Advance payment is passport to international growth

Right balance
The result, says Peter Ewen, managing director of west Sussex-based trade financing specialists Venture Finance, is that bridging the gap between invoices and receipts can hobble a business when it is entering a new market and needs to be at the top of its game.

“It’s about balancing the additional profit from the extra revenues against the additional costs of finance,” he says. “And the difficulties are compounded by the fact that it’s harder to get reliable creditworthiness information from overseas customers, so there’s a greater risk of bad debts.”

Bad debts, of course, can quickly sap the profitability of even the most ardent exporter.

At Manchester-based WFEL, a manufacturer of tactical military bridging systems, the greatest proportion of its business is to overseas governments.

“There are some countries where we’ll deal on open account and some where we won’t,” explains FD Cliff Richards. “Where we won’t deal on open account, we’ll work with letters of credit and advance payments whenever we can, with those advance payments often supplemented by performance bonds and advance guarantee bonds.”

The terminology may be complex, but the intent is clear. Letters of credit and other such pre-shipment finance mechanisms protect the vendor, while performance bonds and guarantee bonds provide assurance to the buyer that delivery will be timely, by imposing a financial penalty on the supplier if they fail to meet an agreed deadline.

And while the long-term trend is for more use of open accounts in international trade, the combination of the recession and tighter credit markets has seen letters of credit and other forms of pre-shipment finance undergo something of a revival, says Lloyds’ Enticknap.

“While letters of credit will never get back to where they were in terms of popularity, they do provide certainty of payment – and you can also get a loan against them,” he says.