As a falling dollar makes Australian exports more competitive, small would-be-exporters can look to specialist export finance to fund expansion.
For many small business exporters, scoring a big overseas contract is a moment of euphoria – and often sheer terror.
Initial excitement over signing a deal can soon give way to concerns about being able to sufficiently ramp up capacity to meet the demands of bigger markets and, most importantly, pay for it.
“One of the challenges they face in expanding is just getting hold of sufficient finance for international business,” says Austrade chief economist Mark Thirlwell, who notes that many small and medium businesses rely on retained earnings to finance their export activities.
With the Australian dollar hovering around the US74 cents mark – dramatically down from the all-time high of US$1.10 in July 2011 – many businesses are looking overseas for more sales. Also pushing the export cause is a sluggish domestic economy, free trade deals and e-commerce advances that are alleviating some of the disadvantages of distance.
Of the 800-plus exporters that Australian Government export credit agency Efic surveyed in its latest SME Exporter Index research, just over 40 per cent expected a rise in their overseas sales during the next 12 months. One in five intended to launch new overseas operations within six months.
Capacity expansion can be costly, however, and requires substantial additional finance. The Australian Government’s Financial System Inquiry led by Ian Murray found that many lenders are requiring more security, usually in the form of residential property, against business loans. Given that many SME owners do not own high-priced property, this can be an issue for them.
The hurdle can be particularly high for exporters: in the 2015 Australian International Business Survey conducted by the University of Sydney, 45 per cent of respondents commented that they found it harder to source finance for international business than for their domestic operations.
UNSW Business School economist and international trade expert Tim Harcourt
says there is no doubt the favourable Australian dollar is helping exporters, although a small proportion of those businesses also import. “The dollar cuts both ways, but it is competitive now,” he says.
With capacity expansion, Harcourt says SME exporters must play it smart and consider strategic alliances and accessing international supply chains.
“Small exporters can get scale through joining those supply chains,” he adds.
Harcourt is pleased Efic now has a mandate to help SMEs obtain finance. This is important, he says, because economic studies show there is a clear link between export finance difficulties and market failure.
Supporting international growth
Melbourne-based IT services company CPT Global
is one small business that has been able to finance international growth opportunities. Set up in 1993, CPT is a computer consulting company specialising in performance monitoring and capacity planning of mainframe systems. It has won contracts in markets such as Europe, North America and Asia.
In its international markets, CPT’s automated solutions for mainframe environments are in demand, and it has thrived using an innovative risk-reward model of service delivery, which means clients only pay for services from savings measured and realised.
The business recently secured a contract with UniCredit Business Integrated Solutions (UBIS), a wholly owned subsidiary of Italian banking and financial services group UniCredit. The contract involved an assessment of the organisation’s mainframe IT systems and the implementation of efficiency improvements.
In order to fund the project and account for the time lag between providing services and receiving payments, CPT needed additional working capital that could not be provided through its bank. Efic provided CPT with a A$1.5 million Export Contract Loan to support the working capital requirements of the project with UBIS.
CPT chief executive officer Gerry Tuddenham says that finance will ensure CPT can continue tendering for other work using the same risk-reward model. Andrew Watson, Efic’s executive director of export finance, is convinced CPT “will just continue to grow and take advantage of the opportunities in front of them”.
Assessing financing options
CPT’s experience demonstrates the importance of alternative financing options when banks cannot help. Government export assistance measures include the popular Export Market Development Grants (EMDG), an Austrade-administered scheme that reimburses up to 50 per cent of exporters’ eligible export promotion expenses.
Austrade’s Thirlwell says the grants have proven to be a valuable financing tool for many, while accessing information or other possible funding from federal and state governments and chambers of commerce makes sense. He also encourages exporters to talk to their peers.
“If you can find an exporter who has already faced some of those challenges, you can learn from their lessons – what worked for them and what didn’t,” he says.
Watson advises exporters to first speak to their bank about options such as a secure loan or a commercial bill facility. Efic often partners with banks when financing is proving difficult to get across the line. That way, says Watson, Efic can ensure the eventual financial solution lets the company take advantage of its export opportunity.
According to Efic’s research, 37 per cent of small businesses expect new financing to become more difficult during this year. The credit agency’s options for exporters include a small business export loan, working capital, letters of credit and loan guarantees. Guarantee products are especially valuable: because Efic is owned by the federal government, an Efic guarantee gives the financier a AAA-rated asset.
Geoff Cox, executive director and global head of trade sales at the Commonwealth Bank of Australia (CBA), says Efic’s working capital guarantees are a good fit with bank financing for export growth opportunities.
Get banks on board
Cox says the challenge with export financing is, in many cases, knowing where to look, and that financing can be found to meet the needs of a wide range of export businesses. He sees “a growing trend” for exporters to seek dedicated trade finance lines, rather than just expanding their general working capital. Such a solution gives the bank better visibility over the borrower’s export business, “which is an important consideration when providing finance”.
Finance is not, of course, the last hurdle for exporters. Cox warns businesses to manage their financing and risk by understanding their target markets and validating the reliability of buyers. “Remember,” he says, “a sale is a gift until you get paid.”
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