Little-Known Import-Export Finance Method Is Cost-Effective

Joe Lupica, vice president of finance for a Torrance-based distributor of high-end optical devices, knows firsthand what importers gain when they understand the phrase “documentary collection.” So do his suppliers overseas.

Put simply, Lupica and his suppliers gain time and money.

As discussed in this space last week, documentary collection is a little-known financing technique used by exporters and importers to hedge one of the biggest hazards inherent in foreign trade--the risk that sellers won’t collect from overseas buyers to whom they ship their goods.

The technique doesn’t speed the time it takes to collect your money. And it doesn’t work at all if your overseas customer refuses your shipment. But if you deal with customers you know, documentary collection assures you of payment at a fraction of the cost of a letter of credit. Thus it makes doing business with overseas customers simpler and cheaper.

Lupica’s company, Celestron International, imports and distributes sophisticated telescopes and other optical devices made in Japan, Korea, China and other foreign countries.

Celestron’s overseas suppliers--like other companies doing business with foreign customers, whether based in the U.S. or elsewhere--have only five options when it comes to seeking payment for the goods they ship. They can:

* Ship on open account.

* Demand cash upfront.

* Insist that Celestron put up a letter of credit.

* Buy credit insurance.

* Ship under documentary collection.

The first four options impede trade in different ways:

* Exporters who ship on open account run the risk that their buyers won’t pay, leaving the exporters with little recourse short of litigation--difficult to carry on from overseas.

* If they demand cash upfront, exporters impose a condition with which few buyers will comply.

* A letter of credit can cost 1% or more of the value of the goods being traded; in addition, letters of credit are cumbersome to get and maintain.

* Credit insurance isn’t free, either, though it costs less than letters of credit and is far less cumbersome.

Like other savvy importers, Celestron International and its overseas suppliers discovered the virtues of the fifth option, documentary collection, many years ago.

Some 20% of the company’s optic devices come from manufacturers in Japan who secure themselves with documentary collections. Celestron’s suppliers in Korea, from which the company buys only about 2% of its goods, demand letters of credit. The bulk of Celestron’s goods come from suppliers in China who work on open account--probably because they receive subsidies from the Chinese government, according to Lupica.

Documentary collection works this way with each of Celestron’s Japanese makers: The maker ships its goods to Celestron via a customs broker in the U.S. Separately, the maker’s bank in Japan sends the maker’s bill of lading, its insurance certificate and its invoice to City National Bank in Los Angeles, with instructions not to give Celestron the bill of lading without payment.

City National collects on the invoice, remits payment to the maker via the Japanese bank and hands over the bill of lading to Celestron. Celestron presents the bill of lading to the customs broker and takes possession of the goods.

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Celestron must present the bill of lading to the customs broker to take possession. And since City National doesn’t hand over the bill of lading until Celestron pays the invoice, the process guarantees that the Japanese maker gets payment.

Better yet, it guarantees the transaction at a fraction of the cost of a letter of credit--usually a mere $100, according to Celestron’s banker, Robert Krant, senior vice president and manager of City National Bank’s international department.

“Basically it’s a cleaner way to do business than a letter of credit,” Krant said. “It’s a cheaper way of selling your goods overseas--and it secures the seller because the buyer can’t take possession of the goods without paying for them.”

Lupica sees other value in the technique.

“Documentary collection is a major advantage for our suppliers in Japan because it allows them to finance their receivables, which are secured through the documentary collection through their own banks,” Lupica said.

“The advantage to us is that we don’t have to put up a letter of credit in order to guarantee that the supplier gets its money,” he said.

“A letter of credit would tie up our line of credit and would probably cost us three or four times what documentary collections cost--because with documentary collections, the bank is only processing paperwork and it has no exposure guaranteeing payment.”

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Documentary collection is the next best thing to working on open account, Lupica said. Banks, however, prefer to sell letters of credit because they generate more revenue, so they don’t promote documentary collection. As a consequence, many importers and exporters don’t know about the technique.

“We’ve been around for 40 years, and I would guess that other companies that have also been around know about documentary collection,” Lupica said.

“But next to an open account,” he said, “it’s the cheapest form of export and import financing.”

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