Exporters are often uncertain about how to optimise their chances of getting paid. There are currency aspects to be aware of, and we include several tips to assist companies on their journey.
Australia is a major producer and exporter of natural resources and energy, food and agricultural commodities, education and tourism. We also export many other goods and services globally.
Regardless of what you are exporting, there are several aspects to understand and consider - from trade structuring to the currency in which your trade is denominated, to payment protections employed.
Let’s review some essential background knowledge and then provide some suggested tips.
Capital vs current account
A number of countries globally still have closed capital accounts, but open current accounts. It is important to distinguish the nature of a payment when addressing this issue.
Countries with a closed capital account and an open current account restrict capital payments and receipts (loan repayments, foreign investments, capital injections into a business etc), but allow current account payments such as international trade transactions supported by appropriate documentation. Capital payments and receipts in such countries generally require approval from a foreign exchange regulator.
Some currencies are restricted to domestic trading only, but remain hedgeable. An example, is the Chinese currency - known on the China mainland as Chinese yuan (CNY) and outside the mainland as CNH – the ‘H’ notionally stands for ‘Hong Kong’, but really means Chinese currency anywhere outside the mainland. CNH foreign exchange risk can be hedged by Chinese and global banks just the same as mainstream global currencies such as the USD, EUR, GBP, JPY and AUD.
Whilst it is generally easier for Australian businesses to structure their trade in Australian dollars (AUD) to remove any currency risk, naturally it is always easiest for a foreign importer to pay in their own currency and this can sometimes secure an exporter a better price, given the convenience for the importer of not having to manage foreign exchange risk.
Tips for successful export relationships
While many of our clients know to engage us to assist with establishment of their offshore operations, we also have clients engage us after they’ve learnt some hard lessons. As always, the key is to surround yourself with experienced advisors and do your homework on any proposed business partners.
1. Due diligence is even more important
Resist the temptation to be blinded by the size of the deal or the size of the market you are entering!
When a foreign company doing business offshore enters into a new business relationship, a common mistake is a failure to undertake the same due diligence as the company would do in their home country.
All countries have different laws, regulations and norms of doing business, so it’s important to engage local expertise and advisors who understand the market to undertake physical, online, regulatory and financial background checks on who you are dealing with prior to entering into new business arrangements.
In some countries an internet search in English won’t help you. Two key reasons:
search engines such as Google are blocked in a number of foreign jurisdictions
for non-English speaking countries, you need to conduct searches on local entities or individuals in the local language, rather than English, to get an optimal result.
The key here, is to do the same or more due diligence on your business partner offshore than you would at home. If you are experiencing hurdles, we can assist.
2. The right payment structures can assist
International trade is conducted based on a continuum of trust. If you don’t know who you are dealing with, put payment protection mechanisms in place with providers that you trust.
Think about how you structure your trade:
currency used – offering your purchaser trade terms denominated in their local currency can potentially secure better pricing and enhance your chances of being paid in timely fashion. Banks can help to hedge foreign exchange risk for widely used currencies.
payment terms – seek whole or part payment up front, or at least staggered payments that stay ahead of the value provided over the contract period to help mitigate your payment risk.
consider the use of Letters of Credit (and consider who the counterparty bank providing the Letter of Credit is). This adds an additional layer of payment protection from your client’s bank.
consider additional layers of protection - Letter of Credit confirmations, export credit insurance, standby letters of credit for services trade, bank performance guarantees if clear contractual performance criteria can be established and agreed. This adds an additional layer of payment protection from either your client’s bank, or your bank.
Importing and exporting? If you have incomings and outgoings in the same foreign currency, consider creating a natural hedge by opening a foreign currency account, thereby obviating the need for currency conversion.
3. Dig deeper on debtor payment issues
If you’re experiencing debtor payment problems, understand clearly the reason why you aren’t getting paid:
is the counterparty not creditworthy?
does the counterparty have cashflow problems that are ‘point in time’, meaning they can pay you later?
is your documentation incorrect? In some countries, local laws won’t allow the counterparties you are dealing with to pay you if you have not provided the correct supporting documents
have you invoiced in AUD or USD, and the business you are contracting with can’t buy or remit foreign currency?
Your bank can assist you to ensure your trade documentation efficacy, with opening foreign currency accounts and with other foreign exchange hedging mechanisms.
4. Do what the big exporters do
Sometimes businesses think that the nature of the product they are exporting – perishable versus non-perishable – impacts the mechanisms that can be utilised to assist secure payment. This is incorrect.
Further, structuring of the trade payment security mechanisms of physical goods export activity should be no different for a smaller business than those utilised by the world’s biggest exporters, regardless of product type.
Where it is not feasible to seek payment up front, there are three ways that the world’s biggest exporters try to ‘guarantee’ payment for their exports to countries where payment certainty is more challenging:
Primary payment obligation rests with the importing party
Letter of Credit (bank guarantee of payment) issued in their favour – you’ll want this from one of the major international or local banks
‘Confirmation’ on the Letter of Credit from one of their trade panel banks, or their house bank. This effectively substitutes the credit rating of their trade panel or house bank for the credit rating of the purchaser’s bank. In essence, in this example, it’s saying that if the importer doesn’t pay and the purchaser’s bank doesn’t pay, then the exporter’s bank must pay - if the trade documentation is correct.
Our client has been exporting to China for many years and has established client relationships in a number of different provinces. Unfortunately, one of those clients recently refused to honour their payment obligation on a regular invoice, and short paid our client by a significant amount.
Due to the longstanding relationship, the additional layers of payment protection described above were not in place and the client runs the risk of being unable to recover payment, or at the very least going through a lengthy and challenging litigation process. We are supporting the business in recovery of the unpaid amount, but the situation could have been avoided if payment protection mechanisms were put in place.
Separately, another client has a sizeable business in Asia and we recently enquired how they structure their trade to ensure payment. Their response was that 80% of their receivables are received via advance payment, which is of course fantastic. We asked about the remaining 20% and their response was that these receivables were supported by Letters of Credit from small provincial local banks.
While utilising Letters of Credit is excellent, the lack of strength, international standing and reputation of the banks used is potentially problematic. There is a higher payment risk under the secondary payment mechanism from the bank, if the primary obligor does not pay. We advised the client that this risk can be mitigated to a considerable extent by requesting their clients provide Letters of Credit from major international or local banks, which they have now incorporated into their credit processes.
While each business situation can be as different as the product or service it provides, our professionals and extended network across many parts of the world are highly knowledgeable in assisting clients structure their trade dealings to support and protect their long-term success.
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