Process Shields Exports From Foreign Crises
If the Asian financial crisis makes you think twice about exporting your goods into the Pacific Rim, take heart. There are worse markets--and people who know how to export to them nonetheless.
Take, for example, Alan Koontz, vice president for marketing and business development for International Remote Imaging Systems Inc., a Chatsworth-based maker of sophisticated medical diagnostic equipment.
A publicly traded company, IRIS expects to generate about $30 million in revenue this year, more than 90% of it from domestic business. Koontz wants to increase foreign sales to 40% of revenue in the next two to three years--a tall order, given the difficulties of export finance even in the best of times.
But Koontz knows a thing or two about a powerful export financing technique called forfaiting, and he used it to finance exports totaling $850,000 this year to one of the world’s more difficult markets, Turkey.
As explained in this space last week, forfaiting allows the exporter to turn foreign receivables into quick cash at little or no cost. The technique allows you to sell goods overseas on long-term payment contracts without the cash-flow problems common to such arrangements.
Best of all, forfaiting works even when you ship to places gripped by political and economic instability--for example, Turkey.
According to the World Bank, inflation in Turkey reached an annual rate of 90% last September. According to the Fraser Institute, a Canadian free-market think tank, the Turkish bureaucracy wields an extraordinary and largely arbitrary power over trade unchecked by constitutional guarantee of private property rights.
This gives exporters two big problems: No customer in Turkey can afford to finance the purchase of imported goods with a Turkish bank loan, and the Turkish legal system makes foreign companies wary of doing business there in the first place.
Turkey, in short, is a tough market. But that didn’t keep Koontz from using forfaiting to finance his $850,000 deal earlier this year.
Koontz’s Turkish customer, a distributor of medical equipment, wanted to pay IRIS’ invoice over two years. The distributor’s financials did not qualify him for credit insurance, and the U.S. Export-Import Bank would not have underwritten a two-year contract for this transaction.
The distributor could, however, get a Turkish bank to guarantee repayment, and that keyed the deal.
Koontz called on Gary Mendell, president of Meridian Finance Group, a Los Angeles export finance and credit insurance brokerage, to arrange a forfaiting deal.
Koontz shipped the IRIS equipment to Turkey, receiving in exchange a series of promissory notes from the distributor guaranteed by a Turkish bank.
Through Mendell, Koontz quickly turned these promissory notes into cash by selling them at a discount to a bank in Europe in a classic forfaiting deal. Forfaiting arose following World War II as banks and other financial institutions in Western Europe began buying promissory notes bearing bank guarantees as a means of expanding trade.
Koontz factored the forfaiter’s discount into his sales price, and he also charged his Turkish distributor interest at about 12% for the two-year term.
The deal went smoothly, benefiting all the parties:
* The Turkish distributor got his medical equipment on reasonable terms, with payments due over two years, including interest at a rate unavailable from Turkish banks.
* The forfaiting cost IRIS little or nothing because Koontz factored the forfaiter’s discount and the interest paid by the Turkish distributor into his final sales price.
* Better yet, IRIS turned the promissory notes from the Turkish distributor into quick cash.
* Last but not least, the deal gave the European forfaiter a nice profit on the income stream from the Turkish distributor.
“Whenever you see a bank guarantee, your first thought is to forfait the transaction,” Mendell says. “The Turkish customer couldn’t get credit insurance, and even if we’d been able to get Ex-Im financing, it would cover only 85% of the deal.
“Forfaiting was the answer.”
The forfaiting deal was a first for IRIS, and Koontz expects to use the technique again as the company’s foreign trade expands.
“We sell instruments that cost between $100,000 and $200,000,” Koontz says, “and in many parts of the world, medical institutions can’t afford that kind of capital outlay.
“They prefer to buy on a ‘cost-per-test’ basis--essentially, paying as they go. Turkish law required that we sell into that country through a Turkish distributor, and our distributor didn’t have the capital to pay for the equipment up front.
“We needed reasonably inexpensive financing for extended payments--so the distributor could pay off the equipment as his own customers used it.”
For IRIS, forfaiting the deal put cash into company coffers even faster than many domestic transactions, Koontz says.
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How to get financing will be a topic at The Times’ Small Business Strategies Conference Oct. 17-18 at the Los Angeles Convention Center. Columnist Juan Hovey will be featured. He can be reached at (805) 492-7909 or via e-mail at jhovey@gte.net.
