Import/Export Trade Credit Empowers Entrepreneurs. Chris Chang, CEO of DS-Concept Factoring, Inc.

Transcription

1 Import/Export Trade Credit Empowers Entrepreneurs Chris Chang, CEO of DS-Concept Factoring, Inc. Import/export trade credit supporting global trade channels empowers entrepreneurs and enables small business owners, especially amidst an environment where many banks have been tight and reluctant on extending credit. Chris Chang, CEO of DS-Concept Factoring Inc., explains why. Import/export trade credit empowers entrepreneurs and enables small business owners, especially amidst an environment where many banks have been tight and reluctant on extending credit. It is widely acknowledged that banks will not fund transactions or lend to small business entities where they are dependent on collecting from a debtor in another nation. Also, many factors and asset-based lenders will not entertain international deals. There is a trend of import/export trade credit firms working with companies which may not be of American origin, but which have a business presence in the United States. This company s parent may be registered in Hong Kong as an example. This company may have global distribution channels procuring camera equipment from Taiwan or China that then gets officially sold from Hong Kong (which has tax advantages). And the principal owner is actually from Italy. I have been seeing an increasing number of these corporate scenarios, where import/export trade credit has developed within this marketplace. The United States still remains the largest consumer market in the world. So business owners like the one I just described need to set up entities in the United States for wholesaling and domestic retail sales. This business owner today may sell from points within the United States or from Hong Kong to the United Kingdom to France to Germany.

2 When the financing needs of such an operation are taken into account, banks, factors, and asset-based lenders are often only able to address a very specific type of deal, a limited scope. The financing package they provide to this business owner becomes fractured, splintered, to the point that the business cannot function given all of the restrictions imposed by their lender or factor. The business owner is faced with having to constantly search for new financing specific to each nation, even though this company should be considered a decent credit risk. Import/export trade credit, which for the most part is a form of international factoring, is able to finance the business owner s products through all of these international transactions I described. Even with purchase order financing for a business, this is usually limited to oneshot, singular transactions where inventory typically gets manufactured in China or a third world nation, and then gets shipped out to the destination of the debtor. An import/export trade credit firm financing all of these different deals is not restricted by the jurisdictions of the legally registered entities, whether they are in Hong Kong, Korea, the United States or other areas. Let s look at a garment which winds up in Wal-Mart, America s largest retailer. Import/export trade credit is able to finance the supply chain transactions every step of the way that lead to this garment being displayed in the store. Raw material textiles from Bangladesh can be financed shipped to China where the product inventory gets manufactured from fabric. Then this merchandise gets shipped to a distributor in the United States, who has the purchase order from Wal-Mart. Everything in this financing process gets leveraged off of that Wal- Mart purchase order (with the highest selling value on the paper). One of the main reasons why import/export trade credit can be effective is the role of credit insurance in these financed transactions. Generally, on domestic accounts receivable, domestic banks underwriting a deal know their domestic market and their home environment. There is usually a data base of payment patterns. It is easy for these banks to evaluate who has good credit or who has gone bankrupt.

3 A lender may lend against a domestic accounts receivable---but it is highly unlikely they will do so against a global accounts receivable. Again, bankers, domestic factors, and asset-based lenders do not consider international accounts receivable as lendable property. However, on the international level, the banks, factors, and asset-based lenders typically do not have the pertinent financial data unless they are in that nation s market. Credit insurance used by import/export trade credit firms is the only vehicle that can be used to establish: When there are open terms for ninety days, if and when someone will pay or not. Credit insurance is practically synonymous with international factoring. Credit insurance provides essential business intelligence about payment patterns, along with performance of a business in different marketplaces and localities. The credit insurance underwriters are able to hold face-to-face meetings with the debtor and require their financials. In different parts of the world, different levels and standards of intelligence may be available. In Europe for example, in a European Union nation, it is common for any business to share their financials with banks. That financial data is often considered public information shared among credit insurance providers. Perhaps, a company had business issues with a bank? Credit insurance provides a profile similar to a credit rating report. Globally, credit insurance is the most common denominator of credit worthiness. As an example, DS Concept Factoring, Inc., maximizes its use of credit insurance to help provide credit protection in underwriting deals. Import/export trade credit firms typically offer financing against credit insurance coverage. These firms provide the credit insurance coverage to the exporter or to their client. Otherwise, the client would have to go out and secure their own insurance policy (which may pose difficulties and additional costs). Making credit insurance part of the financing package from the import/export trade credit firm makes it userfriendly and sets up an economy of scale cost for it that the trade credit firm is able to obtain.

4 The protection being afforded through this financing transaction for the business owner is similar to the owner of a vehicle who has car insurance, a homeowner who has property casualty insurance, or the head of a household who carries life insurance. Credit insurance combined with collection dunning services, bookkeeping services, letters of credit origination, and the financing itself makes international factoring more expensive than domestic factoring. In comparison, the import/export trade credit firm is providing more value in services which may not be necessary in the simple, direct domestic factoring deals. For example, today s import/export trade credit firms have people on the ground in global offices to interview prospects, interview debtors, understand a nation s legal requirements and financial systems. In this financing sector, the international factors generally offer liberal, flexible cost efficient credit terms. Again, this is much different than domestic factoring. Without an import/export trade credit relationship, a small business owner doing global transactions can run into difficulties. Let s say a $50-$100M company has credit line support from Bank of China. This bank will refer the business owner to a credit insurance provider. They must buy the credit insurance, showing it to the bank in order to get lending against their accounts receivable. Bank of China will then want to factor this global invoice whether the debtor is Wal-Mart or a mompop retailer. Bank of China will reach out to Factor Chain International, an international factoring association functioning as a membership network. Bank of China will link up with perhaps, Wells Fargo or another United States bank whereby one will lend and one will collect. Credit worthiness in underwriting becomes domestic factoring. In underwriting where collection takes place in another nation, these two banks may have a threshold on which they will collect. I do not think I can give you $1M, but under $500,000 I will undertake the risk to collect it. And if I am unable to collect it I will

5 owe you the money. In this non-recourse arrangement if there is a problem this is only between two banks. Major banks in Europe are well-versed in import/export trade credit and the role of credit insurance over and above their American counterparts. European banks can go a few hundred miles crossing the border into a different nation. So it is easy for them to embrace an international orientation. And the mindset of European bankers is that the Middle East and western Asia is relatively close by for financing transactions. International factoring in nations like France, or the United Kingdom is well-developed. However, the fact remains many European financial institutions are now in deep distress in nations like: Greece, Spain, and Italy to mention a few. They have cooled down in their engagement of import/export trade credit transactions. On the other hand, American banks typically have Wall Street investment and equity capital to back them up. But American banks often look inward, not outward. By and large, American banks are not global-minded in proportion to the volume of business they represent. In today s world, this is a weakness in the American enterprise system. It appears that in the foreseeable future, the greatest marketplace potential for import/export trade credit is in the developing, emerging nations like Pakistan, Bangladesh, Turkey, Egypt or Hungary, all of where there are growing, expanding needs. XXXXXXXXXXXXXXXXXXX1456