Export Finance
While parts of the UK economy remain sluggish, many companies are seeking to grow their revenues overseas, perhaps for the first time. Vfiles talks to ABN AMRO Commercial Finance’s International Manager Peter Brinsley about the role factoring and invoice discounting can play in funding export activity
The fact that Britain’s economy shrank in the final quarter of 2010, thanks in part to heavy snow across the UK, was a reminder that the road to recovery is littered with obstacles. As yet, the prospect of a double-dip recession is believed to be remote, but with the Confederation of British Industry downgrading its growth forecast for 2011 to 1.8%, we can assume the upturn will be patchy and uncertain. Yes, there will certainly be winners, but other companies will continue to find trading conditions tough.
However, positive signs are emerging outside the UK. Emerging economies in the East – notably India and China – continue to power ahead throughout the ‘global’ recession, while countries closer to home – notably Germany and France – have been recovering more quickly than the UK. Demand in overseas economies is presently creating opportunities for British exporters, especially as the value of the pound has been trending downwards.
Overseas markets
The importance of the export market was illustrated by accountancy firm Deloitte’s CFO Survey Q4, 2010. Based on interviews with the finance chiefs of major UK companies, the recently published survey found a majority of respondents expecting markets outside Britain to be the main driver for growth in 2011. But it’s not just the players of the FTSE 350 who see a potential for overseas sales. A sluggish home economy has prompted companies of all sizes to explore the possibility of taking their products or services overseas.
“Times are quite tough at the moment,” says ABN AMRO Commercial Finance International Manager Peter Brinsley. “What we are seeing is some companies that have never exported before looking to secure overseas sales for the first time, while others that are already selling abroad – say, in France – are planning to break into other markets.” The UK government is doing its bit to encourage export among small and medium-sized enterprises (SMEs). In February of this year, Business Secretary Vince Cable announced plans to extend the scope of the Export Credits Guarantee Department, establishing not only an export enterprise finance guarantee scheme, which will offer SMEs export finance valued up to £1m, but also an export working capital scheme, which will provide credit insurance for companies exporting goods in deals worth £1m or more.
Challenges
But, as Peter points out, selling overseas presents several challenges. “Businesses find they have to address issues such as time zones, language, and trading in foreign currencies,” he says. “A movement in the relative value of one currency against another can have a significant impact on profit margins. Many businesses won’t have had to deal with that before.”
Arguably, the greatest concern for businesses entering new markets relates to all the unknowns and uncertainties surrounding payment. On the face of it, the process of collecting money from an overseas customer is similar to that of the UK. You deliver the goods, raise an invoice and await payment. However, there can be significant differences, not least in terms of debtor days. “In the UK, payment terms are often 30 days from the date of the invoice, or 30 days from the end of the month when the invoice was raised,” says Peter Brinsley. “In some European countries, particularly in the south, the norm is 90 days.”
Ninety-day payment terms (and any delay beyond the due date) will have clear cashflow implications for companies more accustomed to a 30/40-day turnaround. What’s more, a prolonged gap between delivery and payment exposes businesses to fluctuations in currency. For instance, if an invoice is paid in the local currency, any movement in the exchange rate will affect profits for good or ill.
Chasing debt
Chasing late or non-payers is also more difficult, not least because of language barriers. “English is the universal business language,” says Peter. “But when you’re chasing a bad debt, you may well find it suddenly impossible to find an English speaker.” And if the matter requires legal action, a British company will find itself working in an unfamiliar jurisdiction. Equally daunting is the fact that checking credit worthiness in advance is also more difficult when the company you are investigating is outside the UK. The quality and availability of credit and financial information on foreign companies can vary considerably from what we are used to in the UK.
Such issues are daunting, but need not be a deterrent. Traditionally, companies have used solutions such as Letters of Credit to guarantee payment. However, factoring and invoice discounting have emerged as ideal tools with which to address the cashflow issues caused by the time-lapse between sending an invoice and receiving payment. As Peter explains, for relatively small companies new to a particular market, factoring is probably the most appropriate solution. The principles of international and domestic factoring are broadly the same. When a client company invoices a customer, the client can get finance to an agreed percentage of the value of that invoice. The factor takes responsibility for collecting the debt, effectively outsourcing many of the headaches associated with credit control.
Collection
This is particularly useful when a UK SME is selling overseas, as the factor will collect from the customer. “ABN AMRO Commercial Finance’s approach is to partner with a factor on the ground,” says Peter. “So if one of our clients is selling in France, we will work with a French factor.” One advantage of this method is that the presence of a local partner means there are no language barriers to deal with when chasing debt. In the event of a dispute, the local factor will also be familiar with that particular jurisdiction. In addition, ABN AMRO Commercial Finance can provide further security by arranging export insurance.
For companies with an established presence or sufficient resources in the home country, invoice discounting provides the same cashflow advantages as factoring while leaving credit control in the hands of the client rather than the financier. Both factoring and invoice discounting can help reduce the risks inherent in currency fluctuation. “The longer the gap between a company delivering a product and service and receiving payment, the greater the likelihood of a major movement in the currency market,” says Peter. “A company with a factoring or invoice discounting facility in place can get finance within 24 hours of assigning invoices. In that time-period a major move is much less likely.”
Offering exporters the ability to maintain control over their cashflow, factoring and invoice discounting would appear to be the perfect vessel for sailing into new economic waters.
Peter Brinsley
International Manager
peter.brinsley@abnamrocommercialfinance.co.uk
Coming soon... ABN AMRO Commercial Finance's Brian Colvill explains how Import Finance and Letters of Credit can help cashflow at the beginning of the trade cycle
Oiling the wheels of international trade
Venture Finance is a member of the International Factors Group, an organisation that helps factoring companies conduct international business on their clients’ behalf
Founded in 1963, the International Factors Group (IFG) successfully enables member companies to provide their clients with a service that extends beyond national boundaries.
The principal is simple. One of the great advantages of factoring is that credit control effectively becomes outsourced to the financier, who takes responsibility for collecting payment from the end-customer. In the case of international trade, a factoring provider operating in, say, the UK may not have the resources or expertise to collect effectively in France or Germany. The solution is the IFG’s so-called ‘Two-Factor’ system.
Here’s how it works: one IFG member acts as the ‘Export Factor’ in the supplier’s country (dealing with financing, credit management, sales ledger accounting, or a combination of these services). Meanwhile, a second member, the ‘Import Factor’, handles credit cover and collection in the buyer's territory. It’s an approach that provides companies engaged in international trade with the same quality of service they would expect when dealing with factors within the domestic market.
The IFG’s Two-Factor system is proving increasingly popular among businesses. Speaking to IFG members at a recent conference, Venture Managing Director and current IFG chairman Peter Ewen noted a sharp upturn in demand. “It’s worth noting that, at the end of November on a twelve-month basis, the Two-Factor turnover has increased by 33.4% to reach almost 3bn euro.” With new members regularly coming aboard, the expansion of the IFG can only create new possibilities for exporting companies.
Venture currently plays a leading role in the IFG, with both Managing Director Peter Ewen serving as chairman and Venture International Manager Peter Brinsley chairing the education committee. Indeed, it is the active support and involvement of Venture members that enables the IFG to grow and cement its position as an important facilitator of global trade.