Coface’s predictions are that Europe in 2012 will be marked by a recession rate of -0.1 percent, while growth will stabilise in the USA at +1.6 percent and recover in Japan at +1.8 percent. Emerging European economies are most at risk, particularly those in Eastern Europe who are heavily reliant on European banks, as it is estimated that in the last 10 years, one fifth of the growth of Eastern European economies can be attributed to trans-frontier credit.

Italy and Spain’s assessments have been downgraded to A4, affecting in turn Croatia, which is exposed to Italian risk, which has in turn been downgraded to B. The Czech Republic, Slovenia and Slovakia have been placed under negative watch, with Hungary also being downgraded to B.

The political landscape in North Africa and the Middle East has affected those emerging economies’ assessments also, with Egypt being downgraded to C, Syria to D and the positive watch being removed from Nigeria’s D rating owing to ‘problematic governance’.

President of Coface, François David said, “With no rapid response from institutions to the crisis, negative forecasts on financial markets have prompted the distrust of actors of the real economy. However, it will be the corporates that will feel the repercussions of this crisis despite that fact that they have never been managed so well. In 2012, the combination of significantly weaker growth in Europe with the drying up of credit facilities could significantly affect the companies’ credit risk.”

“Some of the reason for the non payment or late payment in China is not only the financial difficulty for companies but, for a large majority of cases, due to either internal difficulties or particular management of procedures or disputes,” he notes.

Identity

The first thing is to correctly identify your client. In China there are a lot of companies with similar names. They have a legal name in Chinese and also a translation name which is not necessarily the legal name. There is one unique registration number by company and by province. It’s a very good way to make sure you’re dealing with the right company .

Obtain structured information about the investors that capitalise the company, where it’s located, the size, their production facilities, who are their main suppliers, their clients, what kind of payment terms do they offer, are they working with banks, what kind of banking facilities can they obtain, what is their financial situation? If possible cross-reference the information.

Payment terms

If you want to sell to these companies you have to open account facilities for credit, otherwise you’re out of the market. If you grant facilities you must make sure to be paid back when payment is due. If this is not the case you need to ensure your risk is secure by using third parties. Credit insurance which is becoming more popular in China only among foreign companies. Chinese companies espeically the medium and large sized companies are getting more sophisticated. More than 85 percent of the companies that we interviewed have their own internal credit management procedures. It’s a sign that the market is more structured and that companies are more aware of the risks.

Getting paid

Late payments or non payments are the first source of companies’ defaults worldwide. There has been improvement, partly linked to the improvement of the economic situation, partly to the strong support of the Chinese government with the stimulus package, but the government is progressively withdrawing its support.

The government wants to rationalise some of these industries where there is over-capacity and where they are not competitive. Object number one of the central government in China for 2011 is to reduce inflation risks so it will tighten borrowing and lending conditions, and interest rates will be increased, so some of the companies will have more difficulty in obtaining finance.

Partnerships

If you want to do business with Chinese companies, know them well and have protection for domestic or export transactions. Traditionally the types of companies that have been perceived as the most risky were the private companies for the very simple reason that they are usually small companies, family type businesses, labour intensive and under-capitalised, but they are also the most dynamic ones and have developed very rapidly. Interestingly, I think recently over the last couple of years the risk has reduced.

With joint ventures it’s more a question of successful cooperation between foreign and Chinese companies. It’s probably where the control aspect comes into the picture. Get a legal opinion before entering into a joint venture. If you want to do business and have any type of structure in China I think legal advice is a must.

—Coface’s Corporate Credit Risk Management in China (Payment Survey) was conducted from October to December 2010, with a cross-section of 1,071 companies in mainland China.

Cash flow stumbles

Christian Vollbehr, member of the management board at global credit insurance agency Coface Deutschland, says that a client may delay payment for a number of reasons, all of which will affect a business’ cash flow: “Sometimes they ask for an extension of payment and come up with reasons to delay payment, or they start a commercial dispute used as a delaying tactic.”

Recent political instability in certain countries will affect payments; even if your customer wants to pay you, they may not have access to their bank because of civil unrest. Whatever the delay, it means export payment terms of 90 days can blow out to months, even years, which severely affects your ability to pay your suppliers and run your business.

