Manufacturers are facing some tough conditions domestically, however there are a number of great opportunities for expansion in overseas markets, as Andrew Watson reports.
For manufacturers looking to grow overseas, the journey to expand export operations can be challenging. Finance is one of these challenges but it doesn’t need to be. There are a range of options available for SMEs exporters looking for support, and a number of great Australian success stories, to prove this is the case.
We know from the companies we speak to on a daily basis that established exporters often come up against challenges in accessing the finance they need to achieve their export ambitions.
According to our recent SME Exporter Index in December 2014, half of all SME exporters expect access to finance to become more difficult over the next twelve months, a figure that’s more than doubled since this time last year.
Whether it be working capital to manage the day-to-day strains of running a business to bonds to fulfil export contracts, accessing finance can be a major barrier to exporters’ success.
Much of this difficulty in accessing finance may be related to the fact that SMEs’ often don’t have the security that financial institutions require.
As Australia’s export finance agency, our role is to help Australian
SMEs grow internationally and achieve export success. We can assist SMEs to access the finance they need through a range of specialised solutions.
Commonly, this finance can be the key to securing export contracts which may require substantial financial commitments up front in the form of performance bonds and warranty bonds or additional capital to purchase raw materials to fulfil an export contract.
Manufacturers that export or are part of an export supply chain may asked to provide bonds or guarantees as part of a contract.
This was the experience of ATP, a WA-based engineering and procurement company, when it was awarded two prime contracts as part of the Ichthys LNG Project in
Darwin to provide a Wireless Local Area Network package for the project.
The package would allow the facilities operator, Inpex, to keep track of all of the equipment and personnel at the Ichthys onshore facility in real time.
While ATP’s bank was very supportive of this contract, it required 100% cash security before it could provide a bank guarantee to fulfil ATP’s contractual obligations.
ATP needed to provide a performance bond and a warranty bond until practical completion of multiple project milestones.
Performance bonds give the buyer of a product or service assurance that if the supplier doesn’t meet their obligations under a contract, the buyer can call on the bond to reduce their losses.
Warranty bonds ensure buyers are protected from loss if the exporter doesn’t meet contractual warranty obligations after the contract is completed.
The performance and warranty bonds that we provided allowed ATP to continue tendering for other contracts in the mining services industry through reducing the strain on its cash reserves.
As ATP’s experience indicates, performance and warranty bonds
can assist manufacturers that are part of the supply chain win more contracts and also help to unlock working capital that can be used to finance additional export contracts.
Additional working capital
Another common challenge faced by SME exporters is providing the security that their bank requires to approve further working capital finance.
A working capital guarantee can be especially useful where a contract requires a large upfront investment, such as purchasing raw materials or packaging for a high-volume manufacturing run.
This was the case when Astec Paints, a South Australian paint manufacturer, needed funding to meet increased demand from a number of Japanese clients for the company’s elastomeric coatings, a product in high demand due to it meeting Japan’s strict building codes.
Despite Astec being an established exporter, with around 75% of its turnover derived from exports and their bank being supportive of plans to increase production, the bank required additional security to approve the funds Astec needed to increase production.
We were able to provide a working capital guarantee to Astec’s bank, allowing it to approve the additional funds, which enabled Astec to increase production and meet this extra demand immediately.
By offering these and other similar products, we’ve helped many Australian exporters take advantage of new contract opportunities that may otherwise have been out of reach.
There are many exciting export opportunities for Australian manufacturers and we want to make sure access to finance does not hold businesses back from realising
[Andrew Watson is Executive Director, SME, EFIC]