True cost of finance
Money for performance bonds is another popular form of finance sought by SME exporters, especially those working on projects, such as construction companies. “Businesses would access out bonding facilities when the obtaining of a bond or guarantee from a bank would have significant adverse effects on the availability of their credit facilities or their cash flow,” says Dravers. “Bonds can be a significant financial strain on companies, particularly in markets such as the USA where the bond is usually 100 percent of the contract value. In many other markets it’s often around 10 percent of the contract value.”
Bonds require a more significant risk assessment than Headway, including a detailed assessment of your business’ commercial and financial status and an assessment of the risks associated with the overseas buyer’s ability to pay. As such, Dravers recommends that the bond needs to be large enough to justify the work: “The size of the bond has to make economic sense for the borrower and for us; anything under $250,000–300,000 is getting unfeasibly small.”
EFIC takes between 5–20 percent of the bond’s value as cash security. The exporter pays the fee upfront for the expected term of the guarantee, which can be extended should the project experience delays. With this facility, the fees charged would ultimately depend on the level of risk. “No two situations are identical, so it really does depend on the borrower’s strengths and the project risk, the buyer and the contract and so forth. As a guide, a company could expect to pay 3–5 percent per annum,” says Dravers.
He believes the credit crunch will contribute to a higher number of applications for both Headway and bonding facilities in the year to come as exporters seek extra security for funding. “Whether the banks have the funds could be an issue,” he remarks. “The amounts are not particularly large in the scheme of things. A typical Headway application is generally from $100,000 to $4 million, but usually around $1 million.”
So whether you’re looking for money, or already geared and looking for more, do your homework on the different types of finance available and make sure you keep in mind the cost of that finance weighed against the benefits and opportunities for your business.
Tips for funding finance
- Attain long-term finance for long-term expenses and short-term finance for short-term expenses.
- If you think you might fall behind in your repayments, talk to your lender as soon as possible. They will appreciate that you flagged problems early and will more than likely be able to work with you on a solution.
- Make sure you can remain profitable even if one or two debtors fall through. It’s important to have a financial buffer such as reliable profitability in your domestic market or a diversity of debtors; don’t rely on one customer to come through with payment to fund your debt.
- Ask about risk mitigation when you speak to your lender. They should be able to give you information about potential problems and advise you on strategies to minimise risk with international payments.
Related Keywords: Cash Flow, Credit Crunch, Foreign Exchange Rates, Margins, Overseas Markets, Repayments, Trade Finance, Working Capital
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Secured trade finance sounds like an excellent option for exporters, but I would assume it’s only beneficial to larger, established businesses. I have a relatively small export company, are their financiers who deal with this method of financing on a smaller scale?