December 2020

International trade has been hit hard as a result of the global pandemic. The trade finance gap has widened and SMEs are disproportionately affected. Many are unable to borrow from legacy banks as these institutions have either become extremely risk-averse and, or as usual, are reluctant to provide funding to companies that have smaller balance sheets.

In these unprecedented times, when legacy banks are well behind the curve, it is time for SMEs to truly look at alternate trade finance providers such as international export-import banks, like Euro Exim Bank, and other trade finance and factoring companies. There are many advantages to working with such service providers and, in this article, we will look at those that are most beneficial to SMEs.

Quick Turnarounds & Better Treatment

Legacy banks are usually slowed down by legacy systems and archaic processes. They have little room for agility and quick turnaround times, which is crucial in the present trade environment. Furthermore, unlike legacy banks, focused trade finance providers are not looking to cross-sell other unrelated products. Trade finance is not simply a small business component for these alternate providers, it is their main business. Thus, you will receive better treatment and enjoy a more focused approach.

Favorable Accounting & Balance Sheet Enhancement

When you discount receivables at a legacy bank, your cash-in-bank and your short-term borrowings increase, effectively having zero effect on your balance sheet. In fact, in the event of a buyer default, the legacy bank will pursue a dual recourse recovery mechanism, which means more potential debt for your business.

On the other hand, when you work with an alternate trade finance provider, through a factoring arrangement, for example, you will enjoy increased cash-in-hand and your receivables are removed from your balance sheet. Many such institutions will offer these services on a non-recourse basis, meaning that, in the event of a buyer default, they will file an insurance claim against the buyer, leaving the seller out of the matter entirely. Thus, making it an excellent way for SMEs to manage risk.

Cross Border Support & Reduced Need for Collateral

Alternative service providers will usually function across borders, while legacy banks will usually focus only on their domestic market. Furthermore, unlike legacy banks, factoring arrangements and other trade finance mechanisms provided by alternate providers do not have huge collateral requirements, enabling small businesses to easily access financing.CategoriesTrade FinanceTagsImport export, trade finance

The International Relations Subcommittee of the African National Congress (ANC), South Africa’s governing party, held a virtual Umrabulo (panel discussion) on Sunday 27^th June 2021, where various matters were discussed. Of particular importance were the comments by Linidwe Zulu, South Africa’s Minister for Social Development with regard to Africa’s low levels of intra-Africa trade being rooted in the continuity of colonialism.  

Zulu remarked that Africa is home to 17% of the world’s population, of which 60% is under 25 years of age, thus accounting for 3% of the world’s GDP and endless promise. Then she went on to say that despite this, “with 3% of the world’s trade [Africa] claims only 2% of the world’s manufacturing output compared with Intra-Asia Trade, which is 52%; Intra-North America Trade, at 50%; and Intra-EU Trade, which is at 70%. Intra-Africa Trade is small, covering only 16 to 18% of traded goods. Among other factors, the low level of Intra-Africa Trade results from the continuity of colonialism into present Africa and the exclusion of the informal sector by market research methodologies.” 

Zulu went on to say that Africa must continue the work of international relations, regardless of the COVID-19 global pandemic. She further stressed that Africa must, “Learn lessons from the international environment and everything that is happening, including how the world is trying to deal with Covid-19.” 

The other speakers on the panel included Alvin Botes, Deputy Minister of International Relations in South Africa and chairman of the ANCs Subcommittee on International relations, along with Wamkele Mene and Peter Katwesige.  

Mr. Botes stressed the importance of the African Continental Free Trade Agreement as an important repository in an effort to negate poverty in South Africa and the African continent as a whole. Addressing the Umrabulo, he also stated that the purpose of the session was to reimagine Africa within a globalized world order that has become volatile, uncertain, complex and ambiguous. He also stressed the importance of vaccination drives stating that, “As we gather today, below 2% of Africa’s population has been vaccinated and approximately 20 African countries are in the middle of the third wave.” 

Helping to Create Opportunities for Intra-Africa Trade 

African businesses often find it difficult to obtain trade financing and other support they need to engage in easy cross-border intra-African trade. This is due to many reasons which include politics, a lack of cross-border relations between banks and also excessive regulation. Therefore, at Euro Exim Bank, we have made the entire African continent a focus area for us. We are creating opportunities for intra-Africa trade through easy access to world-class trade finance solutions. As a reputed international bank specialized in trade financing, we are ideally positioned to provide even the smallest businesses with the necessary support they need, unlike traditional local banks.

A letter of credit, or LC, is a popular trade finance mechanism used to settle international trade transactions. It is by far the safest for both importers and exporters. However, an LC is somewhat more complex than other methods and this can result in many Chinese businesses being reluctant to agree to LC payment terms.

Protections for the Importer and Exporter 

It is a regular practice for Chinese companies to ask for a 30% deposit as an advance. However, it is not uncommon for this “deposit” to then become a non-refundable “down payment” if things do not go as planned. This major risk is entirely mitigated when using an LC. 

For the exporter, the LC serves as a guaranteed payment once the shipment has been successfully consigned. Furthermore, the LC can be used to obtain credit, if the exporter’s bank is willing. Thus, from the exporter’s perspective, it is possible for them to obtain the necessary “working capital advance” while also being guaranteed payment.  

