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

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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.

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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.

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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.

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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

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International business

Murphy’s Law states: ‘Anything that can go wrong, will go wrong.’ While you may not be as pessimistic as Edward Murphy Jr, it doesn’t hurt to think about how you can mitigate all the negative possibilities to which exporting is exposed.

Fortunately, there are a number of ways you can invest in peace of mind. Export insurance, in its various guises, can not only make you more comfortable about doing business overseas, it allows you to focus on, and grow, your business internationally.

Credit insurance

Credit insurance, or trade credit insurance, is the most popular form of export insurance. Suitable for any business that extends credit to their overseas buyer, credit insurance covers the risk of your buyer becoming insolvent or unable to pay the money owed to you.

“Credit insurance will be able to offer 80-to-90 percent recovery to what was owed,” says Kirk Cheesman, managing director of NCI Brokers. “It also offers information and assistance with recovery, especially when businesses are marketing to potential new clients. Insurers will obtain credit reports, financial histories on the debtor, and look at if there’s any adverse information relating to directors and shareholders, and come back with a recommendation and endorsement.”

The premium on credit insurance is negotiated as a percentage against your expected turnover at the beginning of the year, Cheesman explains. If the actual turnover is under expectations, the insurer will charge a minimum base amount and a rate on the lower turnover. “Likewise, if they achieve more, there’ll be an adjustment for over and above,” he adds.

Four commercial insurers provide trade credit insurance — Atradius, Coface, Euler-Hermes and QBE — with government agency Export Finance and Insurance Corporation (EFIC) providing longer-term coverage, usually beyond two-year credit terms, where the commercial providers do not.

Credit insurance is harder to come by these days due to the uncertainty brought on by the global economic downturn, says Cheesman. “The insurers are more cautious given the current conditions, and there is more insolvency out there. You might also have risks in financial institutions. If people are selling on letters of credit, then normally the risk goes through the bank, but a lot of banks have fallen over in the last year so it’s not just the debtor, it’s the bank supporting the debtor.”

The benefits of credit insurance are that it provides the exporter with comfort in knowing that they’re not risking the business if something does happen to the buyer, as well as allowing them to extend credit to buyers unknown to the business, but considered a good prospect by the insurer. “It definitely protects the balance sheet and gives them more confidence to grow,” notes Cheesman.

Political risk insurance

Political risk insurance (PRI) is another type of coverage exporters need to consider, particularly in emerging countries. Political risk is defined as the risk of the overseas government intervening in your investments, which could be the goods you export, or any assets or business you have in the other country.

“Traditional PRI would cover a government confiscating or nationalising or expropriating your assets, or passing laws that block your ability to transfer money out of the country,” explains Chang Foo, head of Product Management and Risk Transfer at EFIC. He adds it also covers war risk and political violence, “like civil war or riots, insurrection, upheaval, coup d’etat: things that are beyond the control of the investor”.

Coverage has also widened to include other constrictions on an exporter’s ability to do business, says Foo, including import-export bans, such as the restriction of importing machinery to complete operations or a cancellation of your export licence; selective discrimination against foreign entities where the government changes the business environment by favouring local business; and business-to-government contracts where the government breaches its obligations, contravening international law.

More and more exporters are doing business with emerging economies, and many businesses aren’t aware of these risks, says Foo. “With emerging countries, you have weaker governments, weaker law, not as transparent judiciary systems as you expect in OECD [Organisation for Economic Cooperation and Development] countries. You could have an unstable regime in which governments come and go. This is where the PRI product comes into play.”

Both commercial and public agencies can provide political risk insurance, from the World Bank to regional and multinational commercial and government providers. “Normally it’s a given that if you buy an export policy you get political risk cover with it, especially non-acceptance,” says Cheesman.

However, a public agency can additionally leverage a government-to-government relationship in the event of a problem. “We can be more proactive and engage appropriate channels to make sure things don’t deteriorate. So we have the halo effect,” says Foo. “The World Bank has a larger halo effect, they have preferential creditor status.”

