Getting Paid – An Exporter’s ViewBuilding Sales with Credit & Finance

T Glyndwr Powell, FICM MIEx

Senior Trade Finance Manager

Fairfax Gerrard Group

Terms & conditions

• Agreement

• Applicable Law

• Delivery

• Payment

Agreement / Contract

• Where is it

• What does it say

• Is it signed

• Is it registered and enforceable

• Is it in writing

• FRENCH Law Models everything must be in writing

Shipping Terms• Title

– Title passes when the parties agree it will pass

– Otherwise title passes ON DELIVERY

• Risk– Risk passes on delivery

• Delivery Point

– Group E - Departure– Group F - Main Carriage Unpaid– Group C - Carriage Paid– Group D - Arrival

Shipping Terms

POINTS TO NOTE:

SEA SHIPMENT - FOB CFR CIF

ANY METHOD - EXW, FCA, CFR, CIP, DDU, DDP

CFR, CIP, CIF, CFR risk passes on loading! Losses are buyers problem!

USE THE APPROPRIATE TERMS

C&F, FRANCO, FOB (USA types) ARE NOT INCOTERMS

Free guide from SITPRO

Payment TermsPlace of payment

– Place determines who jurisdiction over payment– Generally you want place of payment as place

where your account is

Payment Clause– Wording should mention place, account details,

currency, ‘in full, free of all deductions’

– Late payment penalty clause - interest

Security & Risk Mitigation

• Credit Limits

• Insurance

• Guarantees & Bonds

• Debentures, PGs and Cross Guarantees

• Letters of credit

• Title & Consignee

Payment Terms: Major used

• Cash in advance

• Letters of credit

• Cash against documents

• Bills of exchange

• Open account

Common Reasons for Delay

Common Reasons for Delay Reason Solution Disagreement or misunderstanding over terms

Communicate actual situation. Ensure for future business it doesn’t happen again. Ensure agreements are in writing, and refer to them.

Shipping or documentation delay Shipping delay – Whose fault is it? If buyer responsible for arranging shipping, they should still pay. In some countries customs clearance is required to authorise foreign exchange payment. Therefore expedite delivery. Documentation – ensure documents are sent by secure method and quickly. Documents are often required for both customs clearance AND payment

Dissatisfaction with goods Investigate. Arrange early credit if valid. Ask for part payment.

Poor invoicing or documentation Poor documentation can delay customs clearance and forex authorisation ad may incur extra expenses for buyer. Issue correct documents as soon as possible and ensure future documentation is correct.

Incompetence That works both ways, buyer and seller. Training helps.

Common Reasons for DelayCommon Reasons for Delay

Reason Solution Deliberate policy Not a lot that one can do short of stopping trading and using enforcement

processes Lack of funds Short term – agree payment plans and document agreement preferably by

way of bills of exchange Long term – assist client obtain additional working capital or question why you are trading with them

Lack of Foreign exchange

Most importantly, understand the local rules governing forex allocation. Determine when, if ever, client is due to get allocation. If country problem seek alternative methods of payment such as offshore funds or commission offsets

Failure to complete foreign exchange formalities

Until completed to the bank and local regulatory rules, payment will not be forthcoming. Ensure you understand what is required, what is missing and how it needs to be corrected. Some countries will not pay if an import licence is not opened BEFORE importation, and others only if customs duty has been paid and evidenced. If these are missing payment may never be made.

Credit claims Investigate. If valid, credit as soon as possible. Seek partial payment if allowed. If not valid communicate this immediately. The longer a credit claim is outstanding the more likely it is to be written off, whether or not it is valid.

What didn’t the salesman tell you ?

Extended credit. Increased limits. Impossible delivery times. New account, etc. No comment.

Money lost in banking system

Obtain copy of bank’s telex or SWIFT message. It has details of message number, date and time sent and machine identity receiving the message. The receiving bank can then identify the payment from this and investigate.

Collecting Overdue Debts• Collection Agents

– Two kinds - broad cover and specific knowledge

– Can be expensive (10-25%)– Personal recommendation very desirable

• Legal Action– Very slow, Very expensive– Lawyers should be debt collection

specialists not general council

• Insolvency– Hope

• Algeria Government Buyer Finance

• Non Ferrous Metals Finance

• Power and Water Project • Subsidiary Stock and

Receivables• Distributor Floor Planning

Case Studies

Scenario• Seller had a highly profitable niche market selling to

government and public sector buyers for hard currency• It wished to increase turnover dramatically • It did not wish to dramatically increase its balance

sheet exposure to a risky market• It identified extended terms would result increased

