MBITA's trade finance column features articles from the experts in the field of EXPORT FINANCING.
Thoughts on How to Price Open Account Export Sales
by MBITA Member John Keevan-Lynch, Provident Traders, Inc.
Many years ago I exported spare parts for off-highway trucks and mobile cranes to mines
in Mexico and South America.
Early on, I quoted $200,000 for a list of Fiat Allis Genuine spare parts to a large open pit
mine in Mexico, payable by a Confirmed Sight letter of credit (L/C) with me picking up all the
L/C charges outside Mexico.
A competitor quoted $220,000, same list, 30 days open account payment terms.
To my chagrin, I lost the order. Why? The payment terms were more important to the
buyer than price.
Going forward, I knew I had to offer open account payment terms if I was to be
competitive. I could do this for small quotes that I could finance myself (i.e., "carry the Account Receivable (A/R) on my balance sheet"). But for large quotes that I could not carry on my
balance sheet because I didn't have the capital to finance myself, I would have to reduce my
margins even more to entice a buyer to buy from me on L/C terms.
To protect myself from the risk of non-payment on the small open account sales, I
purchased an Eximbank export credit (non-payment) insurance policy. The policy covered 95%
of my invoice value (including profit) on sales of product whose US content was 51% or more
(calculated using the product's Cost-of-Goods-Sold (CGS) and exported from the US. The
premium rate was $0.55 per $100.00 invoiced.
To compensate for the risk, cost and aggravation of open account terms, I added an
additional 9% margin to my L/C price and quoted 30 days open account terms, "subject to credit
If I won the order and Eximbank approved the buyer, off l shipped.
Worst case: if l had to file a claim, I lost my 5% co-insurance, my 0.55% premium paid
and whatever interest carrying costs I might have had. Still ahead of the game.
Best case: if the buyer paid me 30-45 days after due date (typical in Mexico for a "good" buyer), I earned 9% on my money for a 90 day tum (30 days open account plus 45 days
slow pay) times 4 turns a year= 36% annual return on my money.
If Eximbank did not approve the buyer's credit, I would tell the buyer that I could not get
credit approval for this sale but I could offer him a "one-time-only" 10% discount if he paid me
with an L/C or Cash in Advance (CIA). Back where I was to begin with (and the beneficiary of
Eximbank's free advice).
Watch out that you do not "unbundle" the open account cost component of your price
because your buyer will use it to negotiate a lower price from you.
For example, what if you quote Cash In Advance (CIA) or L/C payment terms and the
buyer says "We like your price but we [Pepsi Cola, Pemex, whomever] never have and never will
pay CIA for anything; payment terms must be 30 days open account"? Imagine the buyer's
shock if you added (in my case) 9% to your CIA price for 30 day terms. He'd say "that's
usurious! 108% p.a. ?"
You will have the same problem if you submit two quotes, one on CIA terms and the
other on open account terms.
So, decide what your payment terms will be before you quote prices and stick to them. If
a credit-worth buyer insists on open account terms, quote on that basis up to the amount you can
support but do so without revealing the cost of your open account financing.
Margins will vary according to markets, but the principle is the same: open account
payment terms are a legitimate "value-added" component to a sale that you should be compensated for.
John Keevan-Lynch is President of Provident Traders, Inc., a Northern California based export finance consultancy and licensed export credit insurance broker with more than 33 years experience with Ex-Im Bank.
by MBITA Member Meridian Finance Group
International opportunities are no longer pursued only by large corporations. Middle-market US companies-and even small businesses-are selling to foreign governments, investing in overseas operations, etc.
When you venture abroad: you can secure your contracts, protect your assets, and arrange financing from your lenders and investors using political risk insurance. Once feasible only for major undertakings, political risk insurance is now available for all sizes of international projects, transactions, and ventures.
When you're doing business directly with a foreign government, public-sector buyer, or government-owned entity, contract repudiation insurance can protect against non-payment of your invoices or non-honoring of your contracts, either before or after your shipment of goods or performance of services.
Coverage can also be written to indemnify against frustration of your contracts with private-sector entities that might be unable to perform due to expropriation, currency inconvertibility, political violence, or other local/international government actions or political events that would be out of your-or their-control.
If your business relies on licenses or permits issued by foreign governments, then you can obtain political risk insurance to cover against cancellation of import or export licenses or business permits, as well as embargoes, boycotts, sanctions, or decrees causing business interruption, payment defaults, or other losses.
If your company has assets located abroad, you can insure them against expropriation, inconvertibility, and political violence-long-term or for the duration of a contract-in order to secure your own balance sheet and to facilitate arrangement of financing from your lenders or investors.
Expropriation insurance protects against confiscation, nationalization, and other foreign government actions or political events which would deprive you of your rights of ownership, security interests, or control of your assets situated in other countries. It also covers your ability to repatriate your assets, for example getting your equipment out of the country at the end of an operating lease or after completing a contract.
Inconvertibility policies cover your right to exchange local currency for US dollars or other hard currencies and protect against government prohibitions on transferring hard currency out of the country.
Political violence coverage insures against non-payment, business interruption, forced abandonment, or damage/destruction due to war, civil unrest, sabotage, or other government actions or political events.
