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.”

Most small to medium exporters have less available security on their balance sheet, little no equity and find it difficult to get traditional funding from there finance provider, given their concentration on their domestic markets.

Depending on their agreed payment methods, small to medium exporters have different funding gaps. It is important that the small to medium exporter agrees with overseas buyers on the appropriate method of payment.

There are a number of methods of payment that a small to medium exporter should consider, all with a level of risk:
Prepayment: Remittance from the importer/buyer prior to shipment by the exporter/seller.
Documentary credit: Issuance of sight or term documentary letter of credit with payment by drawing under the letter of credit.
Documentary sight bill: Documents against payment (D/P Bill).
Documentary term bill: Documents against acceptance (D/A Bill).
Shipment on open account: Payment by the importer/buyer after delivery of goods.

Many small to medium exporters find it difficult to obtain traditional funding products from their financial provider because of these risks. In addition, small to medium exporters need to use their receivable book to access cash flow to grow their business in international markets.

Because exporters are pressured to compete in the international market and to provide the buyer with terms that are competitive in the buyers local market, they are often pressured to agree to open account payment terms—often with extended trading terms—creating cash flow constraints and higher risk of non-payment.

The better debtor
As an small to medium exporter you need to look at the whole supply chain to assist your cash flow requirements. Generating a strong cash flow in your domestic market can provide working capital to help grow your export market. Debtor finance suits businesses that need a capital injection to fund business growth or meet cash flow requirements and want to fund these objectives on the strength of their business sales.

Debtor finance is a facility designed to give your business access to funds based on the strength of your business credit sales rather than having a limit determined by mortgage-based fixed asset lending. Instead of waiting for your debtors to pay within your normal trading terms (usually 30–90 days), your financial institution will purchase your approved trade invoices and make available a percentage of the face value of those invoices generally within two business days.

Your daily available limit will therefore automatically increase and decrease depending on the level of your credit sales and debtor collections. When your debtors pay the invoice, you then receive the balance, less any adjustments.

The benefits are:
Funds access—you borrow money based on the strength of your business sales.
Flexibility—it helps you manage seasonal and day-to-day fluctuations in cash flow.
Convenience—you gain access to funds when you need it against issued invoices.
Relative limits—as your business grows and your debtors grow, so does your facility limit.
Accessibility—you can transfer funds from your debtor finance account into your working account via electronic banking, or by written instruction.

Debtor finance is subject to standard bank credit process and a higher margin applies to any amount in excess of your limit. Be aware that other fees and charges may apply depending on the product offered by different financial institutions.

Unless you’re an exporter lucky enough to work on prepayment terms, you’d be familiar with the competitive advantage associated with offering generous credit terms to your international buyers. However, the worldwide economic downturn has changed the financial environment: customers are delaying payments and businesses are closing—so how can you ensure you are paid?

“Credit insurance is what I would refer to as life insurance for companies,” says Christian Vollbehr, general manager of insurance company Coface Australia. “It protects one of the key assets of the balance sheet, which is trade receivables.”

Trade credit insurance, also known as debtor insurance, indemnifies businesses against non-payment incidents and debtor insolvency. In the case of a non-payment incident, the insurer will typically pay the insured business the money owed—up to the amount covered by their specific policy—and then take measures to recover the money from the debtor.

If the debtor is insolvent, the insurer will compensate the insured business and then become your buyer’s creditor.

To take out a policy, you first need to conduct a risk assessment of your customers, usually undertaken in conjunction with the insurer. At this point, the insurer will be after key information to determine the financial health of your debtors and their exposure to risk factors.

“If we’re looking at an exporter, we’d have to get a spread of the countries that are involved,” says Vollbehr. “We’d also need to get a list of the key debtors whether domestic or export. We make an upfront assessment on what kind of coverage we can provide on those specific debtors, under a named buyer policy.”

The more details you and your buyers can supply, the more comprehensive the assessment and more likely you are to receive coverage. Vollbehr says many debtors are uncomfortable with the level of scrutiny a risk assessment invites, but if you explain that a credit insurance policy allows you to give them more competitive credit terms, most of them are happy to open their books.

Depending on your industry, your customers and the countries where they are located, your insurer will then calculate your premium. Vollbehr says to expect that amount to be between 0.15–0.4 percent of the insured amount, although this may increase due to higher risks in the current volatility of the world economy.

“Unfortunately, non-payment incidents have doubled and the loss ratio between premiums received and claims paid has doubled. There are some sectors where there’s a lack of capacity and capacity comes at a premium, so rates are going up because of the level of risk,” he reports.

Some industries are more exposed than others and may not find the coverage they require, he warns. Among these high risk sectors are building and construction, the printing industry and retail, particularly the jewellery business.

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