How does your business find working capital? Why is working capital so important for exporters? How can you obtain the money you need to do business? This is a guide to getting working capital to take your exportsto the next level. Exporting is challenging at the best of times, let alone if the coffers are on the dry side. Businesses need working capital to take advantage of opportunities and grow their business. Indeed, it’s a topic close to the heart of many SMEs at the moment. The JP Morgan-Fujitsu Consulting Australian SME Market Report published in July 2009, found the number one priority for SMEs when borrowing funds is to maintain sufficient working capital. The report included survey responses from 15,000 SME business owners and found that it now takes longer for companies to be paid by debtors, with the average delay more than 50 days, compared to less than 40 days in 2006. Because of this, SMEs are becoming more reliant on loans to maintain adequate working capital, and are borrowing at high interest rates. Of those surveyed, 44 percent carry interest rates of between 6-8 percent, with 36 percent paying above eight percent interest. In a business climate with shrinking confidence, it is more important than ever for exporters to leverage the best assistance available.
What is working capital?
Vince Cali, senior manager of product management in supply chain finance and working capital services for the National Australia Bank (nab) says: "Working capital is the day-to-day cash required to run a business, and cash flow best captures the essence of it. "For exporters, competition not only comes from domestic firms, but organisations on the world stage. To remain competitive, exporters are often required to extend favourable trading terms to customers, which can mean longer delays in collecting payments compared to other businesses. "On the input side, exporters often need to pay suppliers of goods or services in support of their sales quickly, which places further pressure on cash resources. Exporters still need to pay staff and meet other expenses, so sound working capital becomes critical." Traditional sources of working capital include an overdraft on a bank account, loans, business credit cards, sales of account receivables, sale and leaseback of equipment, and future credit card receipts.
Working capital for exporters
Access to working capital is critical for exporters. "Even with favourable trading terms, a growing business is likely to have a shortfall in working capital. Exporters can find themselves committed to holding levels of stock without a full book of firm sales," says Cali. "This may have been as a result of taking advantage of bulk discounts, however in the long run the cost of having working capital tied up in slow moving stock often outweighs any benefit of the initial discount." He adds: "Also they often are required to offer longer credit terms than they would in their local markets to meet competition. Not only does this tie up working capital that could be used for growing the business, but longer terms can also increase credit risk. Exporters must always try to negotiate the best outcome that balances risk and return." Peter Pyrgiotis, head of business development at the Export Finance and Insurance Corporation (EFIC), explains further: "All businesses have an equally great reliance on working capital. The difference between domestic-based businesses and exporters, however, is the ease of access to working capital. "The major difference with exporters is their bankers’ view of the overseas trade debtor. The local bank doesn’t know the credentials of the overseas buyer and is unable to determine their ability to pay the invoice. So the local bank will assign little if any value against this asset for an exporter." EFIC’s 2009 Global Readiness Index-a survey of more than 750 exporters-revealed that 82 percent of respondents rely on retained earnings to finance their offshore expansion and exports. "This is up from 73 percent of respondents in the 2008 survey," Pyrgiotis remarks, adding that it demonstrates the need for exporters to make best use of their working capital. It seems the terrain is particularly treacherous for exporters in maintaining acceptable levels of working capital and this is where specialised working capital resources become invaluable. "Exporters need to explore the use of traditional international trade payment and finance solutions such as documentary letters of credit, as these can assist in accelerating cash flow while reducing credit risk on the payment," says Cali. "If exporters are unable to secure letters of credit they may be able to leverage against their export receivables to gain early access to cash flow, providing suitable export debtor insurance is in place." He suggests ways businesses can better manage and find additional working capital:
- Just in time payments to creditors;
- Gaining early receipts from debtors;
- Using efficient and low cost payment and collection processes;
- Better cash flow forecasting through timely access to cash and short-term investments;
- Effective use of short-term debt;
- Maintaining low inventory holdings.
According to Pyrgiotis, three additional issues include that exporters often fail to adequately factor in the time it will take to design, manufacture, ship and/or install and commission goods to obtain the required certifications that trigger the buyer’s credit period; second that export contracts are often significantly larger in dollar value than domestic contracts; and third, that export contracts often require the exporter to provide bank guarantees as performance surety, which decreases the bank facility limit available to fund the gap in its working capital.
Obtaining extra security
The Export Finance and Insurance Corporation (EFIC) provides specialist finance and insurance services to Australian companies exporting and investing overseas. An EFIC product of particular interest to SME exporters is Headway, a guarantee from EFIC to a bank on your behalf. EFIC provides security to a bank that will lend additional funds, without any need for additional security. Specially designed to enable SMEs to grow their business when facing a working capital shortage, EFIC Headway is available as an extension to the facilities currently on offer from an existing bank. It is designed for general export funding rather than a specific export transaction or contract. Pyrgiotis says: "Headway is just one part of our product offering to exporters but is the simplest to execute and relies on a collaboration between EFIC and the exporter’s bank." Already a successful product, Headway "is experiencing a significant increase in demand presently due to the current economic climate and the scarcity of capital, and bank’s position in preserving capital and credit constrictions," he adds. When should an exporter look into Headway? Says Pyrgiotis: "An SME exporter should approach EFIC, along with their other advisers such as lawyers, accountants and bankers, as soon as they have decided to bid on an export contract. Often, exhausting all other avenues of finance will take a lot of time and the exporter may in fact have run out of time before they get to us only to find that we may have been able to help earlier in the process." EFIC’s mandate stipulates that they cannot compete with the banks, Pyrgiotis advises exporters to include EFIC in the early stages "where we can actually sit at the deal table alongside the banker striving for the same objective". He adds: "Because our global network is so vast, we can assist with information about certain country risks and or other global factors the exporter may not be aware of. We also have a vast network of alliance partners domestically where we can direct an exporter to take advantage of any other government, non-government, or semi-government initiatives for exporters in their particular industry or state."
Tips to find working capital
- Carefully negotiate payment terms.
- Always try to get a sizeable upfront payment to ensure cash flow in the pre-shipment stage of the contract. EFIC may be able assist via their Advance Payment bond solution. Even if the buyer agrees to pay by letter of credit few, if any, banks will provide pre-shipment funding facilities, that is, they won’t extend finance beyond their regular facilities.
- Prepare detailed cash flow projections for the export contract as well as for the company using conservative assumptions to ensure that adequate working capital facility limits will be available. It is critical for exporters to speak to EFIC and/or their bank to address funding gaps.
- Stretch your creditors’ payment terms as far as possible.
- Negotiate payment by letter of credit wherever possible to negate buyer payment risk and to enable the exporter’s bank to bring forward payment via negotiation of the letter of credit.
- In the absence of a letter of credit, when in doubt about the creditworthiness of the customer, take out insurance on the export receivable to protect against failure by the buyer to pay as and when due.
- Consider invoice discounting to fund the post-shipment stage of contracts.
- Consider using EFIC Headway to obtain additional working capital from the bank without the need for additional security.
- Consider using EFIC’s Performance and Advance Payment bonds as a means of negotiating better payment terms without utilising valuable bank working capital limits.
-Source: EFIC (www.efic.gov.au)