With local knowledge, a global banking network and 180 years of experience, Westpac’s team of international experts are geared up to help Kiwi exporters take on the world. From foreign exchange protection to trade finance, they can help manage both the risks and opportunities that global business brings.
trade_business@westpac.co.nz

Successful exporting is all about understanding your own business, your markets, and your risks, having a well thought-out roadmap and knowing where to go for advice and help.

The global environment is extremely volatile with exchange rates and commodity prices changing rapidly. Credit markets have changed fundamentally and your overseas customers and suppliers may be finding it harder to access credit. Trade is facing increased border regulations and non-tariff barriers are becoming the norm. To understand and manage these risks, it is vital to have the knowledge and help you need, especially from a banking partner with the skills and experience to guide you through the ins and outs of trade finance.

Identifying opportunities to increase the efficiency of your supply chain and make the best use of your working capital are essential to maximise the profitability of your business and ensure the risks inherent are known and understood.

Your bank should be your first port of call on all things financial. For a start, they can advise you on how to manage finance-related export risks such as:

• Your buyer’s ability to pay

• The laws, policies and politics of other countries – and their banks and financial institutions

• Exchange and interest rate movements.

The bank can also help with export financing services including:

• Cash management tools (such as foreign currency accounts)

• Foreign currency risk management services, from forward exchange contracts to currency options and derivatives

• Working capital and risk management solutions such as pre- and/or post-shipment trade finance, documentary letters of credit, documentary collections, credit insurance, cash flow acceleration facilities and structured working capital solutions

• Guarantees and performance bonds

• Special mechanisms such as counter-trade or trade risk syndications involving other banks.

How will your customers pay?

When you start dealing with an overseas customer, it is important that you both agree and sign a written contract, covering the goods you will supply, the shipping details, the payment method, the shipping term and any finance period. Note that details such as currency, shipping terms and payment terms and methods can be open to negotiation, depending on the demand for your product.

You will both need to agree to follow the International Chamber of Commerce (ICC) Incoterms, which detail where the cost and risk of the goods transfers from sellers to buyers and which party is responsible for shipping costs and insuring the goods.

Exporting generally involves four main payment methods:

• Documentary collections (often using a bill of exchange)

• Documentary Letters of Credit

• Open account trading

• Cash in advance.

Documentary collections

With a bill of exchange your customer agrees to pay you an exact amount at a time specified in your contract such as on sighting of the bill, a set number of days after the shipping date or at a future fixed date. This is a common payment method, although with future-dated payments there is a risk that your customer may be unable or unwilling to pay your bill on the due date, but will already have the goods.

You can get even more financial security and protection from bills of exchange when combining them with negotiable documents (such as invoices, bills of lading and air waybills) and sending them through the banking system. This is because your bank handles these ‘documentary collections’ and controls the release of the documents on your behalf when

• For sight collections, it receives payment from your customer

• For future payments, your customer has signed and accepted the bill, promising to pay on the due date.

Documentary Letters of Credit

Documentary Letters of Credit are a cornerstone of international trade. They offer a high degree of security, especially when you and your customers have not yet built a strong relationship.

If your customer can produce a Letter of Credit they are likely to be a good trade prospect. This is because a Letter of Credit is a guarantee from their bank that it will pay your bills on your customer’s behalf (as long as you’ve complied with the agreed terms and conditions of the credit).

Documentary Letters of Credit offer three important benefits:

• You reduce your risks because you’re guaranteed payment by your customer’s bank. You don’t have to rely on your customer’s ability or willingness to pay

• They are internationally recognised so you can often set up discounting or loan arrangements to cover you for the shipment period or a customer’s request for extended terms (With discounting you sell or discount the bill to your bank, which collects the payment when it’s due.)

• You can request ‘confirmation’ of the Letter of Credit. Confirmations are ideal if you have concerns over the overseas bank’s creditworthiness or the country you are exporting to.  Your bank can guarantee payment should problems arise with the buyer’s bank or the overseas country which prevent payment being made to you.

If you are considering a Letter of Credit, read it carefully so that you understand all the terms and conditions. Talk it over with your bank, and make sure that:

• You can meet all the requirements it specifies before you go ahead with shipment

• All your documents (including any accompanying request for payment, acceptance or negotiation) align with every detail in the Letter of Credit’s terms.

Open account trading

Open account trading is the ‘do-it-yourself’ approach. You send the goods and documents directly to your customer. Payment terms are typically 30 to 180 days from shipment, depending on the demand and market conditions for the goods and your assessment of your customer’s creditworthiness.

This method is most commonly used for intra-company trading or where you and your customer know and trust each other and want to eliminate the costs and administration of bills of exchange or letters of credit.

Invoicing your customers

When invoicing a customer, use a commercial invoice detailing:

• The buyer’s name and address

• The transport used and the date of despatch

• The shipment/airfreight port and destination

• Product quantities, weights and measures

• The goods’ value and the basis of quotation, e.g. CIF

• A description of the goods and any shipping marks

• Your export Customs declaration/export entry number

• Any requirements of the country of import, such as Customs requirements

• The buyer’s order number

• The buyer’s import licence number (if needed)

• The insurance company involved in the transaction.

