Understanding export finance

There is a lot of help available

It is good to know that there is a lot of help available to exporters. Finance can be raised through formal lenders such as banks, specialist export financiers and government lending agencies.

The South African Government is keen to increase exports and therefore there are a number of incentive schemes to help businesses involved in exports. These range from providing favourable exchange rates, financing the capital required to process an export order to set up import and export long-term credit facilities.

The Export Help website provides a host of useful export tips, so have a look at this if you are keen to get a rounded view of all available help on exporting. The government also has incentives available to assist small businesses that are considering entering the export market. To understand how these work read the module called Do you need finance for Exporting?

Understanding how exports are rated

It is important to have your facts straight before you talk to organisations that provide export finance. In particular, make sure you have researched the possible risks associated with exporting, as the lender will expect you to be able to answer questions on these.

Risks associated with exporting

Political risks: How stable is the country you are exporting to? Countries that are considered to be politically unstable are high risk for lenders. Countries that have a high corruption index are also considered high risk. A second major risk is whether you can easily collect your money. So you need to consider whether there are costs associated with collecting the money. The reputation of the company that will be buying the exported goods is critical here, as lenders assess this risk based on their knowledge of the receiving party.
You’ll also need to consider what customs duties and documents are required and whether there are any obstacles to this process.
Transporting the goods is another consideration, as is insuring them.
Lastly, you’ll need to think about exchange control fluctuations and the impact a change in exchange rates could have on your business.

It is worth contacting your local Department of Trade and Investment as they run import and export training courses for small businesses that will help you to understand the business rules of this type of business. The South African Export Council is another very useful resource for new exporters and will be able to alert you to potential problem areas and generally provide sound business assistance.

Exporting can be costly

Before applying for export finance, it is best to have included the additional cost of the reduced cash flow in the amount of finance you ask for. In general, there is a long gap between the time you accept the export order and the time you finally get paid for it. This is primarily due to shipping times, customs delays and exchange control delays. So you do need to factor these into the amount you will need to borrow.

How available is it?

South Africa generally does a lot of bulk export of commodity products (for example big companies such as Unilever). Recently, exports by smaller firms to other African countries has increased rapidly, but they generally demand an advance payment from the African buyers. Because companies are paying up front, you don’t need export finance. However, competition is gearing up among rivals who export to an increasingly sophisticated African market. This means African buyers are more likely to be granted growing credit lines, and exporters will be increasingly looking for bridging finance.

If you are a first time exporter, banks are going to look at the risks associated with loaning you finance. They’ll look at your balance sheet, track record and if additional collateral is available. If this doesn’t convince them, try to include the invoice to the overseas buyer. The big four banks have international divisions that are willing to lend against letters of credit or bills of exchange (this will be explained more later on in the module).

If this isn’t successful, try the government’s export financing schemes, housed in the Industrial Development Corporation (IDC) or your local provincial Trade and Investment department. If you need to raise funds to pay for an overseas marketing or market-research trip, you could approach the Export Marketing and Investment Assistance (EMIA) Scheme of the Department of Trade and Industry (the DTI). This can be facilitated by your local provincial Trade and Investment department.

Alternatively, you could try to find a lender who specialises in your specific industry. Often these are export agents or logistics companies that dabble in financing deals as a side-line. Start with the export council relating to your industry. If there are specialist financiers operating in that industry, they should know about it.

Finally, try the trade finance specialists. Mostly they deal with financing importing, but you might get lucky. Sasfin regularly finances export deals.

Here are some possibilities

For more information, also take a look at the Do you need finance for exporting? module.

Here are two more ways to finance export finance:

Discounting bills of exchange and letters of credit.
Credit guarantees.

Discounting bills of exchange and letters of credit

Exporting has its own form of invoice discounting. It works pretty much on the same basis as normal factoring and invoice discounting. However, invoice discounting in exporting is more expensive because of the higher risks associated with exporting. Also the lender refers to the invoice as bills of exchange and letters of credit.

Let’s simplify it! Bills of exchange are the documents outlining the agreement between the exporting business, its overseas client, and their respective banks. When the goods arrive at their destination, the exporter retains control over them until his/her customer accepts the bill of exchange, which means they are happy with the goods and agree to pay within the period specified on the bill. Once the bill of exchange is accepted, the lender can factor it, which means they will lend you up to 80% of the value of the bill.

A letter of credit is a document detailing the export agreement, including payment terms. This is issued by the importer’s bank in the overseas country and paid out by a corresponding bank in South Africa. This happens once all documentary evidence has been submitted by the exporter, stating that the goods have been shipped as agreed. Once the letter of credit is “confirmed” by your local bank, it can be factored by the exporter in order to raise finance immediately.