purchase• Willingness to accept Open account and Draft terms

would also win business from competition who insisted on L/Cs

• Delay rather than default was the main risk

Algerian Government Buyer Finance

Solution• Seller offered credit terms of a mix of Net90, 90

day Drafts and LCs• For bigger contracts, seller offered 540 day LCs• Seller mitigated risk with political risk insurance• Seller mitigated cashflow by arranging an

invoice discounting facility

Algerian Government Buyer Finance

Benefits• Annual turnover was increased from $4m

to $11m over 5 years• Seller maintained market presence whilst

others were leaving• Bad debt provision reduced from £250k

to £35k• DSO reduced from 270 days to 45 days• Margins were maintained and

discounting reduced• Balance sheet exposure reduced• Customers VERY happy to deal with

seller. Easy to buy from!

Algerian Government Buyer Finance

Scenario• Company sold scrap metal to India and

China on Cash Against Documents terms• Buyers took on average 45 days to pay

from shipment to arrival in UK bank• Seller paid for goods FOB• Seller was doing maximum business

possible against own funds• Seller had no bank facilities• Accepting CAD terms was an advantage

over competitors who insisted on Cash or LCs

• Value in balance sheet was DEBTORS

Non Ferrous Metals Finance

Solution• Invoice discounting

facility was arranged with bank

• Credit and political risk insurance was put in place

Non Ferrous Metals Finance

Benefits• Seller increased turnover

by 100%• Accelerated cash enabled

seller to buy more, at better prices and take advantage of market opportunities

• Seller was able to maintain CAD Terms and not require LCs

Non Ferrous Metals Finance

Scenario• Client was procurement agency. • Caribbean Government needed to upgrade

electricity and water supplies• Imminent elections • Installation work by the local Ministry of Works. • The total contract value US$13million• ECGD cover US$8million• 15% payable on signature • Their existing bankers were unable to fund the

commercial loan. • Contract subject to provision of Commercial

finance

Power and Water Project

Solution• International Bank with

operations in the Caribbean provided government the commercial loan– ECGD element ($8m) over seven

years– Commercial element ($5m) over 5

years. • In addition, on signature of the

term sheet and payment of the commitment fee, US$1.5million could be drawn down to enable the urgent works to start and the 15% down payment made.

Power and Water Project

Benefits

• Urgent work started immediately• Additional work included as finance

was available• Government established local capacity

to build water and electricity systems• Power and light provided to significant

portion of local populace

Power and Water Project

Scenario• Turkish parent established

subsidiary in USA to market packaged product to US supermarket chains.

• Initial funding was through equity, parent working capital and parent bank lines.

• Substantial growth opportunity if stock funding could be arranged

• Highly seasonal sales (50% of turnover in October to December)

• Finance rates in USA considerably cheaper than Turkey

Subsidiary Stock and Receivables

Solution• Bank identified who would

finance – Receivables

– Stock in USA warehouse

– Stock in transit

• Risk mitigants put in place to cover credit risks and potential losses to inventory

Subsidiary Stock and Receivables

Benefits• $4.5m working capital loan

arranged• Finance 5% cheaper than in

Turkey• Orders for $10m of additional

business taken for Q4 – 2004.• Next 3 years growth secured• Buyer confidence in surety of

future funding

Subsidiary Stock and Receivables

Scenario• Local market had shortage of

available product.• Delivery not price main driver for

winning order• Distributor had limited access to

finance and hard currency, limiting growth potential

• Shortage of spares limited annuity revenue (HIGHLY PROFITABLE)

• No show room stock for demos or copy-shop market

Distributor Floor Planning

Solution• Manufacturer addressed three issues separately

– Stock of spares and supplies

– Show room stock and copy centre machines

– Stock of machines for sale

• Show room stock and copy centre machines sold on 3 year lease• Spares and supplies sold on 180 day letter of credit• Machine stock sold on 360 day terms payable in 4 quarterly

instalments from hard currency offshore account• Transfer and insolvency risk covered through credit insurance• Finance arranged with finance partner

Distributor Floor Planning

Benefits• Manufacturer doubled

turnover• Higher net margin achieved • Service and maintenance

base secured• Distributor won significant

market share• Distributor increased local

profitability with copy service revenue and had demo machines

• Increased customer confidence

Distributor Floor Planning

Glyn PowellFairfax Gerrard Group Limited

45-47 Station RoadGerrards Cross

BuckinghamshireSL9 8ES

Tel: 017530887955Fax: 01753 882634Mob: 07734 329160

E-mail: gpowell@fairfaxgerrard.co.ukWebsite: www.fairfaxgerrard.co.uk

Further Information