Export financing requirements can be divided into two phases: pre-shipment and post-shipment finance. Pre-shipment finance is required to cover the installation of plant and equipment as well as the cost of manufacture, packing, storage and transportation of goods to the port of shipment. Post-shipment finance is required to cover the period between shipment of goods and receipt of payment.
Financing facilities are offered for short, medium and long-term transactions, depending on the length of credit required. Exports of goods and services normally require short-term finance which is provided for up to one year. However, exporters of capital goods or projects of a capital nature will require medium-term (between one and five years) or long-term (five years or longer) financing facilities.
The provision of trade credit to the buyer, whether on open account or on a bill basis, presents the exporter with two problems – how to finance the transaction and how to eliminate the risk of exchange loss. The risk of exchange loss can be covered by selling the expected foreign currency proceeds forward to a bank. This subject is discussed in a separate section on Foreign Exchange Dealings.
Depending on whether the credit is short term, or medium- to long-term, the transaction can be financed from the exporter’s own cash flow or through various sources of post-shipment finance. If the latter option is taken, the exporter will receive rands immediately from the financial source, thereby eliminating his post-shipment exchange risk. However, this depends on whether the financial source takes over the buyer’s debt or whether off-shore finance is used, or if a bill secured by a confirmed letter of credit is negotiated. The cost varies, depending on the currency used to finance the transaction and the type of finance applied. Discussion with your bankers is essential to enable you to select the most favourable currency for settlement and other financial arrangements.
Export Credit Insurance
South Africa is one of many countries which offer subsidised medium to long-term facilities to promote the export/import of capital goods. Financing facilities offered by banks and financial institutions such as Industrial Development Corporation of South Africa Limited (IDC) are enhanced by the credit insurance cover and interest support from the Government-owned Export Credit Insurance Corporation of South Africa (ECIC), established 2 July 2001. The ECIC, enables the exporter of capital goods and services to offer extended credit facilities to the foreign buyer by underwriting bank loans and investments outside the country. (See Export Credit Insurance)
Factoring is primarily a financial service to the exporter. The factor buys the debtor accounts/accounts receivable /receivables of his client (the exporter). In South Africa, title to these receivables is given by way of an outright cession. The factor pays the exporter for the goods on shipment and then takes on the responsibility for obtaining due settlement from the overseas customer. Factoring houses have close associations with their counterparts overseas and are therefore able to use their associates’ expertise in assessing credit risks, debt collection and sales financing in their particular geographical area.
The receivables may be factored on a ‘with’ or ‘without’ recourse basis. In the case of the former, a contingent liability is incurred by the exporter. In the latter case, the factor establishes credit lines for the exporter’s customers, or accepts receivables on the basis of each transaction requiring prior credit approval. In both instances, to the extent that the exporter has been given approval, the risk is fully covered. However, factoring is usually on a ‘non -recourse’ basis. There is no cover on goods supplied in excess of the limits approved. The export sale must be an outright sale. Goods sold on a ‘sale or return’ basis and goods on consignment are not factorable.
There is a factoring commission related to the service given – that is, the granting of credit, the communication between the local and overseas factors, the accounting and debt collection procedures carried out by the overseas factor, and the regular rendition of accounts and information given to the exporter. The factoring commission is charged at a percentage of the invoice value and in influenced by the volume of business, the duration of the credit period and the countries to which shipments are made. The exporter is charged interest on prepayments, from the time of prepayment to the time of receipt of funds from the overseas factor. Costs for forward exchange cover are borne by the exporter
The function of the confirming house is to assist the exporter who needs to grant extended terms to foreign buyers in order to gain access to overseas markets.
To help fund these extended terms, the confirming house re-imburses the exporter immediately on shipment, thereby providing the funds necessary to finance the manufacture of the next order.
The overseas customer is normally offered terms up to 180 days.
Interest rates are dependent on the currency used in the invoice.
The exchange risk is eliminated, since the exporter is re-imbursed immediately and the customer ultimately pays the confirming house in the same currency as the invoice.
Discounting of the export proceeds is done with recourse so that, if the overseas customer is unable to pay, the exporter is liable to repay the confirming house. In these circumstances, exchange risks may appear. Most confirming houses have overseas offices that assist the exporter in investigating the creditworthiness of the overseas customer.
A confirming commission of approximately 2,5 per cent is charged, but this is negotiable depending upon the size of the transaction, the number of transactions, the financial position of the exporter, etc.
The interest rate for the credit term is that applicable to the currency of the transaction.
