Manufacturing News

Managing your export finance risk

FOR Australian companies, exporting and investing in competitive overseas markets always carries risks as well as the potential for significant rewards.

However, the global financial crisis has intensified pressure on exporters who are seeking financial support, as there has been a severe reduction in the capacity and willingness of the commercial finance market to provide trade finance.

Financial institutions worldwide have increased their credit margins, reduced their credit limits and are requiring greater security for loans.

The tight credit environment means that in order to manage their risk, Australian exporters need to pay closer attention than ever to two key business issues:

How do I finance export production without tying up working capital?

How do I ensure I get paid by my overseas customers?

There are a number of actions that you can take to manage these risks. For example, a review of your payments and billing processes may uncover opportunities to free up cashflow.

Take a look at your payment terms: is it possible to bring forward revenue by reducing payment periods? Or can you require a deposit, progress payments or even full payment in advance?

You could also consider increasing your payment certainty by minimising open account transactions or securing payment through Letters of Credit or export payments insurance.

Your business plan may have been formulated in a better economic climate. If so, now is the time to update it to articulate clearly your strategies for trading through the downturn and responding to a range of economic and commercial scenarios. Share the updated plan with your bank – if they have an up-to-date understanding of your business, they’re better placed to provide support that meets your needs.

Another step to help manage your risk is to increase your customer due diligence. Just how important is your export order to their ongoing business? Look beyond your buyer to your buyer’s bank – how strong is it and how stable is the financial system in their country?

If you’re looking for external support to manage non-payment risk or the risk of tying up too much working capital, speak to your bank first. But if they can’t provide all the support you need, EFIC may be able to help.

As the Australian Government’s export credit agency, EFIC offers a range of specialist financial and insurance solutions for exporters, and can work directly with you or in partnership with your bank.

For example, advance payment bonds or performance bonds are common requirements of an exporter in export contracts. Your bank may require you to support the bond with an equal amount in cash on deposit, making precious working capital unavailable.

However, EFIC may be able to arrange for the bonds to be issued without tying up your working capital.

If you’ve reached your working capital limit, EFIC’s Headway working capital guarantee can assist your bank to lend you extra working capital without requiring extra security from you.

For contracts with payment periods of more than two years, export payments insurance protects you against the risk of payment default by your overseas buyer.

EFIC may also be able to provide a guarantee to your Australian bank as security for your buyer’s payment obligations.

*Peter Pyrgiotis is the Head of Business Development at EFIC. For more information call 1800 887 588.

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