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Tuesday 25 June 2013

Exporters - 10 major causes of sleepless nights (with some suggestions to help)

Exporters face a whole plethora of risks, and evaluating those potential threats to the business can be a challenging procedure. The following 10 causes of sleepless nights for exporters has been collated from delegates in export themed workshops, with the attendees being asked to nominate their main concerns and anxieties relating to their company's overseas sales. The findings are in no particular order of priority, but it is based on comments obtained during 2013. In addition to some commentary on the actual risks there is also some potential mitigants or suggestions which might help to ease those restless nights.

1. "Ensuring that we get paid"
A seemingly obvious but vitally important consideration. Securing payment is usually the initial and overriding concern of any seller of goods, and worries about buyer risk are very common. Exporters regularly attempt to mitigate the risk by requesting Documentary Letters of Credit or other methods of payment which effectively transfer the risk from their buyer to their buyer's bank. However, this request may make the exporter appear uncompetitive if alternative suppliers are quite willing to manufacture and ship comparable  goods, without requesting a "secure" method of payment.


2."Terms of payment - concerns about having to offer lengthy terms to buyers"
Long credit terms are expected by buyers as a matter of course in some territories, notably the Middle East, but having to accommodate these terms can be challenging for exporters. If component parts have been sourced from overseas suppliers, followed by manufacture, shipment and in some cases, installation - the wait to be paid can be extremely protracted. Financial Controllers and Directors will potentially experience real cash flow issues but financiers may be able to assist by accelerating payment especially if a Letter of Credit has been received in support of the transaction.


3. "War, civil unrest, political instability in my buyer's country"
The "Arab Spring" which began in December 2010, has had a marked effect on exporters who were considering selling their wares to the Middle East, and also to more experienced exporters who in some instances appear to have been taken by surprise at the extent and spread of the unrest and conflict. Whilst clearly recognising the country risks involved in trading with some of the more obviously unstable territories, the civil unrest and protests in states such as Bahrain, Oman, Kuwait and Jordan have caused UK exporters some real issues. In one particular instance the civil war in Libya resulted in a small exporting company in East Anglia actually going out of business as the vast majority of its trade was in Libya.


4. Buyer selection - identifying new clients.
The process of identifying new trading partners is considered a challenging task, especially as fraud in international trade is not uncommon. Trade fairs/shows in certain sectors are a favoured place to meet new clients in relatively informal surroundings. UK Trade and Investment, the government backed entity along with the more proactive Chambers of Commerce may be able to assist sellers finding clients. Foreign embassies often have departments which can assist UK exporters who are seeking new buyers in their country. In reality nothing can compare to a face to face visit, when an exporter can make a decision based on a personal assessment of the buyer's integrity and trustworthiness, backed up by some robust financial due diligence.    
  
5. Foreign Exchange Risks/Treasury Management.
In some instances this issue is cited as one of the most important risks to consider for an exporting company. The foreign exchange market, unsurprisingly experienced enormous swings in 2008 at the start of the global economic crisis, and more recently in 2011 the USD/GBP rate moved from 1.65 to 1.54 in a little over two months in the autumn of that year. This shift may have resulted in a surprise windfall for exporters who may have received in USD and exchanged their Dollars for Sterling and received more than they had budgeted for - it could easily have gone the other way. If exporters restrict themselves to dealing in the spot market, just selling their USD on the day, they are speculating. Most banks or advisors would suggest that exporters (and importers) cover their risk by protecting a percentage of their foreign exchange exposure by taking out simple protection measures. The choice of FX providers is still wide, although some banks (who provide rates for the FX providers) have exited these relationships as they deem the risk too high, so caution needs to be exercised in choosing your provider.          

6. Poor internal communication (within the own exporter's company).
This is a regularly voiced worry and concern which is often raised by financial administrative staff in medium to large companies. Typically in these circumstances, a salesperson has negotiated a sale with an overseas buyer and agreed that payment will supported by a Letter of Credit. The problems occur when the Letter of Credit is received from the advising/nominated bank in the UK, and the admin staff identify that the actual terms and conditions as stated in the Letter of Credit are totally unworkable. In order to prevent this happening the sales staff would benefit from some rudimentary training in understanding Letters of Credit, and they also need to involve their administration team at the earliest opportunity. In most well run export departments, the administration staff will have sent a completed template to the buyer stating what terms and conditions they would wish to see in the Letter of Credit, and this proactive approach helps to cut down on amendments to the Letter of Credit. However, in many companies this cohesive approach is sadly lacking, and worries about being suddenly confronted with an unworkable Letter of Credit seem to abound.