One remedy, if you’ve already sent goods overseas and your customer has decided not to accept it at the last minute, is to minimise your losses by selling the goods to another customer nearby. “You need to know at any time where your product is sitting. Is it still on the ship, is it in port? Is it somewhere in transition? Can you redirect it? It’s good to know people in-country who can help you on the ground,” says Vollbehr. “You could make some losses but you don’t lose the ability to trade.”

For service exports, or if your goods have already been accepted, you can enlist the help of a debt collection agency. Choose one in-country because they will be better equipped to deal with the local laws concerning debt collection. Having a local representative working on your behalf also makes the threat more real for your debtor.

Next time, try obtaining payment in advance. “That’s the safest way–but you can’t usually ask for that for competitive reasons,” Vollbehr admits. Also look into secure terms “where you have either documentary credit or any other type of secure terms, like letters of credit that are considered reasonably safe”. This depends on the stability of the banking infrastructure in the market, however. “If you have guaranteed payments and the banks shut down, what’s the value of that guarantee? There’s no 100 percent payment guarantee unless you get money up front.”

Also check the risk profile of your buyer and the market in case there are environmental conditions that point to future payment problems. “Watch the media to see what’s happening. Risk changes every day. If you’re setting terms, set them realistically in terms of that market and the industry you’re part of,” says Vollbehr, adding that competitors may be a good source of this information.

He also recommends being strict with your payment terms and keeping track of your debtors. “Keep it alive, update whatever you have.”

Despite offering substantial real value for importers and exporters, free trade agreements (FTAs) are regularly under-utilised.

This is often due to the complex nature of FTAs in the Asia Pacific region. With over 100 trade lanes now potentially covered by an FTA within the Asia Pacific (and 300-plus globally), understanding the opportunities and broader benefits these agreements can provide is of critical importance for Australian exporters. FTAs offer all businesses that trade—import or export—key margin improvement but are under-used as a platform for making exports more efficient and competitive.

FTAs are government to government agreements designed to reduce barriers to trade. Specifically, they offer preferences such as the removal or reduction of tariffs and non-tariff barriers on goods, harmonisation of regulations and standards, extension of national treatment, protection and promotion of investments and increased flexibility for business travel.

Over the last decade Australia has actively pursued FTAs with a number of key trading partners and has others under negotiation or at feasibility study stage. Australia’s current FTA map is summarised below:

What value can FTAs provide?

There are several tangible benefits that FTAs can provide Australian businesses ranging from reduced costs to business improvement measures. Some of the key benefits can deliver include:

Lowering landed cost of products in your export market
Tariff reductions or elimination of customs duties are of significant value in gaining market access and the opportunity to reduce the landed cost of goods in market. Given that FTA compliance is driven by the exporter (not the importer), the benefits can legitimately be incorporated into the broader sales negotiation between an importer and exporter. Factoring in the reduced duties available to the importer under an FTA can often allow the exporter to negotiate a higher product price than may have otherwise been achieved. In some cases FTAs can open up new export markets where Australian exports were not previously on a level playing field.

Gaining a competitive advantage over your competition
Taking advantage of lower rates of duty on entry into export markets can provide a significant advantage over your competitors, where they are supplying from a non-FTA country. With tariffs in Asia exceeding 50 percent on some products the ability to access reduced tariffs through FTAs provides a significant competitive advantage. On the flip side Australian exporters should keep a watching brief on FTAs that are being negotiated in key markets as these may provide rival suppliers benefits. This may require alternative market strategies to be adopted in order to remain competitive.

“Often an exporter with aspirations to grow will leap in because they’re too eager,” says Craig Michie, CEO of Taurus Trade Finance, a lender that provides working capital to SMEs. “We recommend getting all the advice you can before you sign up with an overseas partner.”

Cashflow is usually the main concern for smaller businesses. Michie advises getting a letter of credit where possible. “A ‘sight’ LC is the best way to ensure your exports don’t impair your cashflow,” he says.

