Old models guide SMEs in exports – there is a clear need for financing knowledge
SMEs are too stuck in old operating models in their export activities. The main problems are the use of certain payment methods, poor awareness of receivables protection, long fund repatriation periods and even naivety. For instance, credit insurance is not well-known, although it enables enterprises to focus on sales and, at the same time, protect their sales receivables.
These facts are revealed by Sanni Helppolainen’s Master’s Thesis for Lappeenranta University of Technology. Helppolainen is Finnvera’s Finance Manager for Eastern Finland.
According to Helppolainen, payment methods that enterprises find safe diminish SMEs’ courage to expand trading to foreign countries or to seek new clients.
“A new client might be required to make advance payments or the deal is off. For fear of credit losses, enterprises don’t dare to take risks, but another contributing factor is the fact that enterprises are not familiar with the mechanisms for protecting sales receivables. Knowledge about credit insurance, letters of credit or bills of exchange might encourage enterprises to expand their markets,” notes Helppolainen.
For her thesis, Helppolainen interviewed 11 SMEs involved in export trade. Their turnovers range from EUR 3–30 million, and the sectors they operate in are similar to the sector distribution in Finnish exports of goods.
“The enterprises interviewed mostly operate in the project delivery sector so they frequently use scheduled payments that naturally also include advance payments. Pure risk of the value of trade consisted of a 10–20% residual risk.”
Caution as an obstacle to growth
Advance payments were the number 1 payment method also in the barometer published by Finnvera, Finland Chamber of Commerce and the International Chamber of Commerce ICC in June, focusing on enterprises’ financing knowledge in export trade. A total 92 per cent of the export trade financing barometer respondents said that they were well or quite well aware of advance payment as a means of managing buyer-related credit risks.
“Caution is definitely a deterrent to growth in exporting enterprises. When only advance payments are used, deal sizes remain fairly small, whereas granting a payment period make larger client purchases possible,” estimates Helppolainen.
However, SMEs’ caution often goes out of the window with regard to familiar partners. Only one of the enterprises Helppolainen interviewed had a written credit policy. In the other enterprises, the management had defined guidelines concerning the kind of trading the enterprise gets involved in.
“You could say that enterprises are somewhat naive. They grant major limits and long payment periods to partners they know. The interviewees reported that there had been only a few individual cases of credit losses in export trade and the main credit losses originated from trading in Finland. For many, Anttila’s bankruptcy was a wake-up call, reminding enterprises of how a familiar partner may suddenly go bankrupt. Still, insuring domestic receivables is very rare.”
The unknown credit insurance
Often sales receivables are the largest unprotected item on the balance sheet, although their protection is a significant element in enterprises’ risk management.
For instance, knowledge of credit insurance is very weak among enterprises. The results of the thesis are in line with the results of the export trade financing barometer published in the summer as well as the results of the SME barometer survey commissioned by Finnvera, the Federation of Finnish Enterprises and the Ministry of Economic Affairs and Employment.
With credit insurance, an enterprise may usually seek compensation after a 90-day payment delay, provided that the receivable is undisputed.
“In Finland, credit insurance is quite a new form of insurance compared to the rest of Europe. Especially among smaller SMEs, it is not a familiar option. Larger enterprises do know how credit insurance works,” says Helppolainen.
On the basis of the results, clients’ longer payment periods also pose challenges for enterprises involved in exports. Long fund repatriation periods may cause various problems, such as working capital being tied up and difficulties in cash management.
“Factoring, or financing of invoice receivables, has increased. It makes funds available to enterprises faster. However, it does not automatically protect them from credit losses. The use of letters of credit is the rule rather than the exception among the respondents, especially enterprises involved in trading in Asia,” says Helppolainen.
To improve awareness of export financing options and, as a result, export prerequisites, providers of export financing and credit insurers have decided to launch extensive cooperation to improve financing knowledge in SMEs involved in exports. The nationwide export trade financing tour will be launched in autumn 2018.
Sanni Helppolainen, Finance Manager, Finnvera, tel. +358 29 460 2565