World Trade - September 2008 - (Page 39) assessment software, algorithms for setting buyer credit lines, a line management process and an understanding of bank regulations and payment/FX restrictions. Think countries like Venezuela, Pakistan, and Turkey as examples of where this would be necessary. These activities are not typically done by low-cost labor either. Finance costs A Small- or Medium-sized Enterprise (SME) pays a premium for debt, struggles to raise equity, and lacks the leverage to extend payment terms. SMEs should give a hard thought before going on open account with an overseas buyer (assuming their buy /sell relationship is not measured in years.) The real reason for payment terms was to give the buyer time to ensure the proper amount was being paid, not as a way for the large and creditworthy buyer to ‘borrow’ from the smaller and less creditworthy supplier. It has become a common practice to try and create a post-shipment funding source for suppliers who are trading on open account. While once a Letter of Credit took care of the financing, be it along the supply chain from pre-shipment line to procure materials to a postshipment finance negotiation structure, now sellers have an option to finance post-shipment receivables, hopefully at a rate substantially lower than previously. In moving to open account finance structures, buyers must consider: How their Vendors must use technology – As one SCF vendor put it to me, “Suppliers really get pushed in the middle. They are so confused about all the different ways to get financing. Everyone is promising low-cost, non-recourse, off balance sheet financing. All these technologies and banks converging on them to say, ‘use this service, it will help you out.’ All this actually ends up doing for them is creating more work for the suppliers. One supplier told us they have 40 applications to log into, accept orders, and process invoices for all their customers.” Very few pre-shipment finance models exist – Our 2006 study confirmed that buyers don’t normally care about their vendors’ pre-shipment financing needs; nor are banks especially interested in financing suppliers they don’t know in places like China or India without some insurance. Factories go bankrupt in China, India, Vietnam, etc. and there are cases of banks writing off pre-shipment loans to suppliers when the buyer was totally unaware. Additional insurance costs “The quest for indemnification from the buyer is the Holy Grail of the open account chase.” And few insurers will look at it from a transactional basis. They want a premium based on some holistic package (typically selling you a BMW when all you need is a Volkswagen). As to buyers providing payment indemnities to enable purchase order financing, the model for the underwriting of preshipment finance and what form the indemnity takes is unclear. It is not clear, for example, what form of enhancement the buyer’s bank will be comfortable in providing, what the seller’s bank is most comfortable in receiving and who will pay for this payment indemnity. A global trade banker recently commented, “The quest for indemnification from the buyer, which will facilitate the credit extension to the seller, is the Holy Grail of the open account chase. Buyers who grant these indemnifications, under US GAAP, may face a situation where the former trade obligation needs to be re-classified as bank debt.” Custom and financial documentation costs Sellers typically don’t need insurance on a Letter of Credit. Sure, they could confirm the issuing bank’s standing and country risk, and that information is very accessible. But open account? Have you ever tried to secure receivable insurance as a middle market seller? Trade Services is difficult to automate given its paper intensity, leading to high semi-fixed staff costs for all involved (banks, forwarders, agents, corporations). Moving vendors to open account generally does not lessen the financial or customs documentation requirements. Custom requirements drive paperwork. What moving to open account does is enable importers to WWW.WORLDTRADEMAG.COM 39 http://WWW.WORLDTRADEMAG.COM
For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.