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The time lag between paying for raw materials/labor and receiving payment from an overseas buyer (often 60 to 120 days) creates a major working capital strain.

1. Utilize Export Financing Tools

These tools are specifically designed to bridge the cash flow gap in international sales:

  • Export Factoring: Sell your export invoices (accounts receivable) to a factoring company (a 'factor') at a slight discount for immediate cash. The factor then takes responsibility for collecting the debt from the buyer.
  • Pre-Shipment Financing: Obtain a loan (like a packing credit facility) from your bank to cover the cost of raw materials, labor, and overhead necessary to produce the goods before they are shipped.
  • Post-Shipment Financing: Borrow against the documents of the goods that have already been shipped but haven't been paid for yet.
  • Trade Credit Insurance: Insure your export receivables against the risk of non-payment by the foreign buyer due to insolvency or political factors. This makes banks more willing to lend against those invoices.

2. Optimize Payment Terms and Methods

  • Negotiate Favorable Terms: Strive for payment terms like Cash Against Documents (CAD) or Short-Term Deferred Payment (e.g., Net 30 days) instead of longer terms.
  • Letters of Credit (LCs): Demand an Irrevocable Letter of Credit (LC) from the buyer. This is a guarantee from the buyer's bank to pay you once all shipping documents are presented, effectively substituting the bank's credit risk for the buyer's.
  • Advance Payment: Negotiate for a substantial down payment (e.g., 20% to 30%) upon order confirmation to cover initial material costs.

3. Manage Foreign Exchange Risk

  • Hedging: Large orders expose you to currency risk (the currency you are paid in might weaken against your local currency). Use tools like Forward Contracts or Currency Options to lock in an exchange rate on the expected payment date, ensuring you know exactly how much local currency you will receive.
  • Invoice in Strong Currency: If possible, invoice the customer in a strong, stable currency like the USD or Euro, even if you convert it back to your local currency immediately.

4. Internal Efficiency and Working Capital Management

  • Minimize Production Time: The faster you complete the order, the sooner you can ship the goods and begin the payment clock.
  • Tight Inventory Control: Implement Just-in-Time (JIT) principles for raw materials to minimize the capital tied up in inventory that is sitting idle.

 

krishna

Krishna is an experienced B2B blogger specializing in creating insightful and engaging content for businesses. With a keen understanding of industry trends and a talent for translating complex concepts into relatable narratives, Krishna helps companies build their brand, connect with their audience, and drive growth through compelling storytelling and strategic communication.

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