In his experience, LCs are becoming increasingly difficult to obtain as overseas buyers use their powers of negotiation to force better terms from exporters. “That can leave small to medium exporters with 30, 60 or 90-day payment terms,” he says.

Often banks won’t step in to help an relatively unproven exporter or will demand a ‘bricks and mortar’ guarantee in the form of a director’s home or other personal property. “Assets such as this are not linked to a company’s trading cycle and are a poor response to exporters’ funding needs,” says Michie.

Export Finance and Insurance Corporation (EFIC) might be able to help you if your bank can’t provide finance or insurance cover, but other options are available.

Financing options
Taurus is one financier that can step in to help exporters. “We offer a service whereby we take on the debt from the overseas buyer and pay the exporter upfront,” says Michie. Taurus conducts initial credit checks on the overseas party and gains legal ownership of the export debt.

“We have exporters who make use of our service again and again,” says Michie. “For them, it’s well worth the fee we charge to ensure continuous cashflow.” Other exporters take advantage of Taurus’s facility until their export revenues are constant enough to go it alone.

Michael Cradock, director of Newcastle-based Morgan Cradock, agrees that some growth-focused exporters are too slow to acknowledge their financing requirements: “The important thing for us is to talk the potential exporter though the entire process, taking in every eventuality.”

Cradock offers consultancy advice to technology SMEs. “We look at how an enterprise is interacting with its potential market and make sure they understand their sales and growth objectives.”

When a firm gets into financial difficulty they look for loopholes and reasons to justify delaying payment, or not paying at all. When a sale is made it’s great to celebrate, but we all know things don’t always turn out rosy down the track. One of the best ways to protect yourself and ensure you get paid is to have well prepared, clear and concise Terms of Trade between your business and those with whom you transact. Verbal and handshake agreements may be appropriate in some circumstances, but when things don’t go to plan you want to have something solid in writing to back you up.

I spoke with RP Emery & Associates, providers of contract templates for business. They told me why smart businesses need good Terms of Trade.

Manufacturing Agreement

A manufacturer and purchaser worked well together for a year, but then a dispute arose over an overdue account. The manufacture claimed substantial interest and late payment fees. The case ended up in court, because it was unclear whose terms of trade applied, as there had been express agreement on who made and supplied the goods, but not as to the terms of payment. In this case the Court held that by going ahead and fulfilling the purchaser’s orders, the manufacture had effectively accepted the purchaser’s terms.

The expense and aggravation of having such a dispute resolved by a court is always stressful (and a distraction), so when you enter into an agreement, just make sure that your terms of trade are also signed by the other party.

Similarly, when it comes to licensing and distribution agreements, it is important to make sure that there is a clear understanding between the parties, as to what the intellectual property component really means. It is commonly thought that one can get around design, copyright, or a patent merely by changing the product by X percent, but that is folklore.

IP Terms of Trade

Just this year, Solitaire Homes won a landmark case in which an architect made what he thought were adequate changes to a Solitaire project home design. Once it was established that the architect had in fact based his drawings on the Solitaire design, he was guilty of copyright and trademark violation. So acknowledgement of your copyright and other IP in your terms of trade is critical.

Addressing matters such as these in your terms of trade will keep you out of court. Even the judge commented in the Solitaire case that after five years, the legal costs exceeded the cost of construction of the house, let alone the damages awarded!

Personal Guarantees

Another very important issue is the question of personal guarantees. There was a case in which a company delivered industrial design services and did not get paid by the purchasing company. A magistrate held that, because a director of the purchaser used the word ‘I’ in a letter (rather than ‘the company’), there was an implied personal guarantee, and awarded judgement against the director. Now, the fact that this decision was clearly wrong at law is irrelevant: the director had to appeal to the Supreme Court on a matter of law, and it was cheaper to pay the bill rather than incur the costs of a Supreme Court appeal.

The lesson to be taken from that case is that the terms of trade did not exclude directors’ guarantees.

Import/Export

When it comes to international trade (import/export), the subject takes on an entirely different hue. For example, you need to be aware of roughly five kinds of commonly used international trade documents—government control documents; commercial (invoice) documents; banking documents; shipping documents; insurance documents—and any one of those can bring you undone if you haven’t done it right.

