World Trade - September 2008 - (Page 38) COVER STORY The Hidden Cost of Open Account Often times the internal administration efforts outweigh the perceived benefits. BY DAVID GUSTIN W hen I completed my 2006 Biannual Import Payment and Finance study, 62% of financial firms surveyed indicated anyone can use Open Account. I started wondering if anyone really has thought this through. I also started to wonder if banks are their own worst enemies, not educating their clients as to the true costs of open account. It’s kind of like when we fill up our gas tank for $75 and think that is high, but don’t realize that oil is priced well below its true cost if we added the military costs associated with protecting supplies, as pointed out by the Rocky Mountain Institute. Coincidently, I have had a few recent discussions with investment grade companies that have moved significant payment volume from Letter of Credit (L/C) to Open Account, only to say the internal administration effort was more than they planned. And, most of these companies were not paying for their L/Cs, given their investment grade status. While companies did not explicitly state this, the push to open account is recognition, right or wrong, that the substitution of a bank’s capital in the payment process is not inherently necessary. Thus, credit lines once devoted to issuing L/Cs are now freed up to do other things. 2008 There may be a misperception here, as banks will think very carefully before replacing a trade credit line with a working capital line or project finance facility that is not as safe as a trade line. In addition, while many treasurers do not understand Basel II implications (or even know what Basel II means) the upcoming Basel II charges for operating risk and corporate capital based on risk rating grade will continue to impact finance costs. Again, like the gasoline that actually costs a lot more at the pump than what we pay the oil companies, open account has its own hidden costs. I will examine a few areas that treasurers need to consider: Credit management costs When selling, exporters need to manage country risk, establish buyers’ credit lines, and manage the drawdown process—all of this can be an expensive process. Certainly OECD sellers must factor this cost into their financial supply chain. Take the example of how a company would measure and integrate country risk into a customer risk assessment, to be able to justify the need of a guarantee when customer financials may not be acceptable? That takes having a country risk capability (even if outsourced to Fitch, etc.), customer risk 38 WORLD TRADE SEPTEMBER
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