Advance payment is passport to international growth

Liverpool-based Stewart Group carries out mineral analyses on samples sent to it by a network of offices and laboratories around the world. In all, around 90 percent of group revenues come from abroad. And in addition to 14 trading units around the world, the company exports equipment to customers wanting to perform their own analyses.

All of which, explains group finance director Christopher Fisher, poses a complex mix of international trade finance challenges. Some customers prefer to pay in dollars, others in euros. Some prefer ‘Cost Insurance and Freight’ payment terms for their equipment, others ‘Free on Board’. And some pay 30 days after receipt of analysis certificate, while others pay within 90 days.

“Ideally, we like a substantial payment upfront and for the customer to pay the costs of shipping the equipment,” explains Fisher. “But in a highly competitive market, you have to be flexible.”

More flexible, perhaps, than many businesses realise – especially those that are relatively new to venturing overseas.

“It’s about generating working capital by accelerating receivables and delaying payables,” Simon Enticknap, head of trade sales for large corporates at Lloyds Banking Group, explains.

Currency fluctuations are an obvious challenge. One in three UK small-to-medium sized exporters cite currency fluctuations as their top concern in conducting overseas trade, observes Rocco Magno, director of international payments at American Express Global Foreign Exchange Services. Despite this, as many as 56 percent of SME exporters do not manage their financial risk at all, with just 44 percent protecting their margins against fluctuating rates.

Cashflow can also be unpredictable, says Miguel Zapata, a principal adviser at KPMG.

“Standard payment terms vary widely,” he says. “There’s a wide spectrum – from 14 days with a two percent discount in Germany, up to 120 days in Spain and 180 in Italy. And don’t overlook the cultural dimension, either. Dunning letters (letters of collection) tend to be effective in some countries and useless in others – similarly with phonecalls.”

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.