TRADE
FINANCE & THE COST OF
ADVICE
by Donald G.
Keesee
"You can pay me now or
you can pay me later" is
a line from an old commercial
for Fram Oil Filters. The
emphasis here is that if you
buy a Fram Oil Filters before
you drive, it will cost less
than rebuilding an engine
later. Getting advice and
pricing on trade finance is a
bit like that.
Too often people call
consultants or their bankers
after they have started the
"drive". In other
words, sellers have often
agreed to pricing and the
terms of sale with a buyer
before they have taken stock
of what it costs to complete
the sale on the terms agreed.
Recently we have seen several
instances where sellers quite
fortunate to have won sizable
contracts in places such as
Venezuela, Saudi Arabia, etc.
They, then, have run head long
into the costs associated with
arranging either working
capital financing or even
credit insurance to protect
against the risks of doing
business in such countries.
These costs are quite high in
comparison with similar costs
in other less risky countries.
As the man in the
commercial for Fram Oil
Filters implies, it costs less
to do your homework up front
than to try to address the
issue retrospectively. Once a
price is set and the terms
agreed; it can be devastating
to suddenly realize that your
profit margin will be severely
reduced if you need to finance
your investment in the
transaction.
Could the price have been
increased enough to protect
the margins? Probably; but, it
would have to be done
properly.
Now, the $64.00 question is
how? The first step is the
buyer must understand that any
price out forward is a
"Cash Price" and
that any deferred payment
terms involve an additional
cost. Even if you are the
President of the company
trying to make a sale, put the
decision for credit on your
bankers or your board of
directors. Take the power to
finalize any credit agreement
away from the negotiators.
Make the arrangement tentative
until you have an opportunity
to explore with lenders and /
or insurers the costs of
financing your sale.
Is there an alternative?
Yes. It takes a commitment and
discipline; but, there is a
viable alternative. Before
negotiations begin, the seller
can work out a range of costs
for both financing and
insurance. This range would be
based upon a series of
assumptions, such as down
payments, repayment intervals,
and the length of the overall
credit. In this manner
negotiations are able to
virtually assure the buyer
that his request for terms can
be met. Further the costs
associated with those terms
can be identified. Only terms
outside of the pre-determined
ranges will require home
office review.
One last question is
whether these techniques are
the only options available.
The answer is yes! The moral
of this article is: "You
can pay me now or you can pay
me later", the only
difference is how much you pay
me!!
Donald Keesee is President
of Keesee and Associates which
specializes in trade finance
and political or credit risk
assessment and insurance
coverage. Don is a member of
the Michigan District Export
Council with more than 20
years of voluntary service to
Michigan's international
business community.
Date Updated: March 27, 2007
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