Barclays on Export Week: The benefits of high interest rates in destination countries

UK EXPORTERS are increasingly being asked for extended payment terms by their customers.

Companies in countries such as China, India, Brazil, Russia, Turkey, Indonesia and South Africa, are seeking to use trade credit as a cheaper source of finance than traditional bank finance marked to their central bank lending rate.

Current central bank rates in these countries range from 5.1% in China up to 11.25% in Brazil, prompting many companies in these countries to look to their supply chain for assistance.

All this week Barclays will be writing about various aspects of trading internationally to coincide with UKTI’s Export Week. To read more click here. 

James Webber, regional director for Barclays Trade and Working Capital in the Midlands, said “This is something we have encountered more and more in the last 12-18 months, and it is not surprising – if a company in India for example can obtain extended trade credit from a supplier, then this is a far cheaper source of finance than borrowing from a local bank at a margin over the Central bank rate which currently stands at 7.5%.

“Some clients have rejected these requests when they have come through as at first glance, extending terms of say 180 days to a medium-sized business in India appears too risky, and may have too big an impact on working capital.  But we are telling clients more and more about the potential benefits of these scenarios.”

There are numerous ways an exporter can sell on deferred terms, but still protect themselves against the risk of non-payment, and even receive early payment from a bank a number of days after the goods have been shipped. These include  letters of credit, avalised bills of exchange and credit insurance with open account terms. 

These come at a cost but Webber suggests this could be easily passed on.

“If an Indian business is borrowing at say an all in cost of 10% per annum and the costs of a UK exporter using its bank to obtain early payment a number of days after shipping is 5.5% per annum, then there is clear rationale for the Indian company to pick up all the costs, as it would still enjoy a net 4.5% per annum benefit,” he said.

“By being willing to accept these extended terms and perhaps even proactively offering them, UK exporters can give themselves a competitive advantage in these markets. 

“It may even be possible to share in some of the benefit that the importer receives by increasing the price accordingly.”

As part of its own activity during the week, on Wednesday (May 20) Barclays is hosting a webinar on trends and solutions in export finance, helping firms to maximise their international trading potential.

The webinar runs from 08:30-09:15 and it is free to register.

To find out how Barclays can support your exporting ambitions, please contact James Webber, head of trade & working capital in the Midlands on 07766 362470 or by email at james.webber@barclays.com