Lenders dealing with discounting can be found in the international departments of the big four banks, as well as among independent export-logistics and administration firms, which normally specialise in a particular industry, such as wine, wheat or clothing.

Credit guarantee

In any business, there is potential for things to go wrong. So it’s best that your insurance policy is up to scratch.

Insurance should cover your goods, just in case they get lost, damaged or stolen in transit. It should also cover you in the event that a buyer decides they are no longer interested, and refuses to pay you for an export order that was placed. Unfortunately, there’s quite a bit that can go wrong between the placing of an order by an overseas client, and when the time comes for the individual or company to pay up.

So, what’s it going to cost you? Well, it depends on the risk associated with the region to which you are going to export your goods. Export credit insurers study the risks of doing business with specific countries and work according to a classification system.

Credit Guarantee Insurance Corporation (CGIC), the largest credit-insurance firm in South Africa, classifies countries from the least risky (1A) to the most risky (3C). The number refers to the political stability of the country. The letter describes the payment culture in the country i.e. “A” representing a good payer, while “C” represents a bad payer. If for instance, you were dealing with a 1A country, then CGIC would pay you out 90% if the deal didn’t materialise because the client failed to pay.

Some countries, such as Zimbabwe, carry no number or letter, which makes them uninsurable. In other high-risk countries, CGIC will only insure on the basis of a letter of credit.

The premiums will also depend on:

The length of the buyer’s terms.
The value of the deal.
The way in which the deal is secured.

For example, a letter of credit confirmed in South Africa carries no risk, but a letter confirmed by an overseas bank may still contain some risk. Premiums usually start at R3 500 per month. The insurer would usually insist on insuring a business’ entire debtors’ book, and not just one export transaction at a time.

Exporting has its own form of invoice discounting. It works pretty much on the same basis as normal factoring and invoice discounting. A big difference though is that invoice discounting in exporting is more expensive because of the higher risks associated with exporting. Also the lender refers to the invoices as bills of exchange and letters of credit.

Bills of exchange

Bills of exchange are the documents outlining the agreement between the exporting business, its overseas client, and their respective banks. When the goods arrive at their destination, the exporter retains control over them until his/her customer accepts the bill of exchange, which means they are happy with the goods and agree to pay within the period specified on the bill. Discounting of bills of exchange works as follows: The bill of exchange must be accepted by the client, at this point the lender will provide you with the money – usually not more than 80% of the value of the bill of exchange. In return you will be charged an administration fee and interest on the money.

Letters of Credit

Advance payments

Advance payments are is the best possible option for an export business. This means the foreign buyer pays in advance for the order. However, a business will only be able to negotiate an advance payment if it is in a very strong position, for example, if it has a scarce product or a unique technology, coupled with a certain level of trust. Sometimes, if the country you are exporting to is considered to be a high risk country you may have no option but to demand advance payment as financiers will not fund you if you export to high risk countries.

An advance payment can be made for part of the order only, and the final settlement can then be made once all the products have been shipped. Most trade into Africa is done on an advance payment basis due to perceived risks associated with extending credit to buyers and undeveloped import logistics in African countries.

Lenders dealing with discounting can be found in the international departments of the big 4 banks, as well as among independent export-logistics and administration firms, which normally specialise in a particular industry, such as wine, wheat or clothing.

Export finance is available from many of the large finance houses as well as smaller firms that specialise in financing international trade. Large finance institutions such as banks often have international branches, so they are easily able to work with these branches to track the export progress.

Each finance institution has its own set of offerings for exports. Some simply provide the bridging finance required to complete the order. Others provide the finance and are also prepared to handle the logistics of the exports. Some of these lenders bundle the bridging finance, insurance cover and logistics together. So, be clear on whether you just want access to finance or whether you also need access to managing the logistics of the exports.

Export Agencies

The easiest route for an emerging exporter to take is probably through an export agent, but it is also the most expensive. Export agents are traders with well-developed networks and knowledge of overseas markets. They also have deep pockets and access to finance that can launch a product into an overseas market. However, there is a high cost involved for accessing their marketing networks, resources and the management of your export transactions.

The upside of outsourcing the export logistics is that as a new player in the export game, your orders will be executed smoothly and your products marketed in the foreign country. This is a huge plus as it takes a while to develop the international markets and the export logistics expertise. The downside of outsourcing the export logistics is that the business doesn't get to develop the export expertise itself.

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