MERIDIAN FINANCE GROUP brokers policies from every underwriter in the political risk insurance market, enabling us to quote the most competitive terms and premium rates. These policies work differently from other kinds of insurance, so Meridian provides comprehensive support to help our clients get the most out of their coverage. Contact: (310) 260-2130 or email@example.com.
Initiative (NEI) Update
Statement of Fred P. Hochberg on the Release of Export Data from the Commerce Department
U.S. Exports Reach A Record-High $198 Billion in July
Washington, D.C. - Ex-Im Bank Chairman and President Fred P. Hochberg issued the following statement with respect to July's record-high export data released today by the Bureau of Economic Analysis (BEA) of the U.S. Commerce Department. According to BEA, the United States exported $198.0 billion of goods and services in July 2014, the highest mark for any month ever recorded.
"These record-high numbers show that exports stamped 'Made in America' are sought out for their quality, reliability, and innovation," said Ex-Im Bank Chairman and President Fred P. Hochberg. "Given a level playing field, U.S. exporters can compete with anyone in the world, and Ex-Im Bank is proud to support American exports, just as they support jobs here at home."
Exports of goods and services over the last twelve months totaled $2.3 trillion, which is 46.6 percent above the level of exports in 2009, and have been growing at an annualized rate of 8.7 percent when compared to 2009.
This press release was issued on Sept. 4th by Ex-Im Bank. Press release source article.
Contact Office of Communications: (202) 565-3200.
The National Export Strategy is available also at
http://trade.gov/NEI and http://export.gov.
International Trade Update at
United States Department of Commerce
Office of Public Affairs - Tel. 202-482-4883
|Ayse's Corner is a periodic feature of the World TradeWinds eZine'. Ayse Oge is a published author and global trade marketing expert and author of Emerging Markets.
The Good Life
In June of 2014, I was invited to a fabulous wine and culinary tour in Bordeaux, France to celebrate the French "Art de Vivre" with my fellow Global Women Summit delegates. The trip's highlights included wine-tasting in some of France's most prestigious wine-producing regions: Medoc and Saint Emilion.
Wine has always been an essential part of the French tradition, both culturally and economically, but the growth of the world's middle class has made it a global necessity. Worldwide wine consumption is expected to grow $180 billion by 2016, with a large part of the demand coming from China, Hong Kong, Japan and Singapore. In fact, international trade-in wine has increased by almost 200% from 1961 to 2005, becoming a popular export product in the world markets.
China is Bordeaux's largest market and takes around one in five of the bottles produced in the renowned area, where up to 55,000 jobs depend on the sector. Ubifrance's China-based sector manager told her audience during an address to the Wine Conference "Chinese importers want to listen to a story: they are looking for direct authenticity, for direct contact."
In the last few years, many well-known French wine companies have opened their wineries in Central China to produce sparkling wine. Bordeaux International Wine Institute is offering classes on business management in the oenological arts to wine enthusiast, vintners and vineyard owners coming from all over the world including Turkey, China and India. In Asia, the middle class equates wine with sophistication and "the good life," and wine conveys history, heritage and cultivation.
Globalization has made wine a popular drink, particularly among the world's younger generation who are joining wine clubs, taking wine courses and embracing wine tourism. A strong wine knowledge and opinion is growing ever more fashionable.
In the global wine industry there are two broad categories for the classification of wine producing countries: New World Producers and Old World Producers. The New World Producers comprise of the USA, Australia, Chile, Argentina, and South Africa. The largest of the Old World Producers are France and Italy. And now there are the new players in the industry, such as China, which has been developing its own plantings and has expanded by 20 percent over four years, fully expected to be top producers of wine within 10 to 15 years. This growth in Global Wine consumption is accelerated by the shift to a Mediterranean-style diet, the rise in the awareness of the health benefits of wine, and an increase in use during recreational activities and for general entertainment.
Some key trends in the wine industry are: Premiumization and Craft. This started with craft beer and has become popular among beer consumers and continued into craft spirits and more boutique artisan wines. The millennials who are coming into the age of alcohol consumption can be the best target market for these types of beer.
The U.S. industry created an initiative in 1998 called "WineVision" based on the opportunities presented by the global wine market to the U.S. vintners who are pouring their heart into the craft to be more competitive, both domestically and internationally.
WineVision focuses on three fundamental principles: 1) become the leader in sustainable practices and keep U.S. producers environmentally sound, socially responsible and economically viable, 2) make wine an integral part of the American culture, and 3) position U.S. wine as a high- quality, high-value product.
Expanding WineVision to provide educational and training workshops to help equip U.S. wineries with the business and export tools and skills they need to compete in the global marketplace would be a good strategy. This could help promote the valuable and sought-after California image in the developing world and allow U.S. wine producers tap into global consumers who want more of the good life.
Ayse Oge is President of Ultimate Trade, International Trade Consulting, Speaking and Training. She is also Board Member of California Business Education Association.
Must See Video on Global Trade
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Online Export Classes
This six-course series will cover all key areas of the export industry, including markets, sales representatives, pricing, agreements, shipping and payments. You can earn Continuing Education Units (CEUs) and a Certificate in Export Management. The classes are available online 24/7, so you can start immediately and learn at your own pace.