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Financing cross-border trade after Brexit

The devaluation of sterling since the result of the Brexit referendum has had a significant impact on all businesses trading with overseas customers and suppliers or with financial interests outside of the UK.

Importers and exporters of goods and services will be well experienced in using financial derivative products and trade finance solutions to protect their business from fluctuations in currency exchange rates and movements in commodity prices. After all, it is hard work for most businesses to retain margins without leaving that hard earned profit exposed to foreign exchange and commodity price markets over which they have no control.

Securing fixed currency exchange rates covering future trade is commonplace and the market is well served by banks and others providing competitive and flexible arrangements. However, those forward foreign exchange contracts became much more expensive in June 2016 creating a cost and predicament for management.  Should they hold off continuing to buy forward currency or in anticipation (and hoping) for an uptick in the value of sterling after the currency markets have settled? Foreign exchange contracts do have fixed periods of cover and most businesses buying forward foreign exchange contracts will have seen by now, or will soon see the benefit of those contracts come to an end. The outlook for importers of products and services is clearly an increase in costs.  These costs will have to be carefully managed.

There continues to be an increase in focus on finding certainty of price and many businesses are talking with their offshore suppliers about trading in sterling to eliminate exchange rate risk. There are innovative solutions on the market and banks and others are providing advice and products to try and ease the cost impact. Inevitably, however, importing goods and services is now more costly.

How importers and exporters organise their trade finance may open opportunities to either make some cost savings for importers or otherwise greatly assist exporters in capturing and expanding their offshore business.

Financing trade finance typically involves Letters of Credit which represent a guarantee of settlement, usually reducing cash or borrowing facilities. Leaving the operation and administration of dealing with the paperwork required in the trade finance process for another time, businesses are finding themselves with plenty of orders from overseas customers but are short of the funding facilities to fulfil those orders.

Trade finance is an area of special expertise. The major banks have designated specialist teams to deal with this. There are, however, many other independent specialist trade finance houses who are experiencing an increase in activity and tailor financial arrangements which may involve debt insurance to cover a shortfall in financial facilities. These arrangements, can be put in place for both importers and exporters and are particularly relevant to those businesses with seasonal trade where large stock orders need to be placed months in advance. Without doubt, the current foreign exchange climate makes overseas business transactions challenging. It is a challenge that UK managers will relish and adapt to successfully.

Should you wish to discuss managing or securing foreign exchange rates on trade finance, do not hesitate to contact me or your usual contact at Mercer & Hole.

 

 

Date: 2nd May, 2017
Author: Steve Smith

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