At a time when economic activity is subdued in Britain and across much of Europe, ambitious companies are increasingly looking to customers in emerging markets as a means to drive forward their own expansion plans. But exporting can be a hazardous business, especially for the inexperienced. Even setting off on the export trail involves a certain amount of risk. Time spent researching foreign markets and developing an overseas sales strategy can divert the attention of managers from customers at home. And if the export drive doesn’t deliver the expected revenues, the company may find that the domestic business has suffered.
By far, the biggest risks revolve around cashflow and payment. As any entrepreneur can testify, getting paid isn’t always easy. Some customers fail to pay on time and there may well be occasions when a much-needed cheque arrives only after a string of phone calls, letters and – in extreme circumstances – legal action.
Chasing payment from an overseas customer adds an unwelcome complication to the running of a domestic business. A customer based on the other side of the world, several time zones away, is harder to reach than a client located in the same country. Should they so desire, overseas customers will find it much easier to field calls from creditors than their UK counterparts. And in the event of a legal dispute, pursuing a claim through an overseas court system has the potential to be difficult and expensive.
Of course, the majority of customers honour their debts and pay on time, but even when that is the case, overseas trading can create severe cashflow problems. In Britain the norm is for businesses to settle their invoices within 30 days unless otherwise agreed. Ninety days is considered the absolute limit. However, debtor day agreements overseas vary enormously, and in some countries 90–120 days is considered standard. This can result in an all-too-familiar scenario for UK exporters. A UK business wins a big overseas order, spends up-front and then waits months for payment, while the exporter’s suppliers start demanding payment themselves. In some circumstances, this can result in serious financial distress and a cashflow black hole.
Overcoming the challenge
Happily, there are ways and means to mitigate the risks associated with selling overseas. This can be partly achieved through negotiation and partly by using the tools and processes developed by the corporate finance industry. Exporters should aim to get the best deal possible, one that will see money changing hands as soon as possible. In some cases, it may be possible to secure payment in advance (all or in part). However, customers are understandably reluctant to accept this kind of arrangement because it exposes them to the risk that they’ll pay for something that won’t be delivered. An alternative is cash on delivery, which goes some way to de-risking the transaction for both parties.
However, it is vital to underpin the contractual agreement with mechanisms to ensure that money moves from one bank account to another at the appointed time. This can be achieved through a letter of credit. Essentially, this is a document issued by the customer’s bank, guaranteeing payment when specified terms and conditions have been met. For instance, if a contract stipulates that payment is required once a product has been shipped to the customer, the letter of credit will ensure that the money is transferred to the supplier at that point. However, this relies on the seller providing documentary evidence that this has taken place. Letters of credit can also be applied to credit terms, for instance 60 or 90 days. An alternative is a documentary collection. Operating on a similar principle, this facilitates payment once the goods have been received by the customer. Although this is not a guaranteed, a documentary collection does provide a more secure form of payment. Where goods are shipped by sea, for example, the buyer cannot take possession until the documents relating to the shipment have been sent through the banking system and paid for.
These solutions protect both customer and supplier. The supplier gets paid on time while the customer can be assured that payment will not be made until the supplier has kept his side of the bargain. However, an element of risk remains in that the UK exporter may be relying on an overseas bank to facilitate payment. This means that if there is a payment issue, any subsequent action to recoup the money or goods will take place in an overseas jurisdiction.
Santander Trade Finance
The good news is that Santander’s Trade Finance team can offer further security to UK exporters. When a letter of credit arrangement is drawn up, Santander‘s UK Trade Finance team will put its own guarantee in place. This ensures the transaction is underpinned by the exporter’s own bank. Similarly, Santander will handle the document collection process associated with documentary collections. In certain industries, it is common for exporters to receive advance payments or be required to provide warranties to customers. In these cases, the exporter may be required to provide its customer with a bank guarantee or bond. The exporter may also need to provide guarantees/bonds when tendering or bidding for contracts. Santander are able to provide these facilities to exporting businesses. We can also ease the cashflow pressures on customers, providing specific financing against the value of export transactions prior to payment being made.
These solutions are by no means unique to Santander, but thanks to our international presence, Santander is well placed to bring financial tools to bear on a global basis. What’s more, our Trade Finance division is staffed by people who have deep and comprehensive knowledge of the issues facing UK businesses trading abroad. We not only provide solutions, we can also advise on the right solution for a specific circumstance. We are also working in partnership with the Government to help SMEs get the export finance they need. Santander has signed up to the Export Enterprise Finance Guarantee scheme, an initiative under which the Government guarantees a percentage of the loans made by banks to their exporting clients. Designed to help businesses with an annual turnover of up to £25 million, the scheme covers a range of trade loan facilities including bonds, letters of credit, term loans and export invoice finance. Santander are also working with the Government’s UK Export Finance department to provide UK exporters with facilities supported by department guarantees.
Santander’s expertise in international trade means that our Growth Champions will have access to both finance and an experienced team of financiers. And by de-risking the export process, we are helping our clients achieve their growth potential.
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