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Guide to business and export finance

This is one of three practical guides to the more important and technical aspects of the export process. It will help you discuss your needs with your export adviser, accountant and banker.

People to help you

> > > A guide to export finance and links to key contacts Getting advice on government grants for export market development Introduction to financing your business, explanation of trade finance terms and services including performance bonds and guarantees Documentary credit guarantees and finance, medium term payments insurance, advance payment, performance bonds, country and political risk mitigants Sources of finance, financial assistance programs, and advice on export financing Credit insurance making sure you get paid Courses in export trade and documentary credits Exporting online Austrade Austrade Export Market Development Grants (EMDG) Banks ANZ, Commonwealth, HSBC, NAB, Westpac

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Export Finance + Insurance Corporation (EFIC)

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State governments QBE Insurance Group, Gerling, Atradius (previously Gerling NCM), Dexta/Coface Australian Institute of Export Austrade, the Department of Communications, Information Technology and the Arts (DCITA) and the Australian Interactive Media Industry Association (AIMIA) Australian Business Limited (ABL), Australian Industry Group (AIG), Australian Chamber of Commerce and Industry (ACCI), State Chambers of Commerce Cash Resources Australia, Finlease, Bibby and many others Banks, EFIC

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Export advisory services and export documentation

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Factoring Bank guarantees and Performance Bond

Preparing your company finances for export

A commitment to export places new demands on your company. Some of the key areas you will need to assess are: > Working capital. Producing export orders increases your need for working capital. Banks and financial institutions offer pre and post-shipment finance facilities to meet working capital needs. Marketing costs. Export sales development involves market research, overseas travel, communications, freight and buyer visits. Austrades Export Market Development Grants (EMDG) program provides grants for this expenditure. Financing the sale. Your buyer may require credit terms that place pressure on your finances and expose your company to the risk of non-payment or default. There are several ways to mitigate these risks. Exchange rates. Pricing your goods or services in another currency exposes you to exchange risk if there is an adverse movement of rates against the Australian dollar. Banks and other financial institutions offer services to help offset that risk.

Checklist Use your Export Plan to assess working capital needs early. Seek early advice on eligible EMDG expenses. Know when you must lodge claims. Learn about international finance techniques. Talk to your bank and financial advisers. Web-based products make transactions easier. Make realistic cost estimates for entering export. Accurate cash flow analysis is critical when establishing an export business.

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These are the principal issues to address in managing your companys financial resources for successful export. There is no need to feel overwhelmed by this new language of international finance. The delivery of financial services online has had a major effect on international business. Major banks provide trade finance products electronically, lowering transaction costs significantly from traditional paper-based systems. When preparing for export, seek advice from your advisers early in the process. Using your Export Plan* prepare a financial resources statement that includes realistic costs for your export program. Your financial checklist should include: > > > > > > Market development travel, communications and sales literature. Costs of modifying your existing products or services for export. Requirements to increase plant capacity, if necessary. Freight and logistics charges. Pre-shipment and post-shipment costs. Costs of credit insurance, performance bonds and exchange rate management.

Develop a realistic cash-flow model and allow only for modest export revenues during the early stages of export market development. Factor in best and worst case scenarios to ensure that your business is financially well equipped to handle the export development program.

* See the accompanying Austrade Guide on Strategy and Export Plans.

Financing exports
This diagram illustrates the structure of a typical international trade transaction.

Checklist Accurate cash flow analysis is critical when establishing an export business. Understand the basics of export transactions. Exporters Bank
PAYMENT

Bill of Lading, invoice, insurance, packing list etc

DOCUMENTS

Exporter

Documentary credits are a crucial element in most export transactions. Avoid the temptation for a quick sale through offering open account terms.

PAYMENT

Overseas Buyer
DOCUMENTS * Sometimes this is a correspondent bank used by the exporters bank.

Buyers Bank*

Financing orders pre and post-shipment has a critical impact on cash flows. Performance bonds require special care. Speak with your banker.

