Safe harbors for overseas shipments.

Author:Stroh, Leslie
Position:Includes related article - Trade Finance
 
FREE EXCERPT

Ever have to drag payments out of your foreign customers? You can cross that problem off your list after reading this guide to protecting your exports.

What does every exporter want? To get paid for the goods it sells overseas, of course. But this isn't as easy as it sounds in today's ever-shifting economic and political climate. As a financial executive, you know that the economic risks of exporting can seriously affect your bottom line. Now for the good news: You have the option of using several tools to reduce your risks. The chief questions you need to ask are which ones will be most effective for your company's needs, how much they'll cost and what kind of protection you can expect.

The typical exporter is a big company making small but frequent shipments overseas to a few targeted geographic regions. Nationally, three quarters of all export shipments are under $10,000 in value, according to the Census Bureau. In fact, only 6 percent of the 12 million export shipments over $2,500 each year are over $100,000 in value, although they account for 56 percent of the value of U.S. exports.

But that's not to say the risk you carry on these goods is small -- on the contrary, receivables are typically the biggest uninsured asset your company has. The global insurance market perceives export receivables as very risky because these goods carry country and company risk. As an exporter, you seek to insure only your riskiest accounts, while the insurance industry wants only your safest accounts. To protect your profits, you need to guarantee that all the goods you ship overseas are equally well-protected.

For exporters, the world is divided into two parts: the developed world and the rest of the world. For payment purposes, the developed world is all nations with financial institutions that can enforce the payment of current obligations. In these countries, local financial institutions can guarantee the creditworthiness of your customers.

If the locals can't enforce payments, you won't be able to do it either, and that defines the rest of the world. You can further divide the rest of the world into two parts -- the portion that the Export-Import Bank (Eximbank) will guarantee or insure, and the portion that's too risky even for Eximbank.

In looking at your repeat shipment business, you'll probably find that most of your exports go to regular customers in developed countries. Your occasional exports are likely to be destined for new customers, or for customers in nondeveloped countries, and these shipments tend to be larger than the small but frequent shipments typical of a regular customer.

GENTLEMEN, CHOOSE YOUR WEAPONS

Many exporters with regular accounts use an open account or documentary collection to guarantee payments. This option is probably best-suited for repeat customers in developed countries. It involves using a draft to withdraw money from the customer's bank account and transfer it to yours. A draft in simplest terms is nothing more than a check with the parts rearranged and the name of the paying bank left blank. Think of a draft as the check you're writing for your customer, one that your customer can accept on receipt.

Open-account is easy to use, but drafts do take time and cost you money. As an experiment, take a foreign check for $100 to your bank, and see how much time and money you need to collect on the check. If the check is large, the time...

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