But not every business owner considers all the pitfalls of doing business overseas. For one thing, says B. Peter Knudson, senior vice president and regional general manager of international trade finance at Comerica Bank, it’s imperative to remember that you’re probably going to be dealing in more than one currency for a transaction.
”Foreign exchange rates fluctuate on a daily basis,” he says. “You might find that you’re not getting what you thought you were going to get in terms of your own currency.”
That’s why it makes good sense to put pre-export financing in place. Smart Business talked with Knudson about its importance in any overseas business deal.
What pitfalls do business owners face when financing exports?
Just like any other sale, there is the credit risk of the buyer. But it is more complicated because you’re in a different country, and if a buyer fails to pay, your remedies are substantially different than just going to the local court. There’s also potentially a country risk. That can be anything from a war risk in certain areas of the world to that fact that some countries do run out of money. That’s called an inconvertibility risk, which means that they may not have enough dollars with which to pay.
Finally, somebody is going to take an exchange risk when you’re selling across the border, whether it’s the buyer or the seller. Somebody is going to have to figure out the exchange risk from the time they contract to make the sale to the time they get paid.
How can these risks be avoided?
With regard to the credit risk, there are companies such as AIG and other private insurance companies that provide credit insurance for [foreign] companies just like they do here in the U.S. The terms are a little bit more difficult on an international basis. It’s a little bit more difficult for companies, particularly smaller companies, to qualify to have their risk insured, but it can be done.
You also have the Export-Import Bank of the United States, which provides credit risk insurance for buyer overseas, as well.
What benefits can companies gain from pre-export financing?
From a cash flow standpoint, you are able to obtain money to purchase raw materials and fabricate whatever the product is that you’re going to sell overseas. The pre-export finance may come about from the time that you receive your purchase order. Essentially, that would be to enhance cash flow.
How do you structure that type of deal?
Most companies, like any other forms of credit, need to have a certain capacity. We’re looking for them to have been in business for a certain length of time. A company needs to meet certain minimum capital requirements.
The management team needs to have some experience in dealing with foreign deals. And if a purchase order is supported by a letter of credit, for example, by a buyer in a foreign country, the seller is able to transfer the credit risk from the individual buyer to that of the foreign bank. A lot of it is simply risk management.
So being proactive can have a positive impact on a company’s cash flow?
Yes, and certainly by anticipating the costs of all this financing, as well as the insurance, foreign exchange contracts and all of that, you’re able to price your product and meet the margin that you expect to get without having any surprises.
What else should an executive consider?
It’s extremely important to know your customer. You really do need to check them out. Sometimes a bank can help you by getting a credit reference from another bank. And although most banks don’t give out a lot of information, there is certain key information that we look for that comes from another bank or certain key phrases that we look for.
There was a company I was asked to check out in another country. I called a friend, a banker in that other country, and asked him about it. He made a comment that that company was known to be quite entrepreneurial. Well, here in the U.S., that might be a pretty positive sort of thing. But knowing the individual that I was talking to, and knowing the country, what they were saying was that the person was really kind of a wheeler-dealer, and I’m not so sure that I would have confidence in them.
And they were saying that without saying that. So it’s a matter of knowing the people, but also checking out other people who have sold to them, other suppliers, not necessarily other U.S. companies, but other companies in Europe or Asia that have sold to them. You’ll find that most sellers, unless you’re talking to a direct competitor, are willing to share that information.
B. Peter Knudson is senior vice president and regional general manager, international trade finance, at Comerica Bank. Reach him at (310) 297-2849 or email@example.com. A national leader in business banking, Comerica Bank has 50 branches in key California markets, including 17 in Greater Los Angeles. Comerica Bank is a subsidiary of Comerica Inc. (NYSE: CMA), with $53.5 billion in assets at March 31, 2005.