Open to Export spoke with export adviser Craig Inglis, International Business Manager for HSBC in the UK, about the trade cycle – your business cycle when trading internationally – covering the following topics:
- why it’s important for exporters to know what theirs is
- what factors affect it when selling overseas
- how to mitigate against potential problems within it
- where to go for help
Craig is an International Business Manager for HSBC. Based in Scotland, he works with SMEs starting on their export journey, helping to provide cash flow and risk mitigating solutions.
1. What is a trade cycle and why is it important?
The first thing to note is that every business has a trade cycle like it does a business cycle. Put simply it is the time line between receiving an order for your product or service and receiving payment for it based on the periods for manufacturing, shipping, holding stock and collecting debtors.
There are various factors which can affect the trade cycle period, especially when it comes to export. These could be logistical in terms of the time taken for the manufacturing process, getting the goods to the buyer, seasonal peaks and contractual such as supplier and buyer credit terms, and, and then there’s customs and other regulatory issues all of which can have an effect.
When selling overseas generally there is a longer cash requirement as goods have to be produced, shipped, and sales proceeds collected. Export Finance from a bank can help the manufacturer cover these different stages of the trade cycle, providing finance options from the time an order is received right through to when the final invoice is paid.
The key concern for businesses is that the various stages in the trade cycle can take longer than expected. Understanding the trade cycle can help you to understand where the pressure points may occur – if your trade cycle could be skewed at one stage, it’s important that it is recognised, because it will affect the whole cycle. Trade Finance solutions can help fill the working capital gap allowing favourable terms to buyers whilst providing access to debt.
2. What are the main factors to consider for an export trade cycle in particular? How is a trade cycle changed by selling overseas?
There are 4 things you need to consider – The need to meet contractual terms, the responsibility for shipment, regulatory issues (e.g. export / import licences) and securing payment (which includes currency considerations)
Before committing yourself make sure that you can comply with the terms set out in the commercial sales contract such as the delivery date for goods.
Non – payment is an issue in any transaction but the problem is greater with exports as:
- Many miles between buyer and seller
- Cultural and Language barriers
If the goods are shipped before the payment is received, how can you ensure you are paid on time or even at all? Banks can help to mitigate risks of non-payment through trade finance solutions such as Documentary Credits, Bills for Collection or Credit Insurance. There are pre-shipment finance options you can use to fund your suppliers in the production of the goods you are selling. And there’s also post-shipment finance during the delivery stage
Responsibilities for shipping
Who’s responsible for what? Who’s arranging insurance and paying freight charges? Be clear on your incoterms (Incoterms are a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC) intended primarily to clearly communicate who is responsible for each element of an international transaction) and where liability starts and finishes for buyer and seller. If your liability finishes once the goods are on the vessel, check who is liable when the goods are on board in case the goods are damaged or lost in transit.
Look out for the laws and regulations in each country – are there any export controls that forbid your goods from being allowed into a country or may permit them in certain circumstances subject to licence? It’s worth considering how you can mitigate against any time delays you may encounter getting your product through customs. How long could it take for your goods to get through? Make sure you take this into account when calculating your trade cycle.
If you sell in a currency other than sterling, exchange rates can have an impact on your profit margins as markets move over the life of the contract. Failing to protect against movements in foreign exchange rates effectively means buying or selling without having agreed a price in sterling. There are a number of ways in which you can work with your bank to mitigate the risk of fluctuating exchange rates which provide greater certainty for cash flow planning and budgeting. Doing nothing isn’t an option.
3. What advice would you give to businesses that have concerns about exporting?
People perceive exporting as a bigger challenge than selling domestically, but I don’t think that’s necessarily the case if you understand the risks.
There is a wealth of support available from organisations such as DIT, Open to Export, UKEF, Chambers of Commerce and of course banks who have dedicated resources available to help you.
There are some great export opportunities out there for British businesses where Brand Britain is still held in high regard
4. In your experience, how have more successful exporting companies prepared for exporting?
Simple – Research, Research, Research: having a clear marketing strategy and getting their finances in order. Speaking to their bank and DIT as early as possible, and preparing a robust export plan.
Locating a prospective trading partner can be daunting and successful exporting needs partners who are trustworthy and solvent so it’s important that you do your due diligence on any new buyers. And as I’ve mentioned there’s plenty of sources of help.
In my experience businesses find that doing business overseas not only leads to growth but also to improvements in efficiency and often new ideas for products and services. And once a company has dipped their toes in the water, exporting for the first time or with a new market they tend to gain the confidence to export more.