Also, we all understand the definition of ‘quality’ under Australian law, and the implications of the Sale of Goods Act. But do you understand the United Nations Convention on Contracts for the International Sale of Goods? This convention defines such things as ‘material breach’ and ‘minor breach’ of contract and these have a significant impact on how disputes are handled in the global arena.

This means that you must be across the requirements of establishing quality, and that may be through inspection: sample; grade and standard; and brand or place of origin. These issues bring into play the methods of payment (irrevocable L/C; mail transfer; demand draft; telegraphic transfer) and making sure that you understand the effects of the pricing methods (FOB; C&F; CIF; DAF), because these aspects all impact on the documentary collection and the rights and obligations of the banker at either end.

Sounds complicated? You betcha! It is, but in a global world, we all have to come to grips with these complexities.

Terms of Trade considerations

Other items to be considered in your terms of trade are:

• How will the goods be ordered?
• How will the orders be confirmed?
• Will buyer/seller be entitled to cancel orders?
• How is the price to be paid?
• Are there handling/admin fees?
• Are there penalties for late delivery/late payment?
• Can either party offset amounts owing against an order?
• How are credit facilities to be assessed/granted?
• What defines delivery/collection?
• Can orders be cancelled if not delivered by a certain date?
• Must seller notify purchaser if delivery date changes?
• Can goods/services be delivered in instalments?
• What are the consequences if purchaser fails to accept delivery?
• Can seller retain title until paid?
• Does retention of title outlive termination of agreement?
• Is confidential information being imparted, and how is it protected?
• Are there any Privacy issues?
• Should either party have the right to terminate without cause?
• What are the consequences of termination?
• Have warranty and liability issues been adequately addressed?
• Are there guarantors, and are the guarantee terms clear?
• The laws of which State apply?

As you can see there is a lot involved in the delivery of a service or product. It just might save you a lot of money to have a clear understanding by all parties from the beginning, rather than having to go to court and incur a lot of unnecessary legal fees to sort out a problem later.

—Sue Hirst is the founder of CAD Partners – CFO On-Call

Market research

Proper investigation into an overseas market should be foremost in your mind when considering a sale. Many exporters start selling overseas by accident, that is, someone makes a request to start a trade relationship. It is when a sale is reactive that exporters tend to get complacent because often, if a buyer is keen to purchase your goods or services, they will be more likely to accept payment terms favourable to you. This is fine for one-off opportunities, but it is not exporting.

Exporting is a long-term process, so you still need to do you due diligence to ensure that that country is the right fit as an ongoing part of your business. “It makes quite a difference whether you go into certain developed markets or emerging markets and whether a political risk applies or does not apply,” says Christian Vollbehr, country manager at global credit insurer Coface Australia.

Country credit ratings then come into play. Organisations like government credit agency the Export Finance & Insurance Corporation (EFIC) monitor country risk on various factors ranging from political risk to currency risk and difficulty enforcing contracts. Commercial agencies such as Coface monitor the business environment using macroeconomic information from a country’s economic data, and microeconomic data.“We track non-payments under our insurance-related products. Every time we receive a non-payment notification, our department of economics is kept in the loop and they evaluate the performance of each country, broken down by sector,” explains Vollbehr.

Understand your buyer

Credit ratings can extend so far as to encompass the business environment, the conditions for operating a business. Vollbehr says this allows exporters to understand “how hard it is for your counterparty to operate a business”.
Stephen Holden, general manager of Working Capital Finance at the Commonwealth Bank agrees and recommends finding out what is normal domestic practice: “Otherwise a buyer could say, ‘this is normal in my country’ and you wouldn’t know whether it is or not.” Vollbehr says this is a crucial point as terms of trade from country to country, and from industry to industry.
Both you and the buyer must also agree on the Incoterms in your contract “so you know exactly what both parties are trying to achieve and the buyer less likely to take you for a ride,” he says. Your research should include the buyer’s trading history, he adds: “If they’ve been importing a long time, they have a reputation to risk if they don’t pay you.”
Don’t forget word-of-mouth either, reminds Holden. “Never underestimate the informal exporters club. The sharing of information in a non-competitive way can be very useful. Talk to people.”
He also suggests using credit reference agencies to attain a credit report on the potential buyer. Vollbehr says agencies like Coface provide credit opinions on companies in about 180 countries, supported by credit insurance if required.

