Financing and getting paid

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Since export projects are generally riskier in nature, they may demand larger investments and entail greater operating costs than domestic projects, consideration of whether the company is able to bear export costs without jeopardizing domestic operations is important.

Calculation of the value of required initial capital for export is generally based on three estimates:

  • Pre-production costs: Cost estimates of marketing, personnel and training prior to production, product modification, raw materials and equipment for trial runs in the pre-production period, pre-investment studies, engineering and design, etc.
  • Fixed capital investment costs: Cost estimates of plant and equipment, jigs and fixtures, etc.
  • Working capital: The capital required to finance the current assets of a business, i.e. to keep the enterprise running.

Estimates include the amount of cash required for day-to-day payments of the business, contingencies to meet unforeseen expenses and for reserves to take advantage of opportunities that may arise e.g. raw materials offered at a bargain, receivables, payables, taxes, etc.

Different types of financing

Exporters may need short-term financing in order to produce an export order. Cash flow is an essential part of any export transaction and a steady flow is important to keep the export process moving. Cash flow problems may be avoided if the exporter has access to short-term finance. When there is a guarantee that the exporter will be paid, intermediaries step in on the strength of that security to provide funds for the exporter. This enables the exporter to shorten the period between investment and receipt of funds from the importer.

The most common forms of trade finance are:

  • documentary credit finance;
  • discounting of bills of exchange;
  • pre-shipment and post-shipment finance;
  • financing for market development;
  • trade financing, including short-term trade finance, factoring and forfaiting; and
  • working capital.

The following factors influence a company’s choice of financing:

  • Period of time required for financing (financing for longer periods of time is more expensive).
  • Need for financing in order to sign a deal (terms often determine the competitiveness of your deal).
  • Cost of various methods of financing, such as interest rates and fees and how they affect price and profits.
  • Risks involved in financing the deal, such as creditworthiness of the importer, insurances required, supplier cover and method of payment. High risk means high cost and this is an influencing factor.
  • Need to expand plants, production facilities and equipment.

Sources for financial assistance

Commercial banks: Trade finance departments provide loans for working capital, revolving credit lines, and insurance products. Look at the various financing options offered by the banks, their charges for confirming a Letter of Credit; processing drafts and collecting payment; whether they have foreign branches or correspondent banks; and what other services, such as trade leads the bank can provide.

Buyers and suppliers: Foreign buyers may make down payments that reduce the need for financing from other sources or suppliers. Suppliers may be willing to offer terms to you if they feel confident that they will receive payment.

Ministry of Trade: Assistance in the form of advice, export risk insurance, incentive schemes, etc.

Credit guarantee organizations: Assistance in the form of advice, risk insurance and research.

Short-term trade finance

One of the most suitable sources of finance is an overdraft facility from your bank. However, with high interest rates this is often an expensive form of finance. The export sale is made using either a Documentary Credit or bank collection as the payment of choice. The exporter can obtain cash from the bank when the bank draft – also called a bill of exchange – is discounted by the bank. The bank may advance as much as 80 to 90% of the value of the transaction to the exporter against the bill of exchange or other shipping documents. Such payments may be “without recourse” or “with recourse”.

  • Payment with recourse means that the bank may charge the exporter if the bill of exchange goes unpaid by the importer.
  • Payment without recourse means that the exporter retains the finance sum even if the importer does not pay.

With confirmed Documentary Credits, however, there is not much risk of the bank failing to receive payment, so financing under this option is generally “without recourse”.

Meeting creditworthiness criteria

Financial institutions do not use standard criteria for short-term lending; however, most of them will look for evidence of a good cash flow, adequate shareholder's funds, adequate security (i.e. not too many ties with other loans), experience in trading, good reputation and standing, and a specific purpose for the loan.

For longer term loans, you may need to present the following information:

  1. Credentials: letters of introduction, your profile, brochure on your business, bank and other references, and proof of your company ownership and its registration.
  2. Financial situation: balance sheet, profit and loss account, cash flow statement, and budget for the coming year.
  3. Commercial information: details of orders booked, business plan, and feasibility study report.

Most banks in Kenya have a Foreign Trade Services section that you can discuss with your export financing needs. You can also contact the African Trade Insurance Agency (ATI) whose credit insurance policy can be used as security for short-term funding or working capital needs. ATI also provides insurance covers against non-payments by clients due to political risks.

For information about ATI services, contact the BrandKE (BRANDKE), the liaison office of ATI in Kenya. BRANDKE is located in Anniversary Towers, 1st & 16th Floors, University Way, P.O. Box 40247, Nairobi 00100, Tel: 020 2228534-8, Fax: 020 218013, Email: This email address is being protected from spambots. You need JavaScript enabled to view it., Website: www.BrandKEkenya.org

The Eastern and Southern African Trade and Development Bank (PTA Bank) is a regional institution that promotes trade and development among the Eastern, Central and Southern African member countries of COMESA. It provides a range of transaction-based on short-term credit facilities and payment instruments to exporters.

For export financing when trading with Eastern, Central and Southern African member countries of the Preferential Trade Area, contact the PTA Bank, NSSF Building, 22nd Floor, Bishops Road, P.O. Box 48596 GPO Nairobi, Tel: 020 2712250, Fax: 020 2711510,
Email: This email address is being protected from spambots. You need JavaScript enabled to view it.

Getting paid

How you are paid for your export consignments will vary depending on the market, your relationship with your customer and your type of exporting.

