IT'S not just the rules that have changed - it's the whole game. Ten years ago, the owner of an SME could look down the road at the competition to see how they were faring. Today, the competition comes from all corners of the globe. No longer can an SME stay focused on the domestic market alone; success will not come to you - you must seek it overseas.
Just as every country has its distinct culture, so too financial practices differ markedly from country to country. So what is an SME to do? The answer is to tap into the network of your banking partner. After all, every business uses banking services, so why not get the most out of the relationship?
As small and medium-sized enterprises expand into new markets they are faced with inherent risks which can be broadly classified as follows:
>> New market risks - challenges with dealing with or operating in a new macroeconomic environment;
>> Country risks - the credit challenges arising from political, economic and regulatory factors; and
>> Counter-party risks - the credit risks associated with payment from buyers and receipt of agreed goods and services from suppliers.
To manage these risks, it is important to consider the terms of trade, method of payment and receipt of funds in order to optimise the working capital cycle.
The three most common ways to settle international trade payments are via:
>> Documentary letters of credit (DCs) - also known as letters of credit where the issuing bank gives an undertaking to make payment for goods or services provided by the supplier within a prescribed time limit and against stipulated documents;
>> Documentary collections - encompassing documents against payment (D/P) and documents against acceptance (D/A); and
>> Open account transactions.
Each of these options presents a different risk and cost profile, with implications for the underlying trade transaction. For example, when dealing with buyers in developing countries, it is a common practice for exporters to request for DCs. However, DCs issued by an unknown bank or coming from higher-risk countries can present uncertainties, so when you receive a DC as a payment instrument, it is essential to check that the issuing bank is financially stable, particularly if shipments are going to less familiar markets.
This is where your bank can step in to help protect you. You should insist that your buyer's DC carries a confirmation request to your bank. Once your bank confirms the DC, you are doubly protected with the commitment from both the issuing bank and the confirming bank to make payment.
Business operations can sometimes be held back while waiting for customers to make payments. To minimise the impact of receivables to your business, you can get funding immediately by having your bank purchase your document collections. A cash advance is provided against an expected payment from your buyer under documents against acceptance (DA) or documents against payment (DP) collections.
When the bill is paid, the bank keeps the proceeds to pay off the loan. This is a smart way to improve your cash flow, allowing you to re-invest funds in your business before receiving payment from your sales.
Cash management
The first issue SMEs face when expanding overseas is the need to get their cash management right. Bad cash flow management is one of the top reasons SMEs fail in their overseas adventure. The right bank can tailor solutions to your business needs, taking into account your long-term goals while giving you flexibility to adapt to changing circumstances.
Of course, there is more to it than just organising collections and payments efficiently. By choosing a bank with a quality global network, it can identify cross-border differences and exploit them in your favour, giving you an advantage from your international transactions.
Determining your business payment strategy is both an art and a science: an art in negotiating with your suppliers for the best payment terms and a science in choosing the best method to pay. There are various choices available to you including autopay, telegraphic transfers, demand drafts and corporate credit cards.
You should outsource your back-end resources/functions to automated services. For example, the bank can set up auto-payment systems through the interbank Giro system so your employee payroll, vendor payments and account receivables are all streamlined. A similar automated solution can be used for cheque payments so your bank can issue Singapore dollar and US dollar cashier's orders and cheques on your behalf, enabling you to concentrate on building your business.
Internet banking gives SME owners enormous power to keep track of their finances. You can now manage your accounts and transactions anytime and anywhere. The comp lexities of cross-border transactions are simplified by online banking.
Treasury services
Expertise in foreign exchange transactions can protect your business from adverse movements in foreign exchange rates as well as take advantage of spot exchange rates in your favour. That's why you should take advantage of your bank's treasury services. If you require greater certainty in your currency transactions, then you should also seek your bank's advice on the use of treasury services to enhance your currency transactions.
Finance
There are times when extra funding is needed to take a business to the next level. According to the SME Development Survey by DP Information Group, 37 per cent of SMEs face difficulties in meeting a bank's requirements of pledging collaterals. In the same survey, 51 per cent of SMEs indicated they would like to see a shift towards non-collateral based financing.
However new and innovative solutions are now available. For example, HSBC recently launched Receivables Xpress, the first fast-track receivables financing package in Singapore. With this facility, SMEs requiring working capital, particularly those that are unable to pledge collaterals but with good receivables, can gain access to financing by converting their receivables into cash more quickly without the need to pledge any tangible collaterals. More and more companies are now adopting it as an effective and viable alternative to traditional financing options.
HSBC's Receivables Xpress has the added advantages of allowing SMEs to outsource their sales ledger management and collection to the bank and to mitigate buyers' credit default risks through a credit protection option. By doing so, SMEs can redirect their resources towards growing sales and achieving operational efficiencies, instead of having to worry about the potential buyers' default risks, chasing overdue debt and reconciling accounts receivables.
So the question every SME venturing abroad needs to ask is: Is it getting the service and protection it needs from its banking relationship? You should look to your bank as your business partner in your overseas venture. Choosing an international bank with an extensive global network and making full use of its service can be the difference between success and failure.
The writer is the Head of Commercial Banking for HSBC
