Finance with connections — Exporter Magazine

As domestic businesses grow to a point where they can start eyeing export markets, they face the daunting reality that things are about to get a whole lot more complicated.One of the inevitabilities is that capital reserves will be put under pressure, as selling internationally not only lengthens the supply chain physically, but also tends to result in a longer cash conversion cycle. There is also the risk that comes with dealing with the unknown: clients in attractive foreign markets might be quite willing to sign orders and take delivery of goods, but that isn’t necessarily an indication of how likely they are to settle their bills.The good news is that you don’t have to do it all on your own. There is a wide range of commercial export finance solutions and trade insurance options available.Furthermore, in its recognition of the crucial role played by export finance in earning foreign exchange, the government provides support and intelligence to producers in this country looking to grow into new territories, including the New Zealand Export Credit Office.Barry Squires, head of International Business, Corporate and Institutional Banking at trans-Tasman bank Westpac, says awareness of the availability of export finance and related solutions is pronounced at the top of the town, but perhaps less so for emerging exporters.“There are a few products out there which can be considerably more cost effective than an overdraft. But, more than that, there are other risks that we look at when providing export finance; for example, we take the time to understand the supply chain and cash conversion cycle to assess liquidity risk and make sure our clients understand how much working capital they need and the most cost effective way of getting that.“We also provide insight into market risk through that [cash conversion] cycle – such as forex and commodity risk – and we let our clients know about the instruments which are available to counter those risks.”Greg Fitzsimons, director at Export Finance, agrees with Squires, and says reaching attractive international markets can be eased by credit support providers. “A lot of New Zealand’s exporters don’t have the strongest of balance sheets when they are getting started on international markets, so we look to leverage the balance sheets of their customers to, effectively, increase bank support,” he says.In other words, a shortage of capital doesn’t necessarily preclude ambitious companies from getting into international markets. “We work with trade credit insurers and banks to provide increased working capital for the exporter,” Fitzsimons adds.While he points out that the finance is provided by the banks, and not by intermediaries like Export Finance, Fitzsimons explains that his organisation delivers the necessary expertise to secure those funds. “The issue is that exporters quite rightly focus on their core business and don’t necessarily have the expertise to provide the information that banks require before they provide their support. We also find that exporters often haven’t done the work to analyse who their customers are and the terms on which to sell to those customers.”Intermediaries, continues Fitzsimons, not only secure finance, but also arrange trade credit insurance to provide cover on sales to overseas clients. “That leaves exporters free to focus on their core production and marketing activities; we help them to see what is available [in terms of credit and other instruments] and how to structure terms of trade to gain banking and insurance support.”

Furthermore, it is possible to put a number to trade credit support: Fitzsimons says it is typically equates to less than half of one percent of turnover, while Squires says that borrowing is a very competitive market and therefore capital can be accessed at a reasonable cost.

The real value of trade credit insuranceMartin Jones, country manager at Atradius, says his company provides credit insurance, surety and collections services worldwide. “There is hardly a buyer of consequence worldwide that we don’t know about,” he says. “We have a database of over 200 million buyers and if there is a buyer out there that we don’t know, we will find out about them.”What his company does, Jones continues, is provide the support required by exporters to be able to confidently sell their products with the expectation of getting paid.“Export finance is vital for the little exporter, as these businesses don’t generally own their premises [and therefore cannot leverage the asset] and can be operating with relatively low capital reserves. While that is typically sufficient to do local business, it often isn’t for international trade.”The nature of New Zealand, with its small population, means ambitious businesses very quickly reach a point where they are obliged to look outside the country for growth. “That’s when the expenses step up and the costs of reaching the market double, or more. Often, these organisations are going into new markets knowing nothing – and that’s where the trade credit insurer is invaluable,” says Jones.Wherever that market may be, the trade credit insurer acts as the spearhead of the marketing effort. “We let the exporter know what we know about the buyer, its country and the industry it is in, and we can alert our customers to potential risks,” he continues.As a gatherer of information, Jones explains that there are two main types of information relevant to exporters. The first is information on the buyer, together with insights into the buyer’s operating environment. “For this type of information we utilise credit reporting agencies and data gathered from public counters such as the local Companies Registry,” he explains.The other is political insight and the economic risks pertaining to the buyer’s country. Tracking it can be a lot more challenging.“With political risk, the unexpected can happen quickly – for example, instability in the Central African Republic, the coup attempt which recently unfolded in Burundi, or the problems experienced in Nigeria with [Islamist group] Boko Haram are all events which affect trade.“The reports we compile are therefore multi-layered,” Jones says.

Squires adds that credit risk exposure and general operational risks are also assessed from the bank’s perspective, as well as internal risks such as the client’s stance with managing inventory and debtor control. “Against that insight, the bank brings to bear a suite of products which help from a financing perspective to cover working capital,” he explains.

Facilitating trade can be a deal breakerWhile Atradius exists to facilitate trade and protect the interests of its clients, one of the biggest benefits it provides, somewhat ironically, lies in helping to prevent deals that have a potential for turning sour. “Using insights based on accurate, up-to-date information, we can determine when a debtor is not safe to trade with; that is, when it may not be able to pay,” Jones explains.He notes that, particularly for smaller exporters, there is a tendency to be prepared to sell to anyone who wants to buy. “Few people can afford to run a comprehensive credit control system, so we assess the buyer’s ability to pay, agree a credit limit amount and set any conditions under which we are prepared to cover.“However, we try not to interfere with the way people do business, unless it is by way of not supporting deals which have a high likelihood of ending in losses.”As for the types of industries to which export finance solutions are relevant, Jones says it is very broad based. “If you have a product you want to sell, we will cover it – with very few exceptions. “The trade must be legitimate – no illegal transactions, embargoed goods or anything of that sort. Remember, however, that there are good buyers in bad industries, and bad buyers in good industries and that’s why market intelligence is essential.”While it is a specialised niche, Fitzsimons says the services available in the export finance arena are relevant to any company which is trading internationally. “New Zealand’s exports are diverse, so we work across many industries. I’d encourage any organisation looking to export to engage with providers of export finance and trade insurance, because apart from securing better working capital, you can also offer payment credit terms to your buyers and in that way enhance your offering without significant added risk or cost.

“These are really powerful tools and something that every exporter should know about.”

More than finance and insuranceWhat is clear from Fitzsimons, Jones and Squires, is that exporters are far from alone in their efforts to reach the international markets which earn valuable foreign currency. By engaging with the providers of commercial services, exporters receive far more than insurance or finance; they also get insights into the markets and customers they wish to target, and access to a ‘toolkit’ of financial instruments geared towards reducing risk and improving capital adequacy.Squires agrees. “Talk to us and you will get a lot more than just the finance. A lot of what we end up doing is connecting people to the help that they need. Certainly one of the things that is clear in this industry is that there is a lot of help available for exporters, but people don’t know where to find it. Talk to your bank, talk to NZTE, join Export New Zealand and talk to other exporters. You’ll find that it makes the whole enterprise of exporting into new markets a lot less risky.“Remember that as banks and insurers we all want our customers to succeed, so as long as the risks are acceptable, you’ll find there is plenty of help available.”

Publishing Information

Magazine Issue 

Exporter issue 39 Winter 2015