Payment in advance

Payment in advance is desirable, but is not preferred by importers. It generally happens where there is a high level of perceived payment risk and perishable or specialised one-off products are being exported.

On consignment

On consignment is generally limited to affiliated companies or relationships with a firm mutual trust. The exporter ships the goods directly to the buyer, arranging payment to be made when the buyer sells the goods. In effect, the seller extends credit to the buyer, an attractive proposition for the buyer but one that can strain the seller’s financial resources. This is a high-risk mechanism for the exporter, as control of the goods is lost on consignment and it is hard to enforce payment if the importer defaults.

Sight drafts

Exporters send the bill of exchange, with relevant shipping documents, through their bank to the buyer’s bank. Buyers pay the bill of exchange on presentation by their bank (i.e. “on sight”), which allows them to receive the necessary documentation and uplift the goods on arrival. There is an element of risk in this method as, if the bill is not paid on presentation, goods can lie at the overseas port incurring warehousing and insurance costs.

Term drafts

Exporters wanting to extend credit can arrange for documents to be released to the buyer on acceptance of the draft or bill - that is, the buyer signs it as a promise to pay by the nominated time (30, 60, 90 days, etc.). Exporters can sell or discount the draft or bill to their bank.

Letter of credit

Export letters of credit for payment are commonly used. They give a high degree of security, especially when the exporter and the customer have not yet built up a strong relationship. The overseas buyer arranges with their bank for a letter of credit in favour of the supplier. The buyer gives the bank details of the transaction and the goods, all required documents, the amount to be paid, and the credit’s expiry date.

The bank then notifies the exporter’s bank in Kenya of the terms and conditions. These details are passed on to the exporter who should examine them carefully to check whether they will be able to comply. Any doubts about the terms and conditions should be negotiated with the buyer at this stage, either directly or through the banks. These changes are then recorded with an official letter of credit amendment.

The exporter can have additional protection by asking their bank to confirm the credit for a small fee. This joins the local bank in the issuing bank’s undertaking to honour drafts drawn in terms of the letter of credit. However, if the issuing bank is well known and has a secure reputation, confirmation has little practical value.

Letters of credit are usually irrevocable, which means they cannot be amended or cancelled without the agreement of all parties.

After shipment, the exporter presents the draft and documents to their bank. The bank checks the terms and conditions have been complied with and then negotiates the draft and obtains reimbursement from the correspondent bank.

Discounting of export bills

Discounting is a useful service available from banks and widely used by exporters as a way of obtaining payment for goods exported. So that exporters are not disadvantaged by having to wait for payment, they can sell or “discount” the draft or bill to their bank, which collects the payment when it falls due. The exporter is still responsible for non-payment.

Factoring

Factoring involves arranging payment for transactions by a third party ahead of when payment might otherwise become due, or where there is some potential risk or difficulty in getting payment. It is widely used as a way of financing sales. It mirrors discounting but is most often offered through specialists working independently or sometimes in association with banks. Factoring can be useful as an alternative way of improving cash flow or meeting order requirements.

Credit card payment

Credit card payments are only possible where the exporter has a merchant agreement with an international credit card company. Many purchases relating to mail order or other forms of distance selling depend on customers providing a valid credit card number and signing or otherwise confirming their wish to purchase. In most cases this will be with a company operating out of Kenya and the transaction will be settled in US dollars or Euros.

Opening a merchant account with a credit card company in a non-Kenyan currency depends on the exporter having an account with the participating bank in the country of settlement.

A word of warning: Purchasing at a distance by providing credit card details on coupons, by fax and over the telephone or by email involves risk for the cardholder. People may be able to intercept the transaction, acquire details of the card number and use it to acquire goods or services or to defraud. A number of schemes that protect this payment method are being introduced but security is still a major issue. However, this form of electronic commerce is generally seen as an important part of the future of trading.

A typical financing structure

Here is an example of a financing structure for export transaction on export of garments from Kenya to USA:

An exporter in Kenya receives an order for garments from a USA distributor with whom he has not dealt with before. Payment will be in US Dollars by letter of credit 60 days after loading CIF to USA onto a vessel. The exporter has about half the required amount of cash needed to buy the cloth and accessories, some of which have to be imported from another country.

He obtains an advance in Kenya shillings from his bank through an overdraft facility on his current account. He then signs the contract with the buyer in USA who instructs his bank to issue the letter of credit.

With the money advanced by his bank, the exporter pays for the raw materials, insurance and freight.

Prior to shipment, his bank advises him that the documentary credit has been issued and that he will be credited the full amount 60 days after loading on board the vessel. He is now safe in the knowledge that he will be paid. But first, he must produce the documents that evidence shipment, origin, quality and quantity; the parking list; the insurance certificate; and the invoice. His bank sends these documents to the buyer’s bank which then will transfer the amount to the exporter’s bank when the credit term of 60 days matures.

The exporter then decides that he needs more cash to finance another transaction with another customer. The bank offers to discount the receivable that the documentary credit represents. The exporter calculates that it is to his advantage to accept the bank’s offer. From the proceeds of the discounting, he reimburses the bank the outstanding amount due and uses the balance of cash to complete his next transaction.

About BrandKE

The Kenya Export Promotion and Branding Agency (BRANDKE) is a new State Corporation established under the State Corporations Act Cap 446 through Legal Notice No.110 of August 9th, 2019
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Tel. +254 20 222 85 34-8; 

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