Smart financing for imports and exports

Nedbank CIB’s Craig Weitz highlights some of the challenges import and export businesses face.

A top expert from Nedbank has urged local import and export businesses under financial pressure from the crisis brought on by the Covid-19 pandemic to make use of export credit insurance in order to survive the disruptions in global supply chains.

South African companies that rely on an integrated global trade network need to consider financing options like export credit insurance designed to mitigate risk, through government-backed agencies.

During a webinar hosted by CFO South Africa on smart financing solutions for import and export, Nedbank CIB export credit finance principal Craig Weitz said most export businesses have similar challenges. These include buyers not being able to pay for the goods within 30 to 60 days. Instead, they need payment terms of up to 360 days or longer, which drastically affects the business cash flow.

Another problem is that clients abroad cannot access financing from their local banks. There is also the issue of different currency payments, where the exporter is expected to take on the risk of currency conversion. If the client can only pay their local currency, instead of a globally accepted or preferred currency, the South African exporter is expected to absorb the conversion risk as well as any volatility of that currency.

Importers are not without their own set of problems. International sellers expect local businesses to pay the full amount upfront, creating a cash flow problem. Even if businesses were to approach South African banks for finance, those institutions are limited in terms of how much financing they can provide, and if they can offer the amount needed, it’s usually at higher, or unattractive interest rates.

Craig says export credit insurance agencies can alleviate some of these problems because they are backed by government guarantees. “The mandate of export credit agencies (ECAs) is to support the export of locally manufactured goods to foreign markets, in the interest of job creation, economic growth, and local development,” said Craig. In essence, ECAs provide banks with credit and political risk insurance for a percentage of the financing. In other words, the ECA will indemnify banks against defaulting payments, currency volatility, nationalism, expropriation, confiscation of goods by international port authorities and insolvency.

Export credit financing can apply to any amount, but Craig warns that the application process is lengthy and requires patience. There are minimum requirements to qualify for assistance from the Export Credit Insurance Corporation (ECIC). The goods and services being exported must consist of at least 50 percent locally produced and manufactured content, and the company needs to have healthy financials over a three-year period at least. The client also needs to submit clean financial audit statements and the invoicing needs to be in ZAR, USD, or EUR.

One of the greatest advantages of the ECIC is that even when international buyers are granted financing through the agency, the loan amount is paid directly to the South African seller. “Far too often, South African exporters have told us that despite their clients raising financing, the money is almost never used to pay them once the exports have landed in the destination country,” said Craig. The international buyer can use the fund for capital or other expenses if the monies were paid to them, instead of the exporter.

As with any insurance policy, it’s prudent to read through the fine print. For example, buyers would need to make an upfront payment of at least 15 percent before qualifying for funding. The risk mitigation is not free, and they will have to pay a premium as they would with any other kind of insurance. Lastly, this is a lengthy process and it would be best to begin engaging with the ECIC as soon as possible.

ECAs can also benefit importers. Locally they can assist with ZAR financing, but companies can engage internationally recognised and government-backed agencies in the countries from which they are importing.