This facility is granted by a bank whereby a borrower is allowed to be overdrawn on the current account within certain specified limits. The banks prior approval is required and an application must be supported by guarantees or other forms of security including the bank’s own assessment of the borrower’s future performance. Interest is charged and the bank may demand repayment at any time. Where the facility is used to finance specific exports, the aspect of exchange risk in the export proceeds must be noted. Banks regard the provision of forward exchange cover as a type of lending facility and therefore require that it is secured – usually up to 10 per cent of the value of cover provided.
Local banks and other financial institutions provide loans whereby the borrower is given the full amount of the loan against a pre-arranged drawdown schedule (ie certain amounts can be drawn on pre-determined dates). Financing facilities offered by banks and financial institutions such as Industrial Development Corporation of South Africa Limited (IDC) are enhanced by the credit insurance cover and interest support form the Government-owned Export Credit Insurance Corporation of South Africa (ECIC), established 2 July 2001. The ECIC, enables the exporter of capital goods and services to offer extended credit facilities to the foreign buyer by underwriting bank loans and investments outside the country. (See Export Credit Insurance)
Finance that is not raised in local currency is off-shore finance. Although off-shore loans are predominantly used in post-shipment financing, they can also be used to provide constant or ‘fixed’ working capital requirements for expenditure incurred in respect of the expansion into export markets.
Foreign currency loans can be raised only with the approval of Exchange Control. Applications must be submitted through an authorised dealer in foreign exchange (usually the exporter’s bankers). When the finance is arranged in the same currency as that of the export transaction, there is no exchange risk, since the proceeds offset the foreign currency debt. The cost of the foreign financing is therefore directly comparable with the covered cost of rand finance. However, an exporter may consider financing in one currency in anticipation of receiving payment in another currency. In this case, the resulting exchange risk can be covered by means of a forward exchange contract.
A major source of foreign currency loans is the Euro currency market, centred in London. Large transactions (in excess of R100 000) can be funded by Euro currency credits or clean foreign acceptance credits. The Euro currency market is an international market for the investment of currencies outside the country of origin. A special feature of the European currency market is the freedom from all government and central bank interference. Only banks have access to this market.
The foreign division or branch of the exporter’s bankers, offer advice on the merits of the available sources and methods in the light of prevailing international money market conditions.
The use of foreign overdrafts is approved only rarely by Exchange Control. Once approved, the facility has to be specially negotiated with the foreign bank. This type of finance is normally geared to the needs of large corporations that export on a regular basis. Drawings under the credit are usually made telegraphically for immediate conversion into rands. Before using off-shore finance, exporters should always take account of the prevailing interest rate differentials. (See Exchange Control for further details)
Discounting of bills of exchange/drafts:
Bills of exchange are used in one of three ways:
(i) an importer may request a bank to issue a letter of credit which provides for the drawing of a bill of exchange on the l/c negotiating bank. The latter bank accepts the bill and becomes liable under it;
(ii) the exporter may send documents of title (eg bills of lading) and a bill of exchange to the importer’s bank through the South African bankers, for acceptance of the bill (documentary collection procedure) and
(iii) the importer may send a bill of exchange directly or indirectly to the exporter.
The holder of the bill of exchange can use it raise finance by selling it to a bank on a discounted basis, or by pledging it as security for a facility.
The process of discounting implies that the banker buys a bill at a price less than its face value. The discount is calculated: discount % x period x face value and is deducted from the face value. The net sum is paid out .
A major advantage of this method is that the exporter receives rand immediately at the time of negotiation and is thus freed from the risk of exchange loss. However, before adopting this method of finance, the exporter should take the following aspects into consideration:
- The cost and availability of domestic bank overdrafts compared to the discount on bill negotiation. It may be preferable, for instance, to choose to finance a foreign currency usance draft by means of a local bank overdraft and sell forward the foreign currency proceeds of the draft.
- When comparing the cost of domestic bank credit with the discount rate applied to a foreign currency draft, the exporter must take into account the cost of covering the foreign currency-rand exchange risk. He must also account for any windfall profit that would accrue from selling forward a currency standing at a premium in forward markets.
The facility of eliminating foreign exchange risk is countered by the fact that, should the draft be dishonoured, the bank has recourse to the drawer for the full foreign currency amount of the draft. The drawer has a foreign currency risk until the draft is paid at maturity. The only exception is a draft drawn under a confirmed and irrevocable letter of credit, in which case, the confirming bank has no recourse and bears the entire risk, including the exchange risk.
- Exchange Control
- Export Credit Insurance
- Foreign Exchange Dealings
- Industrial Development Corporation
- Insurance Companies