An export overdraft allows businesses to expedite the receipt of cash from their sales invoices prior to their maturity by advancing their value. It has been a tried and proven method in ensuring that liquidity, cash flows and working capital are upheld all without the presence of debts, collateral and interests allowing entities to flourish in their global trade and ventures.
But like any other method of financing, the resources received from an export overdraft arrangement must be used in as efficient and effective as possible in order to garner maximum benefits. But budgets are easier said than done. They’re particularly tricky so much so that individuals and organizations alike find themselves trapped in the usual blunders that they say they won’t ever be in. What are these familiar culprits? Here take a look.
The Blunder: Under-qualified Staff
We can only expect quality outputs when we put in quality inputs. The same applies to people. Regardless if you’re hiring in-house employees or outsourcing from a firm, it is important that you only pick the right people to handle the finances as well as the planning phase of your budgets and financial plans. Brainstorming here is important and you want the right heads for it. Only seek advice from professionals. You will need all the help you can get to create an effective and efficient budget to best use your export overdraft resources.
The Blunder: Slack and Negligence
If you create a budget that is so easy to attain and is not strictly implemented then you lose every bit of sense and purpose to it. It creates slack and an opportunity for the organization to take advantage of the opportunity for wastage without consequences.
The Blunder: Unrealistic Plans
But it’s also not good to set the bar too high so much so that it becomes impossible to attain. That’ll only lead to frustration. The budget in the use of one’s export overdraft has to be done in a challenging but realistic manner. Budgets have to be tough enough to encourage improvement and avoid slack but also realistic in all sense. There has to be a sweet balance in between.
The Blunder: Failure to Account for Needs
An export overdraft arrangement helps businesses reinvest in themselves. The resources taken from it are oftentimes used to fund for the additional production brought about by the added demand from the new markets. These needs have to be specifically acknowledged for better accounting and planning.
Entrepreneurs all have a common dream: growth and expansion. In every industry, businesses strive not only for profitability but also for longevity and to do that growing one’s enterprise becomes part of the long term plan. One way to do so is by taking things to the bigger stage or in other words the world market. But that’s not an easy feat considering that exportation not only comes with a lot of work but also added costs. In comes export funding.
There are many ways by which business entities can finance their export projects and ventures and below are only some of the options available.
BANK LOAN – Perhaps one of the more common options, it refers to a long term borrowing, often of a large sum, from a banking institution. The amount loaned referred to as the principal shall be repaid in equal installments with interest for a specific period of time. Despite being a very popular option, not all exporting companies make use of it due to the weight of the liability. Plus, those with poor credit scores or inadequate assets (e.g. startups, small to medium scale enterprises) may find it hard to get an application approved due to the strict terms and conditions governed by it.
INTERIM FINANCING – This short term funding is very useful in terms of immediate needs. As its name suggests, it allows businesses to derive the needed cash to fund for their emergency or short term liquidity requirements while their main source of resources are not yet ready or are still being arranged (e.g. mortgage, proceeds from a sale, etc.).
INVOICE FINANCING – This asset based financing is different from the first two options in the sense that it is not a liability. In other words, there are no debts or loans involved. Here, cash is derived by advancing the value of a sales invoice (receivable) or a bulk thereof before their maturity date thus prior to payment and collections. This export funding option can further be split into two types as follows.
Discounting makes use of the invoice/s as security or collateral against the advance. Collection shall remain as the entity’s responsibility and once they have been completed as scheduled and as mandated by the stipulated maturity date, it shall then repay the provider for the amount advanced plus fees.
Factoring on the other hand involves the sale against the invoice’s collection. The advance is received similarly but shall only constitute to a majority percentage with the remainder less fees only to be forwarded upon payment completion. The burden of collection shall now be borne by the provider.
At the end of the day, the type of export funding chosen should complement the business entity’s needs.
Foreign trade for most business entities is both a dream and a challenge. The possibilities and opportunities brought about by exportation are not only promising but also an avenue to expand operations and take advantage of the international market. Unfortunately, it isn’t an easy feat to accomplish not with all the exhaustive documentations required and the presence of various financial risks. This is why financing methods such as the export overdraft have been born. But what is it?
An export overdraft is part of business finance and a very potent tool in foreign trade. It is designed to aid startups, small to medium scale enterprises, established businesses as well as entities in recovery for their international and cross currency trading transactions without the much dreaded complications of financial risks (e.g. interest rate risk and currency rate risk) and meticulously detailed documentation requirements. Moreover, it can likewise sustain the cash flow necessities of a growing company who has yet to start exporting but finds pressure in terms of funding due to delayed cash actualization brought about by either strict vendor terms or deferred customer payments as in the case of credit sales.
What makes this financing method very appealing is the fact that it is competitively priced at an affordable rate without hidden costs and the restriction of a long term contract, making it feasible even to startups and small enterprises. Furthermore, it is very simple to use and understand as it an export overdraft facility works just like a factoring facility.
There are five main advantages to this method that many exporters and aspirants chase after. They are the following:
Currency – Companies no longer have to worry about having to monitor the exchange rates and facilitate the currency conversion for all transactions.
Payment – Businesses are able to receive the payment of export orders almost instantaneously thereby strengthening the working capital, cash flow levels and liquidity.
Expertise – Companies get to tap on the facility’s expertise in international trade, foreign markets and collection procedures.
Language – Mastering several languages from customer countries will no longer be a necessity especially when it comes to collection and invoicing.
Risks – Certain risks such as those brought about by currency exchange rates and interests are minimized if not completely avoided allowing for lesser to zero losses.
Of course, a vital ingredient to export overdraft success is finding the right provider or facility such as workingcapitalpartners.com. In other words, chase for quality to receive it.
Export finance has become one of the most powerful tools utilized by businesses that wish to expand their operations internationally however not everyone knows how to use it as best as they could.
It does not come as a secret that despite of the growth and promising sales of foreign trade, it comes with quite an amount of effort to pull out. Selling a product overseas require shipping and transfers. There are extra duties and taxes to be considered and not to mention freight expenses. Delivery takes long and so does payment. More time and energy will be required in assessing customers and their creditworthiness too. This is why export finance has been considered a hero in the equation but sadly many companies commit mistakes in its use. To avoid committing the said crimes and benefit more fully, here is a list of the said blunders to warn you ahead.
Mistake: Lack of Understanding
Fix: Despite of export finance’s usefulness, not all businesses know about it. Some may have heard of it but still fail to understand it completely. It is necessary to fully comprehend and grasp its use, its procedures, its pros and its cons to use it as best as possible. Research is key here and it won’t hurt to ask a professional to explain it to you either.
Mistake: Absence of Planning
Fix: Using it to your advantage will necessitate adequate planning. Companies need to incorporate it well into current operations and business processes. In order to achieve this, a plan has to be made and executed.
Mistake: Bad Providers
Fix: Not all export financers are great. Just like anything else, there are good and bad sides to the coin. You have to go with the former. Look for the best providers that’ll deliver the quality that you need. Again, research here is necessary. Ask around too and look for recommendations from friends, family and business colleagues. Don’t forget to refer to customer feedback and reviews too. You’re bound to find them with the help of the internet.
Mistake: Misleading Terms
Fix: Before you sign into the agreement of the export finance, make sure that you read through carefully and understand before you sign and concur to its terms and conditions. Not all providers are the same so don’t expect that one contract is the same as the other. Peruse through them carefully. Ask for clarification when needed and don’t hesitate to inquire about having certain clauses changed when required.