Friday, July 8, 2016

Handling the Critical 5Ps of Export Business Success-Part-5 (The Payment)

The purpose of a Business is solve problems and thereby creating value while the he goal of a business is to make a profit. This therefore makes this last factor very critical to the success of any export business. The payment factor in this series focuses on how to source for funds from banks to pay for products or raw materials procured from the local suppliers and how to get payment for the exported goods from the buyers abroad. 

The business plan of a new exporter should answer the following questions about payment, both to local supplier and the receipt of inflow from the buyers abroad. These questions include the following: What are the payment methods available in export trade? Where is the place of valid export contract in export financing? When is ordinary letter of credit not reliable as a payment security? Who are those that are eligible to access export finance products? Why are some payment methods not attractive to banks and is there a way to make them acceptable? Which instrument can give banks comfort when financing local supply? How can an exporter mitigate the risk of non-payment?

The first question states that, what are the payment method available in export trade? This is a very crucial question that is also grossly misunderstood by many exporters and sometimes bankers. The payment methods in an export trade transactions include Open Account (Cash against documents), Bill for Collection, Letter of Credit, Advance Payment and recently, a new one was developed called the Bank Payment Obligations. Under open account transactions, the export ship the goods and send documents directly to the buyer who then clears the goods and pay the exporter at a later date like 60days or 90days after shipment. Bill for collection is another payment method and it involves the transmission of documents through both buyer and seller's banks and collection of payment through the same channel. The banks do not have obligations to pay in this arrangement. The import can pay at the sight of document or at a later. If the importer fails the pay, the exporter will be at loss. Letter of credit will be treated under the third question. Advance payment is the most secured method for the exporter because Payment is made before shipment is done. Bank payment obligations is not yet in operation in Nigeria. It is a technologically driven payment method that combines the simplicity of Open Account and the security of Letter of Credit.

The next question states that, where is the place of valid export contract in export financing? A bank needs to see and review the export contract before financing an export transaction. This is because, the contract forms the premise for the loan request. It helps the banker to know when the preparation for the production and sourcing of products for shipment should commence. It helps the bank to monitor the planning of the shipment with the shipping line. It shows the bank what, where, when, who and how the payment on shipment will be made. It informs the financiers the agreed price of sales for the goods. It also helps the banker to know how best to package the loan facility. Through the contract, the bank is also able to know the liabilities and responsibilities of the exporters. It helps the banker to envisage the likely challenges of the transaction and put in place the mitigants.

The third question is very pivotal and it states that, when is ordinary letter of credit not reliable as a payment security? First of all let me define letter of credit. This is the undertaken of the buyer's bank (issuing bank) to the exporter to make payment when the shipment is made and all the documents that complies with the terms of the letter of credit are presented. However, if the letter of credit is coming from a bank in a jurisdiction that is facing a sovereign risk (political and economic risk) or if the issuing bank ranking by rating agencies is very low, then an exporter might need another bank in another country to give an additional undertaken. This concept is called confirmed letter of credit. So, an ordinary letter of credit here is the unconfirmed letter of credit. Even though it has the force of a bank's undertaken to pay however, it becomes unreliable for payment when the issuing bank is exposed to sovereign risks.

Not all exporters are eligible for export financing and that is why the next question is, who are those that are eligible to access export finance products? Before an exporter can be considered to be eligible for export financing, the exporter will need to provide the following information with documentary evidence.  History of performance- from the Bill of lading records. Export volume per annum- from the Commercial Invoice and the Bill of lading records. Frequency of shipment- from the Bill of lading records. Payment Methods- from the Sales Contract. Terms of Payment- from the Sales Contract. Product Sourcing strategy and risk mitigants- from the business plan/ Proposal. Availability of the products-from the business plan Proposal and investigation. Product destination- from the Sales Contract. Transaction cycle- from the date of Sales contract to the date of receipt of export proceeds for previous shipments. Buyer’s payment History- from the exporter’s  Statement of Account. Making these information and documents available to able gives the credibility that will make them to consider your loan application for export business. 

The next and the fifth question states that, why are some payment methods not attractive to banks and is there a way to make them acceptable? The two payment methods that can make a bank to decline funding an export transaction include Open Account (Cash against documents) and Bill for Collection. However, if an open account transaction can be backed by either a standby letter of credit or payment guarantee, it still retains its simplicity but also becomes attractive for banks to fund. On the other hand, if a buyer's bank under a Bill for collection transaction availises (guarantees) the accepted Bill of exchange, this makes the transaction to become attractive to banks for funding. 

The second to the last question states that, which instruments can give banks comfort when financing local supply? In country like Nigeria, where most of the exportable items are hard and soft commodities, in an environment that is largely unstructured, banks need comfort in order to be involve in pre-export financing. This therefore means that any exporter that wants the bank to finance the procurement of the commodities from their local supplier must be ready to work with people that will secure the bank's funds through Advance Payment Guarantee (if they need the bank to advance funds ahead of delivery). On the other hand, if the supplier have the goods but needs assurance of payment, a payment guarantee from the bank will ensure that he only gets paid after the goods have delivered and the quality and quantity ascertained. 

The last question that is also most important for an exporter is, how can an exporter mitigate the risk of non-payment? This is a major risk for all exporters around the world. The first mitigant that comes to mind is the use of letter of credit and confirmed letter of credit. However, where this is not possible, standby letter of credit and availization can help to secure payment under Open account and Bill for collection respectively. If these mitigants cannot be obtained, then a representative in form of an export agent or export management company at the destination country will be necessary to secure payment. The representative can follow up on payment, monitor delivery and inspection and source for another buyer if the initial one fails to pay.

In conclusion, I will like to say that if anyone intending to go into export business can take time to research and get more information about the questions addressed in these series of articles, he would have successfully created a viable business plan that will make the export business a success. 

For questions on this thought, you can reach me via email to

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