Financing overseas trade – an overview of the options

9th November, 2018

By Chris Eddowes

Following on from Nick Farrant’s recent blog entry ‘South West Food and Drink Exports Up 8.7%’ and the daily news entries on Brexit, (specifically concerns over customs delays for importing and exporting), I thought it timely to provide an overview of the main options for the financing of overseas trade.

Finance with Brexit in mind

Delays at any border with the UK could well extend the working capital cycle for importers and exporters – creating cash flow issues for those business i.e. where there is an extended delay between parting with cash and receiving imported goods to sell, or the time between selling goods overseas and actually completing the order and being in receipt of the cash.

Given the growth in exports and global trade, alongside the uncertainties around Brexit and the potential disruption this might bring, the need for finance of overseas trade is likely to increase. This might also become a concern for businesses who have not previously needed or considered such finance arrangements.

The finance options – an overview

With this in mind, this blog post is an extension of Tom Roach’s post ‘Export Finance to the Fore For SMEs’ which outlined the UK Export Finance (UKEF), the UK’s export credit agency, new partnership with five major high street banks, “allowing smaller businesses to access millions of pounds in government-backed trade finance directly from their bank”.

I overview below some of the potential options available to importers and exporters in financing their operations (a number of which are referred by terminology in Tom’s post).

Finance Option How do they work Advantages and who it is appropriate for
Documentary Credits / Letters of Credit These are a payment mechanism where a bank or financier will guarantee that a buyer’s payment to a seller will be received on time and for the correct amount.

 

A fee is charged by the bank for supplying the letter of credit and security is often required.

Provides security over payment.

 

Useful for trading in a new market, unfamiliar region of with new customer.

 

The guaranteed payment provides leverage for negotiating improved terms on a transaction due to the reduced level of risk.

Import finance Obtain funding against future sales to pay your suppliers up front. Growing businesses where the proceeds from the last sale are insufficient to fund the purchases for the next.
Forward contracts and options Setting the price of exchange rates in advance to guarantee, or have the option to exchange currencies at a set price. This removes the downside risk of exchange rate variances. Trading with countries with a volatile currency or wanting to fix the costs of a transaction so that this is known rather than variable.
Loans Loans can be tailored so that repayments are matched to your trading cycle. Where cash flow can be variable.

 

Useful where a small number of large orders are being fulfilled and the timing of payments and receipts causes significant cash flow swings

Export insurance policies Insures the exporter against the risk of not being paid under a contract Provides security over the costs of exporting and can cover:

Insolvency of the buyer

The buyers failure to pay

Political or economic events

International trader and interested to find out more?

If you can foresee the need or the potential need to explore some of the above options further the tag line at the foot of Tom’s article still hold true “Businesses interested can find out more by speaking to their bank”.

Given the increasing range of ‘alternative funders’ I would also consider researching this market either directly of via a platform such as Capitalise.  In either case, I am sure we can assist.  I would also advice on stress testing/ running scenarios on your projections to see what pinch points you may have if delays do impact negatively on your working capital cycle etc.

Whilst not directly related to funding, I note that our Truro office is hosting an event next month on International Trade, looking at the change ahead for VAT and Customs Duty in an uncertain Brexit world. More details will be posted up on our website next week.

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