Understand the risks of import/export trade and how to manage them

In recent years, Singapore’s trade activities have faced some headwinds from geopolitical uncertainties, as well as the unprecedented impact of the COVID-19 pandemic. While we continue to weather the impact of such events, our strong fundamentals and regional economic factors ensure that the long-term growth potential of Singapore’s trade volumes remains intact.

Asia’s rapid population growth is driving the region’s urbanisation and consumer needs. This results in an increase in the region’s demand for goods such as food, infrastructure materials and equipment, and smart devices. SMEs are well-positioned to capture these growth opportunities in the region, with the support of a vibrant ecosystem and strong trade infrastructure in Singapore.

As a business owner, it is important for you to be aware of the trade financing and solutions available so that you can understand how to better manage your cash flow and cross-border trading risks. Here is an outline of some of the more commonly used instruments in overseas trades.

Improve Cash Flow

Often, within the typical trade cycle, you will need to pay your suppliers for the purchases before your buyers pay you. Having a credit facility from a bank helps to ensure your cash flow stays fluid and transactions can be done without delays to the trade cycle.

For Importers, UOB Import Financing helps you pay your suppliers on time or offer them assurance of payment while freeing up your cash flow, so you can grow your business faster and obtain more favourable credit terms from suppliers.

For Exporters, an Export Bill Purchase provides an advance to you by financing your export bills, before you receive payment from your buyers. Alternatively, an Export LC Discounting allows you to convert your receivables into cash, thus you can receive funds before your buyer pays you.

Manage Cross-border Trading Risks

For Importers of supplies, collecting your goods on time and in good order is most important. With the stresses to supply chains brought on by the Covid-19 pandemic, some suppliers have tightened their credit terms and require their buyers to provide additional assurances of payment. This is where a trade credit facility with a bank can be drawn upon for intermediary services that support seamless trade settlement.

• Import Letter of Credit (LC): Assure your sellers of payment when UOB issues an LC according to the stipulated terms of your transactions. This is a safer mode of payment because UOB only effects your payment after we receive trade documents of the goods that your seller is shipping over.
• Import Documentary Collection: Collect your goods on time as UOB helps to process and release your import documents to you upon your payment or acceptance of the trade bills.

For Exporters, collecting payments efficiently is vital. Similarly, the bank offers many services to reduce the risk of transacting with overseas buyers.

• Export Letter of Credit: UOB offers various types of Export LCs for different purposes. The bank helps to authenticate your buyer’s LC and assure that it is legitimate before you complete the transaction.
  
  If you are a middleman/reseller in a transaction, the bank can issue an Import LC to your supplier that is backed by an Export LC from your buyer. This helps you to quickly secure the goods before selling them again. The bank can also facilitate the transfer of the Export LC from your buyer to your supplier without a credit facility.
• Export Documentary Collection: Collect your payments efficiently as UOB helps to process your export documents.

Manage Foreign Exchange Risk

Whether you are an importer or exporter of goods, the exposure to foreign exchange rate fluctuations can have a profound effect on a business’ bottom line. Therefore, an FX risk management framework is key and here are some points of consideration:

• Determine your exposure – How much of your business is overseas?
• Choose an appropriate FX hedging strategy – FX spot and forward contracts allow you to buy or sell a currency at an agreed-upon rate and fixed future date. How complex should your FX hedging structure be? Should you hedge your entire exposure, or just some?
• Regular review – Is the strategy adequate for the current economic conditions and outlook? Hedging strategies come with various degrees of flexibility and complexity, so they must be reviewed regularly as market conditions change constantly.

A higher percentage of FX transactions, and/or a longer clearance on payments, means a greater need for risk management.

Your banking partner can help

Knowing the best Trade solution to use or the most optimal FX hedging strategy to apply can be a daunting task especially when these are not your core expertise. Yet, these can have significant impact to your bottom line. This is where UOB can come in to support you with expert advice.

Our Trade Specialists can advise SMEs on the most suitable trade product according to your needs. And where possible, they can provide some market insights into the countries your buyers or sellers are based in, helping you understand the local risk factors. Furthermore, having trade documents issued by UOB means your suppliers and buyers can be assured as you are backed by one of the world’s top rated banks.

Analysing and anticipating currency movements requires time and specific expertise, which many SME managers do not have. UOB offers dedicated support to SMEs on forex advisory. Our FX specialists can provide advice on strategy and execution, incorporating views on the direction and timing of markets. In this way, SMEs can benefit from a more disciplined approach to forex risk hedging.

Contact us today to learn more about how you can get support from our specialist teams for your business.

Important notes and disclaimers:

This publication shall not be regarded as an offer, recommendation, solicitation or advice to buy or sell any banking or investment product and shall not be transmitted, disclosed, copied or relied upon by any person for whatever purpose. Any description of banking or investment products is qualified in its entirety by the terms and conditions of the banking or investment product and if applicable, the prospectus or constituting document of the banking or investment product. Nothing in this document constitutes accounting, legal, regulatory, tax, financial or other advice. If in doubt, you should consult your own professional advisers about issues discussed herein.

The information contained in this publication, including any data, projections and underlying assumptions, are based on certain assumptions, management forecasts and analysis of known information and reflects prevailing conditions as of the date of the publication, all of which are subject to change at any time without notice. Although every reasonable care has been taken to ensure the accuracy and objectivity of the information contained in this publication, United Overseas Bank Limited (“UOB”) and its employees make no representation or warranty of any kind, express, implied or statutory, and shall not be responsible or liable for its completeness or accuracy. As such, UOB and its employees accept no liability for any error, inaccuracy, omission or any consequence or any loss/damage howsoever suffered by any person, arising from any reliance by any person on the views expressed or information in this publication.

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