Ways your bank can help you with getting paid internationally
This article comes from our interview on Pricing and Getting Paid with Kevin Shakespeare from the Institute of Export & International Trade.
When should an exporter go to a bank for support when entering a new market?
An exporter should go to the bank as soon as possible. Banks will sometimes argue that they don’t have long enough to consider the business plan or the application from the exporter.
There may be some circumstances where the exporter or product is too embryonic and the bank will say to come back when it’s more developed. Generally exporters need to let their bank know early in the cycle. Even if the bank does say to come back in 2 or 3 months time, at least the information is on the record.
With regard to the information provided to the bank, clearly the better quality the business or export plan is, the better. If banks can’t see the idea or it isn’t very well articulated, then they are less likely to lend. Also, banks like to see some evidence of financial provision to see there is financial awareness in the business, such as projected profit and loss account, and cashflow forecast.
Do remember that business plans are not only external to banks and investors – they’re also for the businesses themselves. Businesses should be looking at their business plan internally for looking at potential markets, how to reach customers, how to sell into those markets, and what their sales, production and marketing strategies are.
What are the main ways in which a bank helps the exporter in getting paid internationally?
Banks will look at a couple of things depending on the transaction with the customers. The traditional mechanisms are loans and overdrafts.
Overdrafts should only be seen as short-term lending to fund working capital gaps. If, for example, you are expecting some money in but you’ve got to pay your suppliers or salaries, then an overdraft as a short-term mechanism can work well. It shouldn’t be for any long-term working capital expenditure type lending though.
A loan can work but banks will first look to things like invoice factoring and asset finance. Loans apply for things like capital expenditure and long-term lending needs, but banks will need to be convinced because loans can be for 5 -7 years. Lending over a longer term is more risky for the bank.
Invoice discounting and factoring is more capital/cost effective for banks than an overdraft. An overdraft can be used for very unspecific purposes. If it’s invoice financing where you have to sell on credit terms to a retailer – 90-day credit terms as the way to win the business, say – the commercial invoice with the buyer can then be used to raise finance from the bank – say 80 of the invoice. That can help cash flow tremendously and banks can on occasions prefer that sort of lending.
Trade finance is in many ways very similar. If it’s within a letter of credit transaction the bank could provide an export loan against that.
The other thing to look at in terms of a production cost is something like asset finance. This can involve either a hire purchase – something like a piece of machinery being purchased; or it could be through leasing – something like company cars, computers.
Exporters may be more familiar with loans and overdrafts, because that’s what they’re familiar with in their personal lives, but it will depend on the circumstances. Banks may prefer to lend via the invoice / asset financing routes, or the trade finance route as well.
Other articles in this feature:
- Different approaches to pricing to ensure you make a profit
- Invoice discounting and factoring – what you need to know
- Forward rating and how to avoid losing out to currency fluctuations
Need further support getting paid internationally? These courses with the Institute will give you in-depth training:
- http://www.export.org.uk/page/AdvancedFinancing
- http://www.export.org.uk/page/Letters_of_Credit
- http://www.export.org.uk/page/Business_Essentials