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Australian
importers and exporters face so many uncertainties in international
trade. On top of the issues you face within the domestic market, there
are so many other factors to consider.
Within
your own market, you can usually obtain reliable information on the
performance and standing of a buyer. When you're dealing on a worldwide
scale, it is much harder to obtain information on a range of issues.
Importers find it difficult to ascertain a supplier's quality and
delivery reliability while exporters have problems with transport
and potential loss of the goods.
Some of these factors include:
- creditworthiness
of the overseas buyer
- access
to credit information on the buyer
- information
on a supplier's quality and delivery reliability
- bank
and country risk
- Tyranny
of distance
- Appreciation
of any social, political, military, regulatory,
currency, tariffs, etc, arising that might impact the free flow
of goods and services and the payment for them.
Businesses dealing with international trade need to establish a company
policy to manage that risk with appropriate standards, procedures
and guidelines, according to John Murphy, head of trade product management,
Westpac.
There
are a number of payment instruments that can be used to facilitate
payment/receipt for goods and services, says Murphy. The choice of
payment instrument, such as open account or prepayment, should match
the perceived risk. For example, an exporter shipping to a longstanding
customer with a perfect payment record may negotiate to trade on open
account terms while shipment to a first time buyer may be undertaken
using a irrevocable Documentary Credit.
In the
normal course, documentary collections will be forwarded through banks,
and title documents (Bills of Lading) will only be released to the
buyer in accordance with collection instruments.
If these
documents are to be released against payment using sight drafts (referred
to as D/P documents against payment), then title to the goods is only
given on receipt of funds and this is quite secure.
Where
documents are released against acceptance of a term draft (D/A documents
against acceptance), there is no bank guarantee of payment and the
seller relies on the buyer's ability to pay on the due date. Should
the draft (or Bill of Exchange) not be paid on the due date, the seller
will need to go through the time and expense of a legal process in
the buyer's country to try to recover the funds owed.
In both
the D/P and D/A cases, the seller has shipped the goods without any
guarantee of payment or acceptance. Documentary Credits give both
the buyer and seller protection by reinforcing commercial contract
arrangements.
Assess
the bank and country risk.
If using
documentary credits, the strength of the buyer's payment ability is
supplanted by the strength of the issuing bank (which substitutes
its creditworthiness for that of the buyer) or subsequently the strength
of a confirming bank (which substitutes its creditworthiness for that
of the issuing bank. For example, Westpac may confirm a documentary
credit issued by Allied Bank, Pakistan. The payment is "guaranteed"
by Westpac removing the risk that the Allied Bank does not meet its
obligations). An assessment of the quality and strength of the issuing
bank needs to be made.
Banks
can generally suggest (but rarely recommend) reputable credit issuing
banks in particular countries. That doesn't imply that a bank would
confirm such issuing bank's credits, nor negotiate documents against
such credits on a without recourse basis.
A buyer
or bank may have impeccable credentials and a strong balance sheet
but their country's balance of payments, position, currency reserves
and overall economic health may be so poor that access to currency
to meet obligations could be severely restricted. An assessment of
the country risk needs to be made.
A good
guide to a country's ability to pay can be made through high pricing
for credit confirmations, or lack of ability to confirm at all.
Currency risk
The
volatility and uncertainty of the Australian dollar against other
currencies can have a major impact on the profit and loss of many
Australian companies. Managing foreign exchange risk has become an
integral part of the daily activities of exporters, importers, borrowers
and investors.
An exchange
rate is simply the price at which one currency is exchanged for another
currency for settlement on a specified date. When dealing with large
volumes of money over periods of weeks or months, businesses place
themselves at high risk should the exchange rate go in the 'wrong'
direction.
According to Peter Bokeyr, senior financial markets manager
at Westpac, prudent management of this foreign exchange risk involves:
- identifying
the size and nature of the risk
- determining
your attitude toward the risk
- formulating
a hedging strategy
- evaluating
the performance of the strategy.
Your chosen strategy will depend on four key questions:
1.
What is your appetite for risk (risk profile)?
2.
Are you averse to paying any option premium/costs?
3.
What flexibility do you require?
4.
What is your view on the AUD exposure?
His
team of dealers try to build a working relationship with their clients,
where they might try to visit them personally in their place of business
three or four times a year. Clients can visit the dealing room and
see where all the action occurs when currencies fluctuate. They can
also discuss their specific needs regularly by telephone.
Understanding the Jargon
Currency Option
Provides
protection from adverse exchange rate moves with the flexibility to
take advantage of favourable movements if they occur. The option buyer
has the right without obligation to purchase or sell a nominated amount
of foreign currency on or before an agreed date at a contract rate
(known as the strike rate) in return for a premium payable to the
bank upfront.
An AUD
Call option is a contract for the right to buy Australian Dollars.
An AUD Put option is a contract for the right to sell Australian Dollars.
D/A (Documents against acceptance)
Goods
are manufactured on order without guarantee of payment. The title
to the goods is withheld by the bank until the buyer accepts the term
draft. Goods are shipped in expectation of acceptance of documents
and draft. The exposure to the buyer is 100% until the draft matures
and is paid.
D/P (Documents against payment)
Goods
are manufactured on order without guarantee of payment. The title
to the goods is withheld by the bank until the buyer pays at sight.
The goods are shipped in expectation of the documents and payment.
Export Documentary Credit:
The
buyer's (importer) bank gives an undertaking to pay the exporter.
Provided the exporter meets the terms and conditions of the credit,
your local bank may pay you upfront after
Export Documentary Collection:
The
exporter's documents are forwarded by the bank to a bank in the buyer's
country. They are only released to the buyer when they meet the exporter's
payment terms and conditions.
Forward Exchange Contract:
This
is a contract with a bank that allows both importers and exporters
to protect themselves against adverse movements in a currency. It
is an agreed rate adjusted by the interest rate differential between
the two currencies involved.
Foreign Currency Account:
Exporters
can maintain an onshore account in any marketable currency that can
be accessed for payment of goods to avoid exchange rate risk
International Factoring:
Exporters
can sell their invoices at a discounted value to their bank. The bank
then pays the exporter and undertakes to collect the payment from
the buyer for a fee.
Open account
Goods
are manufactured on order without guarantee of payment on delivery.
The title of the goods is passed to the buyer on trust against expected
payment in terms of agreement/commercial contract. Exposure to buyer
and foreign country is 100%.
The
Network To Help You Trade
The
Australasian Trade Network (ATN) which is a business network of industry
leaders which supports, educates and facilitates international trade
for Australian small businesses. Network partners include Qantas,
Telstra, Westpac, TNT Express, P&O Nedlloyd, Minter Ellison, Mitsui
& Co and the Australian Institute of Export, in co-operation with
Austrade, EFIC, Australian Customs Service, NSW Chamber of Commerce
and University of Technology, Sydney.
The
ATN is a one-stop-shop for top quality trade information and services.
Potential exporters can talk to specialists about their individual
needs. No membership fees are charged, users pay only for commercial
services used. Contact: 1300 364 844
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