Here’s How Expert Exporters Cut Sales Costs, Secure Payment

If you export American-made goods to the Pacific Rim, you have probably seen your business shrink in recent months as the financial crisis has deepened in Asia.

Sooner or later the crisis will ease, of course, but no one busy running a business in the U.S. can do much to speed it along, given the scale and complexity of the financial and political troubles in Japan, South Korea, Indonesia and elsewhere.

None of this, however, renders you powerless. In fact, there is an export financing technique not widely known with which an American exporter can improve his or her chances of making an overseas sale and getting paid for it.

Bankers call the technique “documentary collection,” and although it doesn’t speed the time it takes to collect on goods shipped abroad, it does cut the cost in a big way--and in any transaction, cutting costs means getting more business, particularly when selling American-made goods to cash-strapped customers in the Pacific Rim.

In the main, U.S. exporters do one of two things when dealing with new customers overseas: They get cash up front or they demand a letter of credit. Put another way, in the absence of cash or a letter of credit guaranteeing payment for the goods once received, the wary exporter doesn’t ship.

With known customers, on the other hand, exporters often grant open-account terms similar to those used for domestic business--30 days, 60 days or even 90 days.

And when they sell to big overseas customers, exporters often buy accounts-receivable or credit insurance, which shifts the risk of nonpayment to an insurance carrier. Common in Europe, credit insurance is now widely available in the U.S., too, from such carriers as American Credit Indemnity, AIG, the Reliance Insurance Group, CNA, Maryland Netherlands Insurance and Exporter’s Insurance of Bermuda.

Each financing technique comes with a downside:

* It’s hard to get cash up front from a customer that has been buffeted by the Asian financial crisis.

* A letter of credit costs you and your overseas customer 1% of the value of the transaction, more when you ship to countries with high interest rates.

* Any open-account customer who disappears can leave you holding the bag.

* Credit insurance, though often less costly than a letter of credit, isn’t free either. Premiums start at $5,000 for credit insurance covering domestic receivables and easily exceed $25,000 for foreign receivables.

On the upside, credit insurance protects your accounts receivable--perhaps your biggest asset--against catastrophic loss and frees up your bad-debt reserves, improving the look of your balance sheet. It allows you to offer your best credit terms to good customers, thus giving you a competitive advantage. And since it guarantees that you will collect on your accounts receivable, it makes your banker much more likely to lend you working capital, even against foreign receivables.

In short, credit insurance works for companies whose business affairs involve trading with big customers overseas. But like a letter of credit, it costs money, cramping your ability to trade.

Arranging for documentary collection, on the other hand, costs a pittance--$100.

In essence, when you arrange for documentary collection, the transaction flows this way: You ship your goods. Your bank, meanwhile, separately sends the originals of three documents--your bill of lading, your insurance certificate and your invoice--to your customer’s bank overseas, with instructions not to release the goods until your customer pays for them.

Once your goods arrive, your customer hands over payment to the corresponding bank and takes possession of the goods. You collect when your bank receives payment from the corresponding bank.

In other words, documentary collection guarantees that you will receive payment for your goods without the fuss and bother of a letter of credit, not to mention the expense.

“Basically, it’s cheaper and cleaner to do business with documentary collection than with a letter of credit,” said Robert Krant, senior vice president and manager of City National Bank’s international department, with offices in downtown Los Angeles.

“It doesn’t speed up collection, but with a letter of credit, you have an application process and fees. Documentary collection is still a secured way to sell your goods overseas, since your customer can’t take possession of the goods until he or she pays for them. But it is cheaper and easier, and that can make the difference between doing the transaction and not doing it.”

At present, letters of credit secure the bulk of the American-made goods flowing into the Pacific Rim, Krant said, but as exporters come to know their foreign customers, many ship on open account. Given the cost and cumbersome nature of the letter of credit, many now use credit insurance as an alternative.

“Fewer companies use documentary collections than you might think,” he noted. “They usually go from demanding letters of credit to shipping goods on open account to known customers.

“Often, exporters don’t even know about documentary collections, and when they come across it, they see that it can make the difference in making a sale overseas.”

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Freelance writer Juan Hovey can be reached at (805) 492-7909 or via e-mail at jhovey@gte.net.