Monitoring a buyer is also paramount. “Stay very close to the first transactions before you establish a routine,” says Vollbehr. “Have sample trades or test trades where both parties have an agreement beside the commercial contract. The buyer can confirm that that’s the widget they want for the next shipment in a larger quantity.”

Things can also change over the course of a payment period, which in international business can often be 180 days long. “Something that is good credit today could be very different tomorrow. That might not just be the business environment in one country, that may also be related to changes in the political environment,” he says.

Unfortunately, the danger is greater for exporters than for almost any other kind of business. Even if you have an established business, exporting can stretch your finances to the limit, simply because it takes so much longer to transport your goods to market, clear them through customs, and get them into the hands of your distributor or customer. Depending on your payment terms and shipping arrangements, that can open up a sizeable cash flow gap thanks to the time lag between paying for supplies and getting paid by your customer.

Then there are the effects of unexpected economic fluctuations, like changing interest rates, unpredictable commodity prices and volatile foreign exchange rates. Without hedging, a sudden spike in the value of the dollar can turn a profit into a loss. All of which makes it essential to put protection in place, so that you never have to suffer a cash flow crunch.

The cash flow cycle

A good starting point is to think about how cash flows into and around your business, then consider how you can get it moving faster. You’ve probably heard of the cash flow cycle, which starts with the cash you invest in your business or earn from sales. You spend that money on business inputs, including salaries, rent, supplies, marketing, whatever you need to keep your business running and get your product out the door.

Next come sales, but that isn’t the end of the process. Unless you’re paid cash upfront, your sales go into accounts receivable, while you’re waiting for the money to arrive. It’s only once you’ve been paid that they go into cash and you’re ready to start spending again.

The important point is this: every dollar you invest in your business has to go all the way around the cash flow cycle before it comes back to you, bringing some profit with it. So the faster you can make the cycle turn, the more successful your business will be.

A long cash flow cycle not only means you have to wait longer before making a profit, and even longer before making a profit on your profits, it also means you need to have more capital tied up in your business, so that you can keep things running until the cash comes in. If you have borrowings, it’s the direct interest cost; if you’re lucky enough to be debt free, it’s the indirect opportunity cost of not being able to invest that money in something else, like growing your business.

Now you begin to see why exporters face a unique set of challenges. Not only is your cash flow cycle likely to be longer than that of most other businesses, you may also face more uncertainty, both in the time it takes to deliver the goods and get paid, and in the variability of all those other factors that influence your costs and your revenues.

A performance bond follows much the same concept, acting as a kind of insurance for the buyer that you will do the job that you have been contracted to do. But this can be a problem, especially for small to medium exporters who either don’t have that kind of money, or could better use the cash elsewhere in their business. This is where financial institutions can step in, fronting up the performance bond for a fee, so that you can complete the job, get paid and grow your business.

Essentially, you don’t touch the money, says Andrea Govaert, executive director for SMEs at the Export Finance and Insurance Corporation (EFIC). “It’s a bond that has been issued by a third party on behalf of an exporter in favour of an overseas buyer. And it is an assurance for the buyer that if the exporter doesn’t perform the contract, the buyer has a ability to call on the bond and reduce their losses.”

Time to bond

Most bonding products require a robust balance sheet so the financial institution knows you’re able to pay back the money for which they’re covering you. Every bank provides a facility like this, says Govaert.

However, there may be situations where the bank perceives the credit risk as too high, which is where a guarantee can help. “We provide a bond or a guarantee in situations where the bank doesn’t want to. We tend to be more of a risk-taker,” remarks Govaert. “EFIC will provide a back-to-back guarantee where we provide the guarantee and the bank will issue the bond. Also, if a foreign buyer isn’t familiar with EFIC, then they may not be willing to take a bond from us, but they’ll take one from a bank and EFIC will guarantee it.”

