Why do you need finance?
OK, your export plan is in place and you are ready to start. Perhaps the first step on the road to export is to give consideration to how to finance your exports. We said right at the beginning that exporting is a complicated and expensive process. It requires time, considerable planning, extensive research (much of it overseas), highly skilled staff, product adaptations, international travel, expensive international promotions, management involvement, etc. At the same time, your prices (and margins) are often keener in export markets and your payment terms may mean that you only get paid in 30, 60, 90 or 120 days (even longer where capital projects are involved). Together this translates into high expenses and slow income. Cash-flow is often a major problem facing the smaller exporter.
When do you need financing?
You will need financing almost from the moment you decide to get into exports. These financing requirements can be divided into four parts (the first three are the pre-contract phases, while the last stage is the post-contract phase):
- Financing to get you through steps 1 to 6 of our export process- At this early stage, very little financing is required. You may need to do some research on the Internet and spend some time with your planning and SWOT analysis. Your expenses are more related with the time you need to put into the planning and preparation process than with actual outlays on travel, research, promotion, etc. You should be able to cover these financing outlays yourself.
- Financing to help you with your export marketing research efforts (step 7)- This is the stage where you take a lot of time and effort to select your target countries and to better understand the target market you wish to enter. Your expenses will probably be related to a failry extensive desk-research effort (which may involve buy various trade magazines, directories, newspapers and other sources of information), as well as at least one visit to the target market where you may spend a week or more researching the market from within, speaking to industry associations, chambers, potential buyers and, more than likely, visiting a trade fair or two. If you plan your research carefully, you may be able to achieve all of your in-market research goals in one visit. A second visit may, however, be desirable, while larger companies may want to acquire the services of professional research agencies which would push up the price considerably. It is very difficult to estimate accurately what a trip like this would cost, but a realistic estimate would be between R25 000 and R50 000 for ten days to two weeks of in-market research. At this poitn you may already need to consider finding financing for this research (the DTI provides assistance to smaller exporters for their in-market research efforts).
- Financing to help you implement your export plan (step 8)- Based on the research you have done, you will prepare an export plan. Thereafter, your next step is to implement this plan – this is where you are now! This is another expensive step in the export process. This will involve promoting your products over the Internet, via direct mail, through advertisements in trade magazines, taking part in one or more trade fairs and visitng potential buyers. It is highly unlikely that you will be able to achieve your objectives without visiting the market in question. Indeed, it is suggested that you will need to undertake at least two or three visits to the market before your marketing has any effect (if at all). The cost of these trips could easily amount to R25 000 per trip, with three trips costing you R75 000 or more. Add to this the advertising you have done, then it is not unrealistic to consider spending R100 000 to R120 000 during this phase of the export process.
- Financing to help you achieve your contractual obligations (steps 9-18)- Assuming that your marketing effort has paid off and you have secured a contract. Your next step is to produce the goods, package and label them, ship them off to the customer, provide the agreed-upon service and wiat for payment. This is perhaps the costliest part of the whole process and is very difficult to estimate. It may cost you hundreds of thousands to millions of rands. This will be the stage where your financing needs are the most acute. It is also likely that this will only take place about two years or so from starting down the road of exports and you may find that you have already spent R100 000 to R250 000 (and more) to secure the order.
What are your financing options?
- Banks – There are a number of sources of financing. The most common source remains the banking institutions. In this section, we will deal with how you should approach your bank for assistance with financing. Click here to learn more.
- The Department of Trade and Industry – At the same time, the Department of Trade and Industry also provides various incentives to assist exporters and small businesses with their export and business operations – we examine these as well. Click here to learn more.
- Payment methods as a means of financing exports – In exporting there are also different payment methods or options that you can follow and each payment option has different implications for your cash-flow – we examine these payment options as a source of financing. Click here to learn more.
- Payment terms as a means of financing exports – Payment terms has to do with the contractual requirments that you negotiate with the foreign buyer and has to do with the method of payment (discussed above), when you will be paid (incorproating any credit terms you may extend to the buyer) and for what you will be paid.Click here to learn more.
- Pricing as a financing mechanism – The price that you charge for a product also has an impact on the money you earn and the financing you require. We therefore examine pricing as a means of financing.Click here to learn more.
- Cashing in on export receivables – If the foreign buyer owes you money, you can turn these ‘receivable’ into cash. Click here to learn more.
- Foreign currency loan – Although not a common source of financing for the avergae exporter in South Africa, a foreign currency loan is worth considering for large-scale capital products. Click here to learn more.
- Alternative sources of financing – Finally, there are several alternative sources of financing that you might want to consider, including getting finance from the Industrial Development Corporation, obtaining overseas financing, getting help from the buyer, your suppliers and even from your intermediaries. Click here to learn more.
- Export risk – The question of export risk also affects your financing requirements. After all, the lower your risk, the more likely the banks will be to finance your operations. We therefore take a look at export risk as a means of lowering your finance risk. Export risk is a multi-faceted topic which discuss in a separate section. Click here to learn more about export risk. Related to the issue of export risk, is the question of exchange rate risk and we also look at how you should deal with exchange rates in your export dealings.