Secure payment is critical. There are a variety of trade finance instruments to obtain payment for your sale and a simplified list is: > > > > A cash sale. A buyer pays cash in advance of shipment. This is unusual in international trade, but more common in internet transactions. Letter of Credit (L/C). Guarantees payment for an export against receipt of specified documents. Letters of Credit have been a cornerstone of international trade since the early 1900s. Letter of Credit confirmations. Your bank can assist with mitigating country and political risks. Documentary collection. The exporter entrusts the handling of trade documents to banks and provides the banks with instructions on the release of the documents (and hence the goods) to the importer. Open account. This is similar to domestic credit terms where you place trust in the buyer to remit funds within a specified time. While these terms are often requested by buyers, notably in the USA, open account should only ever be considered when you have absolute confidence and knowledge of the integrity of the buyer. Export financing. Supporting customers by providing pre- and post-shipment financing. Overseas buyers may require your company to supply them with bonds as security for advance payments or in support of your performance obligations under contracts. Factoring (the sale of an exporters accounts receivable) and forfaiting (the purchase of an exporters receivables) at a discount by paying cash can be useful financial tools to assist new exporters manage cash flow pressures. Performance bonds. A Performance Bond is an undertaking that your company will carry out the required work and comply with the contract. Your bank can assist with establishing a performance bond or guarantee. A bond will commonly be sought for 10-15% of the contract value. The US market is unusual because it typically requires suppliers to post bonds for up to 100% of the contract value for performance obligations. EFIC has established a US$50 million bonding line to assist small and medium sized Australian exporters to take advantage of opportunities afforded by the AustraliaUnited States Free Trade Agreement. A first-time exporter needs to become familiar with the vocabulary of international trade. The terminology is known as Incoterms. (INCO is the International Chamber of Commerce, based in Paris.)

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There are 13 internationally accepted Incoterms that define the respective roles of the buyer and seller in the arrangement of transport and other considerations to get the goods to market. The use of these terms defines when the ownership of the merchandise passes from the exporter to the importer. Some of the more common Incoterms are: > > FOB Free On Board Risk passes to the buyer, including payment of all transportation and insurance cost once delivered on board the ship by the seller. CIF Cost, Insurance and Freight Title to the goods and risk pass to the buyer when the goods are delivered on board the ship by the seller who pays transportation and insurance costs to the destination port. DDP Delivered Duty Paid The seller bears all risk and cost involved in delivering the goods to the buyers premises including customs clearance, duties and taxes.

Checklist Learn and understand basic Incoterms. Study e-trading and be familiar with electronic payment techniques. There are many organisations who can help. Learn what services they offer.

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In sales documentation, Incoterms must be expressed in the three-letter code and include reference to the physical place of transfer of ownership of the goods. The latest Incoterms came into effect on 1 January 2000 and are referred to as Incoterms 2000. The growth of the internet has had an enormous influence on the conduct of international trade. Companies can develop their export business online with low transaction costs and swift communications with buyers. A range of electronic payment mechanisms can ensure a secure transaction. To be able to do business over the internet you need to establish an online presence (website, e-mail, e-market). Austrade and other agencies can assist you to assess if this approach suits your business model.

Who can help you?

There is an extensive range of financial advice available for new exporters and knowing which organisation to contact for a particular type of service is critical. A checklist is provided, with websites. Australian banks have excellent online guides for new exporters together with a description of their products.

Watch points in export financing

When framing your pricing, use this checklist: > Buyer creditability. Is your prospective customer horse trading in the market and quoting unrealistic terms? Be mindful of buyers who insist that you match financial terms from your competitors. Check with other Australian exporters to that market on the terms they are negotiating. Open account terms are a great trap for the unwary. Avoid them. Assume there will be delays which will involve extra financing charges. Talk to experienced exporters in networking groups. Credit checks are critical as is credit insurance. Well-established buyers can experience financial problems and risks of non-payment can arise. Who are your competitors? Do they receive government assistance or credit terms you cant possibly match?

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Useful websites and links

Austrades site at www.austrade.gov.au. Learn more about the Export Market Developments Scheme (EMDG). The New South Wales Exporters Network. www.smallbiz.nsw.gov.au. The Business Victoria website www.business.vic.gov.au has excellent advice follow the link to Vic Export. The Government of Queensland has some good finance information. www.sdi.qld.gov.au. Western Australias Department of Industry and Resources offers an Online Guide to Exporting that includes a module on Finance. www.doir.wa.gov.au. The South Australia Department of Trade and Economic Development home page www.southaustralia.biz/dted has a link to Export South Australia www.exportsa.sa.gov.au. The Tasmanian Department of Economic Development includes modules on exporting, with useful links. www.development.tas.gov.au.

All the major Australian banks include information on their websites for exporters, with details of the range of services for small and large businesses. Many complex, paper-based transactions are now executed electronically at a low cost and high efficiency. Australias Export Finance and Insurance Corporation (EFIC) provides services for small and large companies. www.efic.gov.au. Credit insurance makes sure you get paid if your buyer is insolvent, refuses to pay or if factors threaten your payment. Contact Atradius www.atradius.com/au, QBE www.qbe.com and Dexta/Coface www.dexta.com.au. To establish a business online, visit www.ebusinessguide.gov.au. Ubnz and Co www.unzco.com is a US company which provides publications and guides on exports.

Austrade would like to thank Westpac for their contribution to this guide.

For more information on Austrade phone 13 28 78 or visit www.austrade.gov.au

October 2006