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Acquisition

It’s a serious undertaking when a business decides to acquire another, particularly if the acquiring business is a small or medium-sized one. While having enough money is usually a major concern for all types of takeovers, acquiring an overseas business will also require significant thought in regard to legal and cultural considerations. This is a guide that outlines how smaller businesses should approach the acquisition process.

Secure your strategy

Be very clear about why you’re considering acquiring the other business. Acquisition has many benefits, notably related to speed in gaining market share, technology and/or skills.

“If you’re in a market and only have a small market share, there’s probably going to be a long path for organic growth. You may want to acquire to increase meaningful market presence,” says Symon Brewis-Weston, executive general manager of Local Business Banking at the Commonwealth Bank. “You may use acquisition to enter a market. So in a market where you don’t exist, instead of starting a business from scratch you may just acquire a business.”

He also nominates possible advantages such as gaining scale or cost efficiencies, or buying the human capital of the other business: “You might acquire because you think they may have a better R&D capacity or a better skill base or technical expertise.” Reducing competition, or diversifying your business are also common reasons for acquisition.

As an expensive, research and time-intensive process, acquisition may compare unfavourably to other methods of reaching your business goal, such as licensing another firm’s intellectual property, attaining a certain skill base through outsourcing or setting up a joint venture.

Clive Rabie is the CEO of the Reckon Group, which comprises of business services and software. “We like to buy best of breed technology as opposed to customer bases,” he says. The process then includes the human resources level—”look at the management and the people involved”—before the numbers: “Look at the earnings, numbers and profit against capital requirements, how capital intense it is, and look at your own financial position: whether you’re growing organically.”

In the end the equation should be fairly simple: “The main drivers are whether it’s strategic to your business. The next thing I would look at is whether it’s synergistic and then how it affects your business,” he adds.

Plan for people

One area that should attract as much attention as the finance aspect is cultural fit. Not only do businesses have different cultures within them, when you’re trying to join two businesses from different countries it’s a more significant factor than usual. Your handling of culture could mean the difference between success and failure.

“When you want to go overseas there’s a whole other layer of cultural focus as opposed to just being in Australia,” notes Rabie. “If you’re going overseas, add another layer of consideration: ‘okay, how do we manage? What sort of relationships do we have on the ground in those places? What are the risks? Who, locally, can look after that relationship?’ On the positive side, from the acquisition what can you bring back home? And that goes back to the synergies.”

Brewis-Weston agrees that not enough attention on culture can lead to problems: “The biggest risk that I see is where you’ve acquired people to do a job and you’ve imposed a way of doing business that might be different. It can lead to a great deal of disenfranchisement.”

Looking internally, he insists that businesses understand the cultural reasons for why your business is already successful, as well as understanding the skill capacity of your staff. On an external front, do some research on the operating context of the business to be acquired.

“Understand the culture of the country and try to get as much of an understanding as you can of labour laws and culturally how those people operate. Typically, most people fear the acquirer unless it’s a survival thing, and most people will assume that costs will be cut,” he notes. “You have to be clear about the messages that you’re going to bring, and try and have people on board who can advise you of the cultural issues and how to manage that.”

Brewis-Weston admits that a number of acquisitions lose value because the acquiring business has either overpaid because they don’t understand the asset they’ve purchased, or they “don’t get the people piece right”.

“If you’re buying a pharmaceuticals company because they have a good R&D team and you change their culture, they could then leave to a competitor and half your team is gone, which may be the reason you bought it in the first place,” he gives as an example.

Other stakeholders are the customers of both businesses. The acquiring business needs to understand that if they change things, they may also be changing the relationship between the acquired business and its customers. If you’re acquiring a business to gain market share, this is a crucial consideration.

“A lot of people don’t think of how their customers might react. You have to think of why people are customers of that particular company. You need to maintain the link between that service and the customers; if you lose that, you’re in real trouble,” Brewis-Weston remarks.

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Grants are a great way to boost your business funds for a particular area of your business, whether it’s research and development, innovation or marketing. Funding bodies tend to be not-for-profit agencies, most commonly local, state or federal governments, but also research institutions such as universities, and foundations where your business’ products or services meet their agenda.

