Delivering cash from abroad

Of all the risks facing businesses exporting goods and services abroad, the biggest are those that hit you in the pocket. Delivering the goods is one thing, getting paid is quite another. Dan Matthews looks for a solution


Over the last five years, thousands of UK exporters lost patience waiting for Europe’s slumbering economy to wake up and broadened their horizons into the developing world. But, as many found to their cost, with the promise of lucrative deals in countries enjoying double-digit growth comes greater exposure to late or non-payment.

Customers abroad, unschooled in British terms and conditions, have caused a headache for many businesses – the bigger the consignment, the bigger the hit on cash flow. Luckily there are a number of services and devices that can protect exporters from the worst of the damage.

“As a starting point, all businesses should look to their own bank for advice and support,” says Phillip Coleman at accountancy group RSM Tenon. “However, you can never have one bank that does everything for you. Some banks are stronger in other international markets than others so it is important for businesses to seek out banks that have the relationships you need.

“The first step is to identify how your customers are going to pay you. If your payments are small exchanges, online transactions via credit cards could be the best option for cash-flow management as this system is simple and easy to use, and transfers the risk from you to the credit card company.

“For larger transactions, however, businesses should talk to their banks about obtaining letters of credit for making international payments – this is a negotiable item that will allow businesses to engage with the bank more effectively.”

A letter of credit is issued by the customer’s bank and underpins a guaranteed payment when the contract is honoured by the supplier. Terms can be arranged such that, for example, the buyer is not permitted to take possession of the goods until documents are sent to its bank and payment is arranged.

Unimaq, a North Wales-based manufacturer of machinery that prints on to drinks cans, secured bonds and letters of credit from its bank after winning a contract to supply its machinery to a major Chinese beverage can producer.

Businesses should talk to their banks about obtaining letters of credit for making international payments

The business, which turns over £6.9 million and employs 45 people in Wrexham, also sought working capital to pay for required infrastructure changes, in part to fulfil the new contract.

“China is an important growth area for us and a large proportion of our machinery has been sold to Chinese companies over the past two years,” says Unimaq managing director Berty de Jong. “But there is also a considerable amount of administration associated with supplying these companies, which is where the bank has been invaluable.”

For bigger exports, or those which take time to fulfil, a simple solution to issues of cash flow is staggered payments, according to Tenon’s Mr Coleman. “For companies like equipment manufacturers and construction companies, where delivery may take some time, stage payments should be built into the contracts,” he says.

“This ensures businesses obtain cash up-front, which not only ties a company into a financial contract, but it also helps to fund projects as they progress and better match the cash-in to the cash-out.”

Outdoor clothing business Equip, owner of the Rab and Lowe Alpine brands, imports finished goods from China before sending consignments to stockists in the UK and abroad. It has negotiated a credit arrangement with Santander bank to help the process run smoothly.

“When you’re dealing with China, they want to be paid as soon as the product leaves the factory. We pass that to Santander and they advance us a percentage of the value,” says Equip finance director Ryan Bennett.

“If it wasn’t for the bank, we’d be paying straight away. When it comes into the warehouse, we turn it around as quickly as possible then raise invoices and the bank advances us again. What’s quite neat is some of that money doesn’t come to us, it goes to trade finance to pay down the trade facility.

“Because of the seasonal nature of the business, 65 per cent of sales happen in autumn and winter, that product ships in the summer, so we have £10 million of stock on a boat – we physically could not pay for all of that, so we need to finance it.”

If you’re still unsure about where to start, UK Export Finance is a government service that provides independent advice about the various financial instruments on offer. Advice is free and the service can include independent financial assessments.

CASE STUDY

DON’T GO UNDER – GET THE MONEY

Tyneside-based manufacturer Soil Machine Dynamics (SMD) secured a £2.7-million asset finance facility to help the business fulfil a big export order from Cyprus. The deal was arranged by Lloyds Bank and underwritten by UK Export Finance (UKEF), the government’s export credit agency.

The funding supported the sale of a SMD remotely operated vehicle to Senaxell Shipping for its oil and gas exploration. The vehicles are unmanned and used to carry out tasks up to four kilometres below the ocean’s surface.

Demand for similar vehicles is expanding within the oil and gas industry because of their uses in exploration and subsea maintenance. Senaxell has deployed the vehicle off-shore in the Mediterranean Sea.

Andrew Hodgson, chief executive of SMD, says: “As we look to boost sales in new territories, the support of Lloyds Bank and UKEF has been absolutely critical. In addition, their understanding of both the oil and gas sector and our business has enabled them to quickly tailor a package that allowed the deal to complete smoothly.”

Supplier credit finance facilities cover bills of payment purchased by the bank from an exporter like SMD, which it receives from selling to an overseas buyer. Their use allows the UK business to receive payment instantly while allowing the purchaser to repay over a longer period of time.

Under a supplier credit finance facility, UKEF can provide a guarantee to a bank for a loan to an overseas buyer to finance the purchase of goods from an exporter in the UK. It can also cover payments due under bills of exchange or promissory notes purchased by a bank from an exporter received in payment for goods.