In providing both direct bonds and guarantees, EFIC understandably takes a wider view of exporters that may be suitable for this facility. “We do not look at it from the balance sheet, what we look at primarily is the ability of the exporter to comply with the contractual requirements, if they are technically competent to deliver under the contract,” Govaert explains.

The assessment starts with an application form, where the exporter needs to explain the tender, nature of the contract, how much they need, and who is the counterparty. It helps if the exporter has a proven track record in the industry and has a list of successfully completed transactions.

EFIC will then indicate the price of the bond, based on the strength and nature of the business, as well as taking into account the contract. “Clearly a six-month bond is a very different concept to a five-year bond,” says Govaert. “We also take the risk profile of the country into account.”

The contract is another key aspect of the bonding process. The parties need to specify milestones, and set realistic expectations in a realistic contractual period, she explains. “Usually the bond reduces with time, but you need a trigger point that needs to be clearly defined in the contract, otherwise there will be grounds for dispute.”

Who bonds?

Exporters that need bonds tend to be in the construction, engineering, oil and gas, cleantech, or mining industry. Sometimes they are in the process of commercialising technology, so the buyer needs a guarantee that the product will be delivered. Most are medium-sized businesses looking to grow; often the need for a third party to cover the performance bond indicates their first big contract. “Typically it’s the mid-sized companies. The bonding facility enables companies that are technically competent to undertake contracts that are much larger than their balance sheet than their normal circumstances allow them to do,” says Govaert.

Ironically, the companies that are big enough to afford bond money don’t tend to need it. Mature businesses such as BHP Billiton or Leightons have strong enough reputations that allow them to dictate the terms of a contract.

Trading

For young tourists, the two greatest risks associated with travelling are getting lost and losing their money. Either is traumatic, but having both occur simultaneously can devastate the best and most meticulously planned itinerary.

Australian businesses travelling offshore in either an import or export capacity are equally at risk of ending up in an unfamiliar landscape with depleted finances thanks to the unique risks associated with importing and exporting. But these risks can be both managed and transformed into opportunities that can ultimately benefit the business.

Importers and exporters need to be absolutely certain of their access to funds. Trading cycles – both domestically and internationally – can be volatile depending on macroeconomic and sectoral factors, so Australian businesses need to make sure they partner with an organisation that can facilitate transactions as needed. National Australia Bank’s Trade Finance specialists provide solutions based on working capital finance and risk management to Australian businesses—from large retail, wholesale and institutional clients to small to medium-sized enterprises—that require flexible finance to support their trading cycles at home and abroad.

Two key risks Australian exporters and importers face are related to interest rates and foreign exchange (FX). Adverse movements in either of these markets can result in a direct impact on profit and loss, reduced cash flow, higher costs or an inability to take advantage of growth opportunities.

When a client borrows money for trade finance, or for any other borrowing requirement, they are taking on risk related to interest rates. The Reserve Bank of Australia has indicated that Australian interest rates will continue to rise towards average historical settings, so mitigating the risk of an adverse interest rate movement is critical for Australian businesses. Depending on the tenor of that finance and how long the trade cycle lasts, there is an opportunity to manage that interest rate risk with a tailored solution that can deliver a known interest rate level or map out a worst case scenario.

Businesses dealing with suppliers or customers offshore are also exposed to FX markets. Movement in FX markets can have a direct impact on reported profit and loss as many clients, such as importers and exporters, make or receive payments denominated in foreign currencies.

On conversion to the AUD, these payments can change in value from one day to the next depending on the relative value of the currencies involved. With the recent trend of the AUD now rising towards parity with the USD, importers and exporters may wish to think through how they can benefit from that movement or mitigate its effects on their business by speaking to a NAB FX specialist.

Journeying offshore can be both exciting and risky, but you don’t need to travel alone—NAB can go with you. So, if you want to benefit from a partnership that’s prepared to understand your business as well as it understands foreign trade, let’s talk.

Talk to a NAB FX specialist on 1800 019 215, or a trade finance specialist on 13 10 12 or visit www.nab.com.au/tradeoverseas