Trading offshore
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Importing and exporting can stretch your finances to the limit. It takes much longer to transport your goods to market and you’re impacted by fluctuations in the Australian dollar.
There are four key areas to understand when considering trading offshore:
- The impact of the Australian dollar
- Managing currency risk
- Managing your payment terms
- Financial solutions
The impact of the Australian dollar (Foreign Exchange)
Whether you're importing or exporting, an unexpected change in the value of the dollar can put a real dent in your profits. So it's important to understand foreign exchange risk, then think about how you can control it.
Most offshore transactions take place in a foreign currency like US dollars or Euros. This means that an unexpected surge or slump in the value of the Australian dollar can put a hole in your pocket … or a smile on your face, depending which side of the fence you’re on.
The Australian dollar has a floating exchange rate, so its' value can rise and fall from day to day. The dollar that was worth 97 US cents on the day you sent your order might have fallen to 87 cents by the time the goods arrive, weeks later.
The value of the dollar affects you differently if you're buying or selling offshore:
| Importers | Exporters | |
| Rising Australian dollar | Reduces your costs | Reduces your profits |
| Falling Australian dollar | Increases your costs | Increases your profits |
| Example | You place an order for USD50,000 worth of shoes from India when Australian dollar is worth 90 US cents, so the cost is AUD55,556.
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You receive an order for EUR30,000 worth of furniture from Germany. At the time, 50 Euro cents will buy you one Australian dollar, so you expect the sale to be worth AUD60,000.
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Managing currency risk
The size of your currency risk depends on your payment terms and the size of each transaction. But in many cases it's a risk worth guarding against using options like:
- Forward Foreign Exchange
A contract that allows you to lock in an exchange rate for a specific date. The big advantage of forward foreign exchange is that it allows you to plan with certainty, even if a transaction isn’t due to be settled until a future date. - Currency Options
Gives you the right, but not the obligation, to exchange at a specified rate on a specified date. - Flexible Forwards
Flexible Forwards combine the security of a Forward Exchange Contract and the flexibility of a Currency Option. With flexible forwards, you can protect your business against adverse exchange rate movements, while still benefiting if the exchange rate moves in your favour.
Managing payment terms
Depending on your payment terms and shipping arrangements you can find yourself with a sizeable cash flow gap, thanks to the time lag between paying for a product and getting paid by your customer.
Choosing the payment terms that work for you is key:
| Cash in advance | The importer pays upfront before the goods are shipped. |
| Open account or clean payment | The importer can order goods up to an agreed value "on account", before settling on agreed terms (for example, 30 days from dispatch). |
| Sight or term documentary collection | With sight documentary collection, the importer pays for the goods at sight, after taking up the shipping documents that allow the goods to be released to them. The exporter's bank sends the documents to the importer's bank, and the importer then pays their bank, which remits the funds back to the exporter.
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Financial solutions
There are the simple mechanics of trading to consider. How and when are you going to be paid for your goods, while still giving your overseas distributor a fair deal? Fortunately, there is a range of finance solutions you can use to make things easier. Here are some of the most frequently used.
| International money transfers | An electronic funds transfer to a foreign bank. Usually provides cleared funds in around three days. |
| Letter of credit or documentary credit | A conditional guarantee from the importer's bank to the exporter via their bank, guaranteeing payment when the shipping documents are released. A letter of credit allows the exporter to ship the goods, confident that they will be paid for them, based on the credit standing of the importer's bank. |
| Trade advance | A short-term loan for importers or exporters, helping them to close the cash flow gap. |
| Insured export finance | Allows exporters to take out short-term loans against invoices billed to an (primarily) overseas debtor. The invoiced debtor is insured by an eligible trade credit insurer. On open account transactions, you can borrow up to a maximum of 81% of the value of each invoice. Insured export finance can be used with both open account and documentary collection payment terms. |
For more information
Important information
As this advice has been prepared without considering your objectives, financial situation or needs, you should, before acting on the advice, consider its appropriateness to your circumstances. All products mentioned on this web page are issued by the Commonwealth Bank of Australia; view our Financial Services Guide (PDF 59kb).
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