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Special to: Secured Lender Media Contact: Jim Rednour (773) 342-9900

Evolving Global Business Opportunities Call For Sound


Credit Decisions and Innovative Financial Solutions
by Michael Epton, Executive Vice President
Transcap Trade Finance

Map makers are having a banner year selling updated reference materials which reflect
worldwide changes in geographic and political borders. For those of us in the financial
business, the continuous evolution of worldwide cultures, economies and political
boundaries represents an even greater potential for profit and growth. This is especially true
for progressive financial services providers who are prepared to offer their importer,
distributor and manufacturer/assembler customers the innovative global financing programs
needed to complete cross-border transactions and capitalize on time-sensitive, international
business opportunities.
Every international transaction has two sides. What is an import to one party is an export
to another, and they frequently need to be financed from both sides. This financing need
creates opportunities for different types of lenders to offer various categories and levels of
financing.
The Common Denominator
Everyone involved in a good faith global business transaction has two things in
common 1) they want the deal to go through as expected, and 2) they want to be paid.
Whether the deal involves product that is inbound to the U.S., outbound from the U.S., or
crossing non-U.S. borders, there are several ways to finance the transaction. Unless the buyer
can self finance or get open credit terms from the seller, based on their good credit record

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and payment history, they must borrow to do the transaction.
Open Terms
The seller extends Open Credit Terms to the buyer and requires no upfront payment
prior to shipping product. This typically occurs in situations where the companies involved
have conducted business before and in countries where the seller is comfortable. In these
circumstances, the seller has confidence in the buyers good credit standing and integrity to
pay for the product upon receipt, or after the buyer has made delivery and invoiced the end
customer(s).
Advantages of Open Terms To Seller
Encourages sales by making it easier for
buyers to acquire sellers goods.
Disadvantages of Open Terms To Seller
Loss of control of goods while in transit.
Seller must rely on buyers willingness and
ability to pay without hanging up the deal.
Seller must wait days for payment, which may
restrict cash flow and operating capital.

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Advantages of Open Terms To Buyer


Availability of goods without prior cash
payment.
No cashflow restriction or need to secure
third party financing.

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Walking A Fine Line...Of Credit


Even if the buyer gets open terms from the seller, they may still need to borrow funding
at some point during the transaction (upon receipt of goods, upon clearing of customs, etc.)
depending on when the terms say payment is due. The Buyer can secure some or all of the
needed funds from their traditional line of credit, if their needs fit within the lenders
parameters. The level of advances that a lender provides is typically based on various means
ranging from a rigid formula (as in the case of a traditional asset-based lender), to a less
rigid set of criteria based on borrowers collateral (such as a secured bank line), to a non-

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rigid standard based on the borrowers cash flow and capital structure (as in the case of a
cash flow lender, sometimes referred to as Structured Finance).
Credit Enhancement
When a U.S. company is selling to a non-U.S. buyer, based in a country that lacks a
globally recognized market rating (S&P, Moodys ADR\American Depository Receipts),
it is risky for them to extend open terms or for their lender to arrange an advance without
credit insurance. Credit insurance, also known as credit enhancement, is protection against
the risk of non-payment by the cross border buyer/borrower. Non-payment can result from
numerous factors, some that are beyond the buyers control, including: 1) Imposition of
Exchange Controls - which prevent the buyer from converting local currency to U.S. dollars
or other currency with which payment can be made; 2) Confiscation of goods by the
government; 3) War Risk or Political Violence;
4) Commercial Risks (buyer pays slow due to cash flow problems, dwindling margins,
bankruptcy, etc.)
Credit enhancement allows the seller (or sellers lender) to transfer the bulk or all of the
risk of non-payment from a foreign buyer to an insurance company whose credit worthiness
is acceptable. This allows a company that wants to sell on a cross border basis the
opportunity to offer extended term financing, which makes them more competitive.
Competitiveness, financing and risk mitigation go hand in hand, and these three things
combined give rise to the utility of credit insurance.
Matching The Credit Enhancement To The Transaction
Depending on the size, country and credit histories of the buyer/seller, and the amount
of time involved between product shipment and payment, there are several governmental
and private credit insurance facilities that will apply. One such entity is Export/Import
Bank (EX-IM), an agency of the U.S. government that provides short-term and medium-term
coverage on a single-buyer basis, as well as comprehensive multi-buyer coverage. EX-IM
provides special programs for small businesses, and prefers to complement, rather than
compete against, private insurers.