You may also have to meet country or customer requirements such as:

• Certification by a Chamber of Commerce

• Certification by the consul of the destination country, sometimes called consular invoices

• Certificates of health, quality and analysis

• Certificates of origin

• A pro forma invoice.

Remember, if you are using a documentary Letter of Credit, your invoice must comply exactly with its terms.

Organising trade finance facilities

When you are ready to talk trade finance with your bank, you will need to be able to answer five questions:

1.         Who do you buy from, i.e. who are your raw materials’ suppliers?

2.         How and when do you pay them, i.e. what are the payment terms?

3.         How long do your products sit in stock before you ship them to your export customers and what is the shipping transit time?

4.         Who do you sell to, i.e. who are your customers?

5.         How and when do they pay you, i.e. what are the payment terms?

Your answers will help both you and your bank to understand your cash flow and working capital requirements, identify the risks you are taking and build the right trade finance facility and risk mitigation for your business.

You can also maintain a foreign currency account and borrow in a foreign currency. This could offer an interest rate lower than rates charged for New Zealand currency accounts. However, it is important to note that:

• On the date you are due to repay your loan, the New Zealand dollars you have to pay will depend on the exchange rate on that date, unless you have borrowed in the same currency of your export receivables

• The fluctuating value of the New Zealand dollar may wipe out any benefits gained by lower interest rates.

To manage these foreign currency exposures, you can use either a forward exchange contract or a foreign currency option.

Where your bank can help

Help with manufacturing and production costs

If you would like to borrow for the costs of manufacturing/production, your bank may want to see three and five year plans for your business. Your financial structure will also need to deliver the correct gearing, for both the short and the long term.

As a general guide:

• Your overdraft/term loan should reflect the answers to the above five questions

• Your equity ratio in the business (shareholders’ funds and advances compared to total assets) should be sufficient to satisfy the banker that you have a commitment to the business, this will depend on the nature of the business.

Help with pre-export finance

Your bank may be able to provide short-term pre-export trade finance if you have evidence of actual or potential export orders. You will need:

• An up to date balance sheet (preferably less than six months old)

• A detailed cash flow projection, less than 30 days old, covering the finance timeframe

• Forecast financials at the end of the cash flow position, along with details of your assumptions

• Copies of relevant export orders

• Evidence of post-shipment finance and how your buyer will pay you (e.g. confirmation of payment by Letter of Credit or documentary collection).

Help with security

If you have an established borrowing relationship, you will probably be covered by your existing security arrangements. If not, the security you need to provide can range from personal guarantees and general security agreements to assigning the overseas debt or other individual arrangements.

Help with selling on extended credit

Your bank may have facilities that enable you to offer up to 180 days of extended credit terms to your customers while still keeping your working capital cycle operating efficiently.

If you make the sale in New Zealand currency then finance it, the interest cost will be the same as, or less than, an overdraft rate. If you sell in a foreign currency, the exchange rate will often be fixed (transferred to New Zealand currency) at the time of financing, and the interest cost will depend on the currency in which you made the sale.

If you would like to offer extended credit, you should use a Letter of Credit in consultation with your customer. This means you can discount through your bank, often with no increase in your borrowing facilities. Alternatively, your bank may offer a structured working capital solution on a full, partial or non-recourse basis.

Managing your exchange rate risk

Exchange rates – and their fluctuations – can have a significant effect on your export earnings. For example, in the past 10 years the New Zealand dollar has traded against the United States dollar at a low of US$0.39 and a high of almost US$0.74.

The two main tools for managing this exchange rate risk are forward exchange contracts (FECs) and currency options. However, it is important to remember that, while they can help reduce the impact of currency fluctuations, it is almost impossible to eliminate currency risk from your business.

Forward exchange contracts (FECs)

An FEC is a commitment to the bank to deliver a certain amount of currency at a date in the future, at an exchange rate you agree today.

FECs offer certainty on the rate at which you will sell your foreign currency and, if used consistently over the economic/interest rate cycle (which can be as long as seven to eight years), will smooth the impact of exchange rate changes on earnings. However, the downside is that, once you have entered the contract, you will lose the benefit if the exchange rate turns in your favour.

Currency options

Currency options are becoming increasingly popular, as they provide more flexibility than FECs and offer you the opportunity to benefit from improvements in exchange rates.

By buying a currency option, you effectively can protect yourself against unfavourable movements in exchange rates while retaining the opportunity to benefit from favourable movements. You simply pay a premium (in a similar way to ordinary insurance), while making sure that it is appropriate to the value of the asset you’re protecting.

Most banks offer cover for amounts as low as $100,000. Generally, the level you choose will be a proportion of your expected receivables, i.e. the more certain your payments, the greater proportion you can confidently cover. In contrast, if you are not sure when payments will arrive (for example, if you are expecting payment in two to three years’ time rather than within 12 months) you should cover yourself for a much smaller proportion of the expected flow. A wide range of currency options is available, including those that can be structured so you do not pay a premium.

This is just an overview of the financial requirements of exporting. For more information or advice relating to your business, contact an international specialist at your bank.