7. "Funding the manufacturing period"
Most banks/financiers are much more willing to consider funding the post shipment phase of a export, especially if they are the confirming bank in a Letter of Credit. Many companies state that unsurprisingly, they require some funding when they are buying raw materials/component parts and incurring labour costs during the manufacturing process. In simple terms most mainstream banks have a conservative appetite to financing this period, but they will consider advances in selected instances, usually requiring the manufacturer to have already received in a Letter of Credit. The pre-shipment advance is usually for between 50% - 70% of the value of the Letter of Credit, and recipients of the advance must have robust financials and have a sound record of presenting compliant documents under previous Letters of Credit. It is all about assessing risk from the bank's perspective, and post shipment finance is far less risky, as the bank will have examined the shipping documents, found them to be compliant and will have marked the risk on the issuing bank.


8. "Our performance risk - fears about claims on contract guarantees/bonds"
Many exporters have mentioned their fears about claims under contract guarantees which their bank will have issued in favour of their overseas buyers. It is very common in certain parts of the world for the overseas buyer to request the issuance of contract guarantees to support the seller's performance of their contractual obligations. These guarantees/bonds may include - tender bonds, advance payment bonds, performance bonds, warranty bonds and retention bonds. In the vast majority of cases the guarantees/bonds are simple demand guarantees, which effectively means that the buyer is not bound by any conditions or has to obtain approval from an independent arbitrator that the claim is a fair and legitimate demand. In truth UK sellers are vulnerable to unfair claims, and recent statistics state that up to 15% of performance guarantees are claimed upon, but of course many of these may well be legitimate claims, with the seller having failed to perform their obligations under the contractual terms. It is also worth stating that if UK sellers refused to supply the guarantees in the first instance, they would not participate in the business, so in effect they have no choice, but they still worry about potential spurious (or genuine) claims.

9. Bank Charges!!! - (eroding our profit margins.)
Many delegates moan about their banks almost as a matter of course, but charges for transacting a number of trade products has become a topical issue and a concern for many companies. The largest bank charges levied are usually confirmation charges on a Letter of Credit, and these can amount to many thousands of pounds, if the Letter of Credit is of significant value and the country and issuing bank risks are assessed by the confirming bank as high. On a number of recent occasions, exporters have been surprised by unexpectedly high confirmation charges, and to compound their frustration, the UK bank has not explained how these charges have been arrived at, just stating a stark figure on their Letter of Credit advising schedule. Bank charges vary quite considerably and best advice for exporters who are seeking a trusted bank to add confirmation to an incoming Letter of Credit, is to shop around. Having said that, some banks are getting quite cautious about adding confirmation for beneficiaries who are not known to them, so even shopping around these days may be quite a fraught process.

10. "Discrepant documents under Letters of Credits? - why are banks so picky!"
Concerns and general anxieties surrounding documentary presentations against Letters of Credit are common, and generally provoke some strong reactions amongst exporters. The general consensus (whether fair or not) is that banks will look to find discrepancies and therefore avoid paying the Letters of Credit. This feeling amongst exporters almost certainly emanates from heated discussions with banks over whether a documentary presentation is truly discrepant or the bank is not using common sense and is being in the exporter's usual words "over picky". Banks should use the International Standard Banking Practice which provides intelligent guidance to document examiners, and a new version of this publication is due to be released in the near future. The current version does offer common sense advice, and helps to provide some clarity to banks, in how they should interpret UCP 600 - the rules that govern Letters of Credit. However there will always be some grey areas, and exporters will continue to voice their opinions on the quality of  documentary examination by banks.

These 10 worries/concerns are not intended to be a definitive list, but they do represent issues which exporters have raised on a regular basis at workshops/seminars in 2013.         

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