Feature article—
"Make your bank a hardworking partner to close international
sales"
In a presentation to exhibitors bound
for Mexico, Martha I. Johnson took some of the mystery out of the vital
role financing plays in current sales into Mexico.
Johnson is Vice President of International
Finance at Old Kent Bank in Grand Rapids, Michigan. And she has an
impressive track record in working with her export clients to close
business with Mexican customers.
… Johnson detailed several types of
transactions, their applications, and levels of risk — from most
conservative to highly speculative.
1.
Payment in Advance
“You send the money, then I’ll send the
product,” she explained, is the safest. But it is only likely to work if
there is a clear and immediate need for your product and no competition.
It transfers all risk to the buyer.
2. Confirmed Irrevocable Letter of
Credit
This is “confirmed” by a U.S. bank
(not a U.S. branch of a Mexican bank), and that confirmation has a cost
for the risk that the U.S. bank is taking — often 1/8 percent to 1/4
percent of the value of the Letter of Credit, plus several hundred
dollars for the bank to affect the transaction.
“This is when you can’t take any
Mexican credit risk on your balance sheet,” Johnson said. “No foreign
government risk, no foreign bank risk, no foreign customer risk.”
3. Irrevocable Letter of Credit:
This is issued by a foreign bank, and the bank is substituting its own
credit for the credit of the buyer.
Documentary Time Drafts, Documentary
Sight Drafts, and Open Accounts are much riskier instruments. Drafts are
due at specified times or upon demand.
In none of these cases does a bank
guarantee payment. But these approaches are faster, more flexible, and
less costly to execute. “They may make sense due to the length of the
relationship between seller and buyer,” Johnson explained.
She warned that the fraudulent Letter
of Credit is “really easy to do” and explained precautions she uses to
protect her customers.
"You
should always have your bank ‘advise’ your Letters of Credit. They can
help you do a dry run and avoid problems later.” Some key benefits of
this approach include evaluations for legality, review for authenticity,
and reading for logic (“I notice that this says your ship date is in
three days, is that what you intended?”).
Martha Johnson’s presentation was part of the
Representaciones Guadalajara exhibitor in-State briefing
sponsored by the Michigan International Trade Authority on August 2
[1995].
