A large part of UK exports is still financed by bank overdrafts and about 64% of companies use this method – a welcome reduction from nearly 80% over many years, but still far too high. Habitual use of an overdraft for this purpose is expensive, inflexible – even when the overdraft is great enough for the exporter’s purpose – and carries serious danger if the bank decides to call it in. Clearly, many companies avoid other financial arrangements for fear that these would be more expensive and leave them less in control of their own affairs, but hard-headed analysis of the choices would often show important advantages in getting away from routine overdraft finance for exports. Credit insurance is not enough: companies may cease trading through insolvency before claims are paid.
Now there is a variety of cash-flow schemes which are cheaper, flexible and allow the exporter to make money work for him. Most exporters can benefit from some form of secure cash-flow finance because of the long credit periods often allowed in export trade and the insecurity of payments. Such finance both protects cash flow against the uncertain arrival of receivables and allows optimal use of working capital. It should be without recourse to the exporter in the event of default by the customer overseas. It should ideally provide the whole invoice value against proof of shipment less agreed charges while giving the customer a normal credit period. It should allow the importer to pay in a currency which suits him and give the exporter an exchange rate guaranteed in advance; and it should be easy to administer with a simple charge structure.
There are numerous cash-flow schemes offered by banks and their associated finance houses. They are usually based on credit insurance and some can use the exporter’s own policy.
They are competitive and the exporter must decide which best suits his business. He may well have to go to a bank other than his own or its related finance house; companies are often unwilling to do this for fear that their account-holding banks will curtail or cancel overdraft facilities, but a well-managed business will usually find that one bank will try to match another’s terms in order to keep a good customer. The market is changing: in the last five years many schemes have been withdrawn because banks were losing money and new ones are often introduced. Some of the best are offered by smaller banks, while bigger banks are prepared to adapt schemes to the needs of individual companies, so the exporter must decide in detail what he needs and be prepared to negotiate terms. Banks have learnt from past mistakes and are now more willing to provide what customers want – provided the customer knows this himself.
This is an extract from Tate’s Export Guide, for more information in regards to exports, imports or anything else involving international trade please visit our website (www.tatefreightforms.co.uk) or call us on 01908 221162.