How can it help me?
A foreign bill negotiation can help you manage your foreign exchange risk in an export contract and assist your business cash flow.
What is it?
A foreign bill negotiation is an advance by your bank for the amount and currency that you will receive when your overseas buyer makes payment under your export contract. Your bank provides you with a short-term, post-shipment advance by buying (negotiating) a bill of exchange that you have issued in a foreign currency in a documentary collection transaction.
How does it work?
If you’re receiving payment in a foreign currency using the documentary collection method, you draw up a bill of exchange in that currency.
When you present the shipping documents to your bank for forwarding to your buyer’s bank, your bank buys the bill of exchange drawn on your overseas buyer. In effect, the bank pays you a foreign currency advance on the security of the promise of future payment from your buyer.
You can either keep the advanced funds in the foreign currency or convert them to Australian dollars. You pay interest on the funds until the maturity of the advance—that is, until your buyer pays the bill of exchange.
When the buyer pays the bill of exchange, your bank receives the buyer’s payment on your behalf. The bank keeps the payment as reimbursement for the advance it made to you and the interest you owe on the advance.
A bank may negotiate a bill of exchange as ‘with recourse’ or ‘without recourse’ to you. With recourse means that if your buyer doesn’t pay the bill of exchange, you must refund the advance you received from your bank and pay interest on the borrowed amount.
If your bank agrees to buy your bill of exchange without recourse, it accepts the risk of non-payment by your buyer. Your bank may be more likely to agree to a without recourse facility if your buyer’s bank has added its aval (guarantee) to the bill of exchange.
A bill of exchange tends to be used for short-term credit in the international trade of goods. For longer-term credit, a promissory note is often used—another type of payment order that you can ask your bank to negotiate before payment from your buyer is due. It represents an irrevocable promise from your buyer to pay you according to the conditions outlined in the note.
The diagram below shows the main steps in a typical foreign bill negotiation.
Notes to diagram
- You enter into an export contract with your overseas buyer which requires payment in a currency other than Australian dollars.
- You ship the goods to your buyer in accordance with the contract.
- You provide the bill of exchange and shipping documents (including the title documents) to your bank.
- Your bank buys the bill of exchange, advancing to you in foreign currency the amount you are owed by your buyer less an agreed discount (the discount represents your interest expense for the advance).
- Your bank forwards the bill of exchange and shipping documents to the buyer’s bank.
- The buyer’s bank presents the bill of exchange to the buyer. The buyer accepts the bill of exchange by signing it and receives the shipping documents from their bank, allowing them to clear the goods.
- The buyer pays their bank for the goods.
- The buyer’s bank transfers the payment to your bank, which retains the payment as reimbursement of the advance made to you in step 4 plus interest payable on the advance.
What are the pros and cons?
|Can enable you to raise short-term, post-shipment finance in the same currency as your export contract payment
||If the foreign bill is negotiated with recourse to you and your buyer doesn’t pay, you’ll have to repay the advanced funds plus interest|
|You can crystallise the Australian dollar amount you receive for your export order at any time by converting the proceeds of the advance into Australian dollars
||If you have converted the advanced funds to Australian dollars and your buyer doesn’t pay, you have to buy foreign currency at the market rate to repay the bank|
|Since the interest rate on the advanced funds will be the rate applicable to the borrowed foreign currency (rather than that applicable to an Australian dollar loan), you can calculate your interest expense in the same currency as the payment to be received from your buyer
|A without recourse foreign bill negotiation can reduce your payment risk in a documentary collection transaction
What costs are involved?
Interest rates on advances against foreign bills of exchange reflect the rates that apply to the relevant foreign currency and, if the advance is without recourse, your bank’s assessment of the non-payment risk associated with your buyer. There may also be service fees payable to your bank.
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