Opinion: Trading information
With the debt crisis likely to keep a lid on US and European export markets for some time to come, Australian small businesses should consider Asia and other emerging economic zones to boost sales – but there are pitfalls for the unwary. By Richard Reese, General Manager Operations, Banklink.
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Richard Reese, BankLink
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There are a range of areas where accountants can advise their small business clients involved in import or export trade. At the top of any list should be the capability to understand and advise on currency risk, ability to do due diligence on overseas counterparties and to explain how their client is going to fund each export deal.
This is the advice from Alex Fernandez, head of alliance and product for SMEs and mid-market firms at the Export Finance and Insurance Corporation (EFIC), who added: “A sale is not a sale until it’s been paid. The biggest risk is that there will be a default and the exporter has to enforce the contract in a foreign jurisdiction.”
Fernandez was keen to explain that EFIC doesn’t compete with commercial lenders; rather the agency provides a boost, such as credit enhancements, to “export-ready” Australian businesses to ensure a bank is comfortable funding a business in what may be its first offshore venture.
This approach means that while the banks and other lenders put a lot of emphasis on the quality and value of the securities against which they lend, EFIC puts greater emphasis on the customer’s ability to perform under an export contract.
“We provide credit enhancement to commercial lenders, mostly. We work with the banks and lenders, who provide financing on the back of our guarantees,” he said.
EFIC’s default rates are very low, according to Fernandez, because of the effort they put into their assessments. “Some people want to export, but are not export-ready, so we need to be able to guide them in the right direction to get there,” he said.
“For their accountants to add value, it really comes down to them understanding the market their clients are targeting – who they are dealing with in that market, what the risks are, [and] having a very comprehensive business plan.”
Make business sense
One point Fernandez was also keen to make clear is that even though EFIC will assess credit differently to how the banks do it, and will help get transactions funded, the deal must be commercially viable right from the start. “We won’t provide guarantees on speculative transactions. Again, where accountants can really help is to structure the transaction and have the right level of understanding to deliver on the contract, before even we can help.”
A small exporter may have a viable transaction on the drawing board, but the bank is unwilling to fund it because of the country risk, the buyer risk or just straight-out lack of security. Sometimes hopeful exporters need to do a bit more homework on how they structure a transaction, warns Fernandez.
The way he views the process is that it’s all about looking at the complete capital cycle, from order to payment. “That’s where accountants can add a lot of value, in explaining the risks to their clients and making sure the contracts are well structured to allow cash flow and that there is enough working capital when [their client] wins a contract,” he said.
“It’s really about helping the exporter to understand when they’re going to be short of cash, or will be receiving cash. We do a lot of work with construction and engineering firms, and a lot of their contracts tend to be performance based with milestone payments to fund the projects.”
Use the bank’s expertise
A crucial next step for SMEs, particularly as they often don’t have enough working capital in their business when they win a large project, is to engage their bank.
Accountants can add a lot of value to how the exporters interact with their banks, especially in finding the right people, notes Fernandez. “They need to know who to talk to in the banks to help their clients,” he says.
“An average front-line relationship manager has hundreds of products to sell, and won’t necessarily think to ask the trade finance department to help structure the transaction. It’s often a lot easier just to talk the customer into taking an overdraft, or just say ‘we can’t help you’ if it looks like there’s not enough security,” said Fernandez.
Trade finance specialists, on the other hand, understand the risks, so are more likely to come up with a way to help or work with EFIC.
The banks will look for information prepared very cleanly and simply to see that the customer also understands what they’re getting into. “So an SME’s accountant should be looking to present the right information to enable the bank to make a quick and, hopefully, positive assessment of the transaction to be able to fund it.”
According to Richard Reese, BankLink’s General Manager of Operations, it is crucial that an SME engage their accountant in a business advisory capacity and go beyond seeing them as just a resource for standard compliance work.
“The accountant is one of the major assets for an SME contemplating approaching a lender – not only in helping prepare the necessary documentation, but also for helping shape their business decision making. The SME should be using their accountant to help them streamline the information presented to the bank including showing in snapshot the SME’s performance and future growth opportunities.”
Reese added that it is also vital that the business owner establishes a trusted and positive working relationship with their accountant as a trusted advisor.
Although financial information provided by the SME might give a bank a lot more comfort, it may not be enough.
“The lenders rely on security, and that’s where we can step in and assist by providing a level of guarantee to credit-enhance the transaction, and give the bank the opportunity to fund it,” said Fernandez.
As the SME’s trusted advisor in dealing with their commercial bank, accountants need to source independent external advice and information. EFIC is one business resource that might be worth exploring.
BankLink helps around 4500 accountants streamline the accounting process for more than 250,000 small business and self-managed superannuation fund clients. It has partnered with accountants for 25 years.
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- Banking
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- Richard Reese, BankLink, bkellerman@financialpublications.com.au
- Article Posted:
- August 15, 2011
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