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 setting up import and export long term credit facilities. The Export Help website provides a host of useful export tips – have a look at this is you are keen to get a rounded view of all available help on exporting. The government also has incentives to assist small businesses that are considering entering into the export market. To understand how these work read the module called Do you need finance for Exporting?
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.
It can be worth contacting your local department of Trade and Investment as they run import and export training courses for small businesses and these help you understand the business rules of this 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 general provide sound business assistance.
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, custom delays and exchange control delays. So you do need to factor these into the amount you will need to borrow.
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 have 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 and 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.
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:
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— 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. It works like this: 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.
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—“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:
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’s entire debtors’ book, and not just one export transaction at a time.
Finfind provides its services free of charge to businesses seeking finance. Our primary purpose is to link SMEs with all the relevant finance providers and finance products that match their funding needs. As a matching service we are not required to be a registered finance provider as we do not loan money directly.