Why does an exporter need to understand the Transactional Relationship Diagram in the Supply Chain? First, understanding this diagram will help you assess if your business has the ability to offer foreign buyers open account terms, and if so, what kind of terms. Second, understanding this diagram will further enable you to better understand your cash cycle and determine if you need export finance tools to mitigate the risks associated with open account trade.
The Transactional Relationship in the Supply Chain is the period between the time it takes you (the exporter) to pay your suppliers, and the time it takes for you to get paid by your buyers (the importer). In many cases, the foreign buyers that purchase goods from you are not the end users of the products. They have a distribution network within their country, and offer certain terms to their domestic buyers, which has an impact on how fast you will get paid and in turn, your cash cycle. As such, having a good understanding of the supply chain diagram will help you determine the types of export finance tools you need to offer appropriate open account terms to your foreign buyers and protect your business from the risk of buyer nonpayment.
For example, if you know that your suppliers offer 60-day open account terms for raw materials, and you require your importer (foreign buyer) to pay on 30-day open account terms, your cash flow will be in good standing as long as your importer makers the full payment on time. However, if your importer (foreign buyer) offers its domestic buyers 30-day open account terms, and requests 60-day open account terms from your business – you will have a liquidity crunch to cover, so production can continue while you wait to be paid.
Exporters who determine they lack the sufficient liquidity should look into getting working capital loans to cover the entire cash cycle from the purchase of raw materials through the collection of the sales proceeds. One way that exporters can obtain the working capital loans is through working with commercial banks. However, many commercial banks are hesitant to provide export-related working capital loans to small business exporters due to their associated foreign buyer risk. This is where Export Import Bank of the United States (EXIM) can help. EXIM has a program that guarantees working capital loans for exporters from commercial lenders. With this guarantee, the commercial lender’s risk is reduced and exporters are able to obtain the needed loans to fulfill their export orders and meet their day-to-day obligations.
Another way that an exporter can protect its business is through obtaining export credit insurance. Export Credit Insurance benefits the exporter in three ways: 1) it can be used as an risk mitigation tool, paying the exporter up to 95 percent of the purchase value in the event of buyer default, 2) it can be used as a sales and marketing tool, empowering the exporter to offer competitive open account terms to foreign buyers, and 3) it can be used as a financing tool, giving banks the needed assurance that their loans will be repaid. With these export finance tools in hand, you will have the know-how needed to offer your foreign buyers the appropriate open account terms and protect your business’ financial well-being in a competitive global marketplace.