Still, Many Chinese Businesses are Reluctant 

When trading with China, you will encounter much reluctance to agree to LC payment terms. This is for multiple reasons. Many Chinese businesses are small “survival” businesses working from one order to the next. Thus, they are often turned down by banks when seeking credit, even if they have an LC. It is also significantly more hassle for them to obtain credit against an LC when compared with obtaining an advance payment from the importer. Furthermore, many smaller companies often do not have the experience required to accept an LC.  

Still, for the best chances of getting your order accepted under LC payment terms, it is important to communicate this early on. If you make it clear that you will only agree to LC terms, then you are likely to more quickly find an exporter who is willing to accept this.  

A Note on Nitty Gritty 

Both importers and exporters must pay attention to the details of the LC. An LC’s strength and reliability lie less in its nature and more in how well it is structured and what details are included.  

The importer should ask not just for the shipping documents but also for quality inspection reports, compliance tests, and or product certificates, as necessary; to make sure the goods shipped are to specification. On the exporter’s side, they must pay due diligence to all the terms they are agreeing to, otherwise unscrupulous players can rely on “discrepancies” to withhold payments.

Importance of Choosing an International Export/Import Bank 

Whether you are an exporter or importer, choosing to work with a reputed, experienced international trade finance provider, such as Euro Exim Bank, will ensure that your LCs are well laid out and ironclad. For exporters, banks like this can also provide much easier access to trade financing, both against an LC and in other forms, such as factoring.

For both importers and exporters, a letter of credit (LC) usually offers the best protection and assurance of payment and delivery. Banks will act as trusted intermediaries to the transaction and guarantee payment, once the necessary conditions are fulfilled. Additionally, for importers, an LC can be used as collateral against which to obtain financing for the shipment. Overall, it is the safest and most standardized way to govern and settle international trade transactions, as the rules are generally similar around the world.

How They Work 

While there can be many banks and beneficiaries involved, an LC usually works as follows. The importer will request their bank to draw up an LC for the desired value and with the desired terms. The importer’s bank will then send the LC to the exporter’s bank. Now the LC is official. Once the shipment has been successfully consigned, the exporter will present the invoice and shipping documents to their bank, who will examine them and then send them across to the importer’s bank. Once everything checks out, the payment will be made, less any fees the banks may charge.  

This kind of LC is usually referred to as a sight LC as payment is due ‘on sight’ of the documents. However, other types can also exist. Discussing all of the various types is beyond the scope of this article, but commonly used ones include standby, irrevocable/revocable, deferred payment, red clause, back-to-back, and confirmed/unconfirmed LCs. Each of these variations has its own use cases. LCs can be amended if all parties are in agreement. 

Parties Involved 

In a standard, basic LC there are four parties involved: the applicant (importer), beneficiary (exporter), issuing bank (importer’s bank), and advising bank (exporter’s bank). However, additional parties may become involved in certain circumstances, such as when more than two parties are involved in a trade deal or when an extra intermediary bank needs to get involved.   

Margin 

To issue an LC, banks may demand a certain percentage value of the shipment to be placed as a margin. This can usually be done either in cash or cash-like instruments/assets. In some jurisdictions, this may be a mandatory requirement. Importers may also keep collateral with their banks, such as property, against which LCs can be issued.  

Documents Required 

This may vary depending on the jurisdiction, but usually, the following documents will be required: 

• Business registration documents 
• Tax certificates/registration 
• Licenses or permits, if any are required 
• Proforma Invoice that clearly states all the details of the shipment 

Choice of Bank 

When using an LC, for international trade settlements, it is crucial to choose a reputed, tech-savvy international bank that specializes in trade finance, such as Euro Exim Bank. This will ensure speed and reliability. Also, if your business is based in a jurisdiction with excessive regulatory controls, an international bank can help you transact with more ease.

The first major trade deal, post-Brexit, has been signed. The new trade agreement, between the UK and Australia, will see the two economies transacting freely with each other. UK sectors such as vehicle manufacturing, whiskey, and biscuits are likely to benefit heavily, while Australia will enjoy free access to the UK’s food market, with no tariffs or limits, making it very lucrative for Australian food producers. The UK too will gain access to Australia’s markets and British citizens will be able to live and work more freely in Australia.  

Overall, the deal appears to be mutually beneficial. For Australia, it may also help to ease some of the pressure the country is under as a result of tensions with China. For over a year now, Australia’s main exports to China have been subjected to various tariffs and restrictions; wine, beef, barley, and coal have all been affected. The deal will also pave the way for the UK to join wider trade agreements in the Asia Pacific region.  

What Could Go Wrong? 

While the deal is mutually beneficial, the UK’s farming industry could end up being negatively impacted. Challenges may emerge when UK farmers have to compete with Australian products. Costs and thus prices of farm products in the UK are high, while Australia enjoys lower costs and major economies of scale; 8 of the 10 largest farms in the world are in Australia. Some members of the UK National Farmers Union believe that this new trade deal will seal the fate of small family farms, sending them into steep decline.  

Some concerns have also been raised within the UK with regard to Australia’s relatively lower food and animal welfare standards. For example, hormone-injected beef is banned in the EU, so pre-Brexit, Australian suppliers had to meet this requirement. However, now that may no longer be the case.    

On the flip side though, sectors catering to Australia’s main imports from the UK will flourish. These include cars, medicines, and alcoholic beverages, and employ over 3.5 million people in Britain. Thus, these areas of the economy can expect to see new opportunities emerge. Regardless, as this trade deal is likely to set the tone for future post-Brexit agreements, one thing is clear; there will be winners and there will be losers in Britain’s post-Brexit economy.