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Dealing With Documents
When a line of credit is used to pay for goods in an international transaction, a transfer of
documents most often completes that line of credit. Note: While electronic shipping
documents (tracking product and payment) are becoming more prevalent in conjunction with
the Letter of Credit documentary process, there are still security concerns. Thus, for the time
being, the majority of transactions are still documented on paper.
Documentary transactions can tie up a buyers funds for a limited time, as in the case of
Documents Against Presentation (D/P) or Document Against Acceptance (D/A)
transactions, or for a more extended period, as when a Letter of Credit (LC) is the underlying
basis for payment.
A D/P is a demand for payment drawn on the buyer at site. When the documentation is
accepted by the buyer, funds are released to the seller and documents are released to the
buyer in order to take possession of the product (which is on the water or on the dock
depending on the transaction agreement).
A D/A transaction is similar to a D/P in the movement of documents, but it allows for a
predetermined period of time to pass before payment is made.
A Letter of Credit (LC) is a legally binding document outlining all requirements that
must be met and support documents that must be provided to prove that requirements are
satisfied before payment is made. It is best to keep LCs as simple as possible, so as to
facilitate rather than inhibit the successful completion of the global transaction. At the same
time, the LC must be carefully prepared because it is the only assurance that both companies
are going to satisfy all aspects of the transaction.
Advantages of LC to Seller
Letter of Credit is tangible, enforceable proof
of the buyers willingness and ability to pay
for the product once all requirements set forth
are met.
Letter of Credit also specifies when and how
(which currency) the seller is to be paid.

Advantages of LC to Buyer

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Buyer does not have to pay before
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receipt of shipping documents,
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inspection reports, etc. to prove that
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the transaction has gone through.
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Disadvantages of LC to Buyer
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International companies can frequently get


additional financing from an in country
lender based receipt of an LC.
Disadvantages of LC to Seller
Seller must wait for payment until all
requirements set forth in LC are satisfied.

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of credit from conventional lender, so
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funds are not available for other
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needs.
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Paperwork can be technical and complicated.


Companies often find dealing with LCs
difficult due to requirements and timing.

If buyer does not have sufficient


funds to pay for the Letter of Credit,
they must have a strong enough
history with the conventional lender
to get an over advance to open the
LC. If not, they will have to look to a
supplementary financing source
which can provide up to 100%
inventory financing.

Innovative Financial Solutions


Once it has been determined that the client will need to borrow funds to pursue
seasonal sales and other extraordinary opportunities, the lender should be prepared to work
with them to consider innovative financial solutions, such as: Over-Advances, Cash Flow
Loans, Purchase Order Financing and Trade Financing.

These financing methods can

enable the buyer to complete the transaction by accessing greater amounts of working capital
than is available through their conventional line of credit.
Offering an Over-Advance or Cash Flow Loan that is substantially higher than normal
collateral advances would warrant may offer a greater profit opportunity for the lending
institution. However, the lender must be willing to re-evaluate the formula that has been
established to determine the clients advance level and assume additional risk.
In the case of an Over-Advance this risk frequently comes in the form of a significant
erosion of the lenders cushion or reserve against the clients collateral, which means that the
lender must be willing to accept a lower percentage of collateral coverage than provided by
conventional loan parameters. A Cash Flow Loan can also be used to help the client secure a
greater than normal advance and is based not on collateral secured, but rather on the client
companys expected cash flow and present capital structure, as they apply to their ability to
re-pay the borrowed funds.
In both cases, the lender must be prepared to monitor these higher risk
transaction(s) through conclusion, or risk lending money for a transaction that, if not
successful, could result in a loss of funds.
Mitigating Risk Through Short-Term Supplementary Financing

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Short-term financing from a third party lender can be utilized to allow clients to move
a deal along without tying up their credit line or limited operating capital. An increasingly
popular global financing solution which provides rapid availability of funding (up to 100%
Inventory Financing) for large amounts of new inventory is Purchase Order Financing.
P.O. Financing enables the borrower to enjoy incremental revenue growth by
providing a financial bridge to support the transaction between the time a sale is made
and the time the end user is invoiced for delivered product. Another short-term financial
option that has proven effective in facilitating cross-border transactions is Trade Financing.
This type of financing is based on the viability of the product and the ability of the borrower
(buyer) to sell or distribute that product. The third party lender will exit at a
predetermined stage of the transaction, at which point the primary lender or its client will
utilize other more conventional funding options.
Understanding & Reducing Risk
Regardless of which funding method (or combination of methods) is utilized, there
are inherent risks for both parties involved in an international transaction that should be
considered and, when possible, mitigated. Failure to properly address any of these points
when obtaining insurance or preparing appropriate documents can influence the successful
outcome of a global sales transaction. For example, a significant number of credit document
presentations are found discrepant on first examinations. Discrepancies may be difficult to
understand and agree on, and they can give the buyer an excuse, albeit temporary in most
cases, not to pay. Understanding all of the variables in a transaction is essential. Each party
and their service (e.g. inspection service, freight forwarder, insurer, etc.) as well as the
supporting documents they generate, must be prepared in harmony and monitored to
optimize a successful global transaction.

About the Author: Michael Epton is Executive Vice President and National Director of
Marketing for Transcap Trade Finance. Transcap is a joint venture of Transamerica Business
Credit Corp. and Transcap Associates, Inc., and is the largest, most experienced and fastestgrowing Trade and Purchase Order Financing company in the U.S.
Acknowledgment: The author would like to thank Mr. Sam Moore of John Stone Downey &
Kline and Mr. Tony Marcussen of American National Bank\International Department for
their contributions to the informational content of this article.