While attaining a grant is not necessarily a hard task, far more businesses apply for grants than there are funds available, so receiving money from a grant is not guaranteed. In many cases you may also have to meet strict criteria that could affect the way you do business, or the funding body may have a different agenda to your business’ aims.

The grant application process can be quite intensive and involve identifying and sharing a lot of company information. If you’re finding it difficult to throw away all the effort you put into the application, here are some ways to leverage the information you now already have at hand, and maybe obtain the money some other way.

A win-win situation

It may sound implausible to win a prize when your grant application has just been rejected, but if you already have all the information readily available, it’s worth a shot. Often competitions are looking for entries that are a little bit different, whereas the grant process may seem a bit more conformist.

Prize money can go up to several thousand dollars, such as the recent $30,000 that RMIT University awarded as part of its 2009 Business Plan Competition earlier this year, or valuable equivalents; last year, for example, the Australian Small Scale Offerings Board held a pitch competition where the winning business received a $40,000 listing.

Non-monetary prizes could include business services or office equipment that could assist you. The Telstra Business Awards, for example, have a $400,000 prize pool that is made up of a mixture of cash and Telstra products and services.

While you’re at it, don’t forget that there are a number of awards that may not have monetary prizes, such as the Australian Export Awards, but are nonetheless valuable from a marketing perspective and could enhance your chances of receiving grant money or other prizes in the future. If you already have the information at hand, why not?

Working capital harder

If you’re looking for extra money because you need more working capital—as opposed to being a start-up entity at the commercialisation stage—investigate other ways where you can free up funds. Securing a steady stream of cash flow is vital for most exporters, though you wouldn’t be alone if you found this difficult to do. Use the information you gathered for the grant application process to make cash flow projections based on your current sales and identify areas where you’ll be investing the money, then see whether you may be able to cover this area by extending your current working capital.

Invoice finance is one way to ensure your sales equate to money flowing through the business. Invoice finance, which includes factoring and invoice discounting, allows you to take your sales receipts to a financial institution that will, for a fee, give you a percentage of the proceeds upfront, usually between 80–90 percent, and the rest upon settlement of the invoice. This means you can use the money before it actually falls due from your buyer, which could be some 90 days after the sale.

Factoring is invoice finance where the financial institution also manages your sales ledger, which means they will chase late payment on your behalf if necessary. It will typically be more expensive than invoice discounting, which is invoice finance without this type of management.

Another thing you can do is extend your existing credit lines with your financier. If you’ve been a good client, most institutions would be happy to accept the business case you initially built for your grant application as a basis for requiring more capital.

Reached the limit of your credit? You may be able to secure more money via a guarantee such as through the Export Finance and Insurance Corporation (EFIC). EFIC’s Headway program has been designed specifically for small to medium businesses that seek an extension to their current finance facilities but do not have additional security to offer.

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Banking seems like such an everyday facility that exporters forget that doing it the wrong way can be costly. Whether it’s opening a bank account in the destination country or finding finance from foreign sources, there are a number of costs exporters should consider—and many they can avoid or minimise.

Overseas accounts

If you are already with a provider, obtaining an overseas account is usually a matter of completing paperwork and letting the institution do the rest. Most Australian banks don’t have branches overseas, so they will generally go through in-country partners to set up an account for you. Global banks, such as HSBC, can process country accounts through their own network.

At this stage, the main cost to you is time and effort. “Some of the indirect costs are exporters needing to have two banking processes, and there could ultimately be multiple providers in that,” says Jason McClintock, senior manager in FX trading at American Express Foreign Exchange International Payments. “There’s a cost internally to keep those accounts functioning within general ledger systems and accounting systems in the back end of any exporter.”

Foreign accounts tend to attract transactional fees similar in structure to Australian accounts. Fees and charges will vary according to a few factors. “From a client perspective, it depends on their volume as to what they get charged, and the size of their balances. If you were to use a third party bank it’s typically more expensive because of that third party aspect,” explains Wendy Booth, head of global payments and cash management at HSBC Australia.

“From the bank perspective it depends on the country, For instance, the UK is notoriously expensive for telegraphic transfers. The US don’t pay interest on accounts because of local regulations, so they’ll charge fees, and their fees are a little bit more competitive.”

