• IOE Home
• Trade Portal
• Contact

You are here >

  Printer Friendly

UK exporters will inevitably have to invoice buyers in currencies other than sterling. A foreign currency account can be of considerable  account can be of considerable help by allowing the exporter to chose a favourable moment at which to convert from foreign currency to sterling. However, as the exporter must eventually convert to sterling in order to report assets and liabilities in his balance sheet, he always risks incurring (perhaps substantial) losses on conversion.

The exporter has two basic choices:

• He may enter in to a forward exchange contract, arranging for conversion to be done at agreed rates at a fixed date in the future or at any time between two fixed dates. The exporter is obliged to take up the contract, even though he cannot be sure exactly when the foreign funds will be received.
  

• For a premium paid in advance, he may take out a currency option that gives him the right (without the obligation) to take up the currency deal. The exporter can thus take up a spot deal (if the advantage is greater than the premium paid) or take up the option at the agreed price when the spot rates are moving against him.

Foreign exchange is a very complex subject, so the exporter should seek independent advice.

Export finance options

A number of specialised facilities allow exporters to obtain additional finance for exports. It is sometimes possible to include overseas debtors in calculations of the value of an exporter’s assets, and lending in the currency of the export recievable is also possible.

Back to contents

Pre-shipment finance

• Confirmed orders from reputable buyers (Credit inquiries about such buyers may have to be made)

• Any documentary Credits issued in favour of the exporter by reputable banks

• A cash-flow forecast showing:

1. projected payments to suppliers

2. overhead expenses

3. projected shipments

4. estimated receipt of sale proceeds on a month-by-month (or other acceptable) basis.

Cash-flow forecasts, validated by professional accountants, would go a long way to helping the Bank decide whether to make finance available.

Balance sheets are not the prime consideration: the Bank relies more on its assessment of:

• The exporter’s trustworthiness and

• The viability of his business case, including:

1. the confirmed order book

2. sales contracts, and

3. documentary Credits on hand.

Credit insurance, although important, may not be an issue at this point. Red clause Credits and revolving Credits also allow the exporter to obtain finance against these instruments on a one-off basis.

Back to contents

Red clause Credits

Red clause Credits (Advance payment Credits)

Red clause Credits are instruments by means of which pre-shipment finance could be made available. They  contain a term allowing an immediate cash payment to be made, on the responsibility of the bank that issued  the Credit, on the basis that, upon presentation of conforming documents on shipment, the advance is repaid. The amount of the advance depends on the arrangement between the exporter and the buyer, but advances of 60 to 70 per cent of the amount of the Credit are common.

The exporter’s own bank or another specialised lender would pay the advance to the exporter against any documents required in the Credit. Such documents would generally include:

• A simple receipt from the exporter for the money received.

• An undertaking from the exporter to utilise the advance to manufacture, buy and otherwise source and ship goods in terms of the Credit and to present documents covering the shipment to the Negotiating or paying bank.

For control purposes, the exporter may be required to deposit the original Credit instrument with the bank, keeping a copy for himself. The Credit may require the goods to be stored in an independent warehouse in the name of the Issuing Bank, protected by any necessary insurance cover.

Revolving Credits

Revolving Credits may be used as instruments by which the exporter may obtain pre-shipment finance. The essential nature of such Credits is that the amount available under the Credit is automatically reinstated after each shipment.

The exporter should be aware if the buyer includes a clause in the Credit indicating that reinstatement requires specific authorisation of the Issuing Bank each time. Such a provision would hinder the bank from providing advances over the validity period of the Credit.

Formal lending facilities

In collaboration with