplier credit: using credit terms available from suppliers to finance all or part of the gap, until payment is received from the end buyer.

Bank finance: talk to your bank about your financial requirements and the support that can be offered. Businesses with a good track record should be able to approach their bank for additional short-term funding to support the preparation of goods for overseas sale.

‘Red Clause’ Letters of Credit: where a high level of trust exists between buyer and seller, the buyer can insert a clause in the Letter of Credit that allows an advance payment to the seller (exporter) to finance the preparation of the goods for export.

Working capital increase: EFIC’s Headway product allows eligible SME exporters to access an additional 20 percent of working capital through their financial institution, by way of EFIC underwriting the additional finance. Applications are forwarded through the exporter’s bank.

Negotiating a direct, upfront, part payment from the buyer can help to get goods ready for export. This may be appropriate and desirable where the goods are tailored to the requirements of a particular buyer.

Inventory finance: as goods are prepared for export, an inventory builds up and this inventory represents idle funds until shipment takes place and payment is made. By converting the inventory value (or part of it) into cash, the business has available funds to finance additional production. The goods or inventory may need to be assigned to the financier and will need to be readily saleable stock.