The good news is exporters may be able to negotiate fees with their provider. “Depending on the size of the corporate, everything’s negotiable with the transaction fees,” she says. Factors that would influence negotiation include volumes, size of deposits, and the extent and length of the relationship, Booth notes.

Foreign finance

Attaining finance from a foreign market involves a similar process as attaining finance in Australia. However, whether or not you’re eligible for finance will depend on the country you’re in. “In the more developed countries it’s a more refined process and more available to the lower end of the market, but in lesser developed countries it’s not as easy,” explains Andrew Skinner, head of trade and supply chain at HSBC Australia.

An indirect cost is maintaining a presence in the market. Typically you need to have assets in the country before you can apply for finance in that market; you may also need a financial track record to be considered for finance. “That track record may be offshore so if in your new market you have no track record, it’s not going to be easy to get access to large facilities unless you have strong security, for example,” he says.

“There are also some markets in which you can’t give security, or it’s of negligible value. The better the security, the cheaper the finance will be. People whinge about security but if it gives you a better cost of funds, then that’s a more sensible way to get it.”

He adds that if your facility goes beyond the standard loan you may need independent legal advice, which has a cost attached to it.

As for the cost of the finance itself, Skinner says Australia is quite competitive, so you may be better off getting finance here, especially as you’ll already be familiar with the regulatory environment. The volatility of the other country’s currency may also be discouraging.

But there are still advantages to attaining finance in another country: if you have costs in that country, then “you may be able to provide a natural hedge for your product to remove some of the currency issues,” says Skinner. Also, “some countries have a lower cost of interest.”

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A documentary credit (DC), also known as a letter of credit, can be described as advice issued by a party—usually a bank or other financial institution—authorising the payment of money to the exporter, against delivery of specified documents as evidence of the shipment of described goods.

A DC constitutes an undertaking by the issuing bank that, providing all the terms and conditions of the DC are met, they will pay the invoice amount. This payment undertaking is independent to the underlying contract of sale. DCs can be issued either at ‘sight’ or with credit terms, for example ‘60 days after sight’.

DCs are issued under a framework of rules to which all banks subscribe: the Uniform Customs and Practices for Documentary Credits published by the International Chamber of Commerce (ICC).

The creditworthiness of the issuing bank, (credit risk) and the country of issue (political risk) are important considerations when accepting DCs as a form of payment.

The importer requests a DC from the issuing bank, which may subject it to a credit assessment before agreeing to issue a DC. The issuing bank then forwards the DC to the beneficiary via an advising bank, typically in the country where the exporter resides.

Once goods have been shipped, the exporter collates the required financial and shipping documents including drafts, invoices, bills of lading and any other documents specified in the DC. The exporter then presents all requisite documents to a negotiating bank, normally located in the country of residence, for negotiation and/or payment.

The negotiating bank reviews the documents against the DC terms and conditions. They will advise whether the documents contain any ‘discrepancies’ against the DC terms. It is important that documents do not contain discrepancies as non-compliant documents can enable the issuing bank to waive its payment undertaking.

Benefits of Letters of Credit

Some benefits of DCs include that the issuing bank’s creditworthiness is substituted for that of the buyer’s; this security for the exporter is normally the fundamental purpose of a DC. The necessity for the seller to assess the buyer’s creditworthiness is removed as the seller has a greater certainty of payment while the buyer is sure of receiving documents.

Furthermore, for a fee, the exporter can ask the negotiating bank to underwrite the ‘documentary’ risk—ensuring documents conform to the DC’s terms—and payment risk, which is credit risk on the bank and country from where the DC is issued. This is known as a DC confirmation.

Exporters can use the DC to offer terms to buyers, giving them a competitive advantage without having to take on the buyer risk for payment. Exporters can ask their banker to purchase or discount conforming documents presented under the DC for early access to cash flow.

Other than pre-shipment payment, the DC remains one of the safest the payment options as it provides the exporter with greater payment security at a minimum level of risk. It also gives them a tool that can be used to obtain early cash flow from their bank.

DCs are also a tried and tested instrument with all parties having a clear framework, the ICC rules, under which disputes can be resolved.

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