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UK Export Finance: clearing your path to trade
Despite a recent relative slowdown in its record-breaking economic growth, China remains a key market for UK exporters. But alongside the opportunities, it is important for firms to manage the risks relating to payment and finance. Working to complement the private sector, UK Export Finance (UKEF) can be a useful partner in this field. Here is our guide to how we can help clear your path to trade.
China’s astonishing GDP growth of about 10% a year for 30 years from 1978 firmly established it as one of the most significant markets for UK exports. Although this growth rate has now eased to about 7%, China’s rising middle class and continued development of free trade zones mean its trade outlook remains strong.
According to the latest China trade and export guide from UK Trade & Investment, top UK exports to the country include cars, pharmaceuticals, power generating machinery, metal ores and industrial machinery. Other sectors identified as strong opportunities are as diverse as financial services, fashion, and TV programme licensing.
However, trade with China – with its high levels of state business control and often unpredictable legal system – does carry a degree of challenge and risk. In 2014 the World Bank ranked China as low as 96th in the world for “ease of doing business”.
In particular, exporting requires careful financial management, from securing working capital on competitive terms, to considering export insurance, or fulfilling requirements to obtain performance bonds.
Most exports from the UK to China are sold on short credit terms of typically up to six months. However sales of capital goods or construction projects are usually arranged on longer terms, with buyers sometimes looking for payment terms of 10 years or more.
Specific issues to manage can include:
- Having to wait for payment, restricting cashflow
- Being exposed to the risk that the buyer cannot (or will not) pay for the exports – for example, if the buyer goes bankrupt
- Being asked by the buyer to provide a performance bond in return for an advance payment. The bond would need to be provided by the exporter’s bank which is likely to ask for cash security, another potential cashflow restriction
Help is at hand
UK exporters can talk to their bank or approach other specialist financial organisations to try to secure working capital, and to insurers or brokers to source insurance against the risk of not being paid. Where they are unable to find all the support they need from these sources, UK Export Finance (UKEF) may be able to help.
In recent years we have supported UK exports to China in the aerospace, medical, scientific equipment, industrial processing, oil and gas and creative and media sectors.
We can consider support for all exporters, large and small, across a wide range of sectors. UKEF currently has the capacity to support £1 billion of new export business to China.
A wide range of support
Types of assistance UKEF is able to offer, in the right circumstances, include:
Bond support –Under our Bond Support Scheme we can offer guarantees to banks issuing performance or other contract bonds in relation to UK exports to China. This often means the bank can issue the bond and also expand working capital facilities for exporters, as the extra credit is guaranteed by UKEF.
As an example, in 2013 UKEF helped specialist oil and gas handling and transport specialist Techflow Marine of Northumberland obtain the performance bond it needed to secure its biggest-ever Chinese contract. Without a UKEF guarantee for its bank, the need to set aside its own cash cover against this bond would have restricted cashflow and held back the firm’s growth. UKEF guaranteed a proportion of the bond which helped release cash to fund its work on the $5.8 million contract – and seek other business as well.
“We had a turnover of £4.6 million, so this Chinese contract was significant for us”, said Techflow Marine Director Graham Clark. “We didn’t want to turn it down, which has happened with large contracts in the past. The help from UKEF meant that we were able to fund the contract, and use the freed-up funds to look for other international contracts.”
Working capital support – UKEF’s Export Working Capital Schemecan enhance your bank’s ability to lend you working capital to support export-related activity. Under the scheme, we provide partial (typically 80%) guarantees to lenders to cover the credit risks associated with export working capital facilities. The scheme is particularly useful in circumstances where a UK exporter wins an overseas contract that is larger than it is used to handling, or manages to win a number of contracts at the same time, but may struggle to finance them all at once
Both the bond support and export working capital products are accessed through participating banks. If your bank representative is unfamiliar with the products, they can be referred to our ‘Banking toolkit’, which can accessed at www.gov.uk/uk-export-finance
Credit insurance – our Export Insurance Policy (EXIP) can insure your firm against the commercial and political risks of not being paid under an export contract, where cover is unavailable from the private sector. There is no maximum or minimum contract value for consideration, and the policy can cover up to 95% of contract value. UKEF can also provide insurance protection to exporters against the calling of contract bonds unfairly or due to political events.
If you think we might be able to fill a gap, ask your insurance broker to work through our ‘Broker toolkit’, which can accessed at www.gov.uk/uk-export-finance
Buyer loans and loan guarantees – We can provide medium and long-term loan guarantees to banks making loans to overseas buyers of UK goods and services. In some circumstances, we may be able to lend directly to an overseas buyer to finance the purchase of capital goods and/or services from UK businesses.
Letter of credit guarantees – Letters of Credit (LCs) are a form of payment guarantee made by the buyer’s bank to the exporter, subject to certain conditions such as delivery on time and to the specified standards. Exporters will need to consider carefully in each case whether it is worth requesting one, as there is a cost attached. In some circumstances, UKEF can provide exporters’ banks with its own guarantee of payment based on LCs from the buyer’s bank, so again we are a good source of information and support.
Export Finance Advisers – your free resource
UKEF’s regional network of Export Finance Advisers (EFAs) stand ready to offer free trade finance information to UK companies who are exporting or considering exporting to China.
The EFAs act as local points of contact to introduce exporters and prospective exporters to finance providers, credit insurers, insurance brokers, trade support bodies and sources of government support. They can also help explain UK Export Finance’s own product range, complementing what is available in the private market.
For more information and to book a meeting with an EFA, visit: www.gov.uk/making-exports-happen
Note: more detailed UKEF contact information can be found on the Resources section of this guide.