Friday, January 16, 2009

Financing Options on Exports of Earth Moving Equipment to the UK

Financing Options on Exports of Earth Moving Equipment to the UK

Fortunately Joe Jaroslovsky at Ace Equipment has many financing options for securing payments on his earth moving equipments however they increasingly reduce his risk coverage beyond payment prior to sale at zero risk and letter of credit with insured coverage which highly impacts risk, rejection, price and rights of action terms which need to be juggled for the most profitable least risky mix.

First, if the importer is absolutely desperate for the goods, the firm may agree to documents against payment by sight draft which would require up to 3 months storage in a secure facility in the UK which would provide assurance that the products had been shipped while dependent entirely on Ace Equipment to ensure quantity and quality of goods. In addition it would secure title transfer risk for Ace. This would imply that purchase price was being met by alternate sources of income other than the sale of the moving equipment during the 90 days credit period which would also make Mr. Jaroslovsky more comfortable (unless the Brits were planning on taking on expropration projects on papal property). However the importer is indicating through credit terms request that they would seek to sell the products to a third party to earn those profits to pay the purchase price in full (contingent upon sales) in making the credit request.

Next, credit may be extended by documents against payment by time draft however risk increases to Ace Equipment as British firm may reject delivery or refuse to sign the time draft at importer's bank or fail to pay in full upon maturity date of 90 days. Again, title risk transfer prior to payment is avoided and the importer will be again dependent entirely on Ace Equipment to ensure quantity and quality of goods which could provide risk of rejection. Open account is another option however unsatisfying to Ace Equipment without a transaction history with the British firm. It would be like opening Mother Hubbard's cupboard to the wolves. It should not be done.

A consignment contract would ensure payments made contingent upon sales. However returning a heavy crane or backhoe to Canada unsold would be an albatross in terms of freight rates. Credit terms would imply fewer discounts on the total charges for these products as Ace prefers cash and knows, "Cash is King."A hybrid contingency contract which challenges boiler plates might be considered. Partial advance payments and monthly percentage of sales payments schedule could be proposed. The importer might go for it especially if an attached costs break down in terms of partial order shipments could be made up. As well terms for meeting a projected monthly sales schedule in England would prove useful as Ace would prefer these movers keep moving and not clutter up the sales lot. Agreeing to such terms would be concessionary. Ace would move product slowly at first and more quickly later on based on speed and turnover of UK sales inventory.

Barter might also be an option. Do the importers possess any goods which would be of use to our manufacturing facility at market reduced prices? Are there by chance any retired or traded-in excavators ready for the shredder which might well service our blast furnaces at throw away prices during this commodities market melt-down? Factoring or forfaiting might also be possible as England is far from being a developing country slow to recessionary growth notwithstanding. Possible export credit insurance from EDC and direct loans to the importer may be available to reduce overall risk. (All from John R. Jagoe's, Export Sales and Marketing Manual 2007)

Reservation of titles and security: Taking control over the importers assets might be the most prudent request according to our text and would not be a high risk for them unless they had no secure buyers for our excavators upon point of acceptance. It would be a quick resolution to a credit problem and would easily reveal their level of commitment to and certainty of purchase. Chattel mortgages as applied in Canada however would not satisfy the full terms of 90 days credit. Some other more extensive mortgage holding terms on listed assets might be required to meet extended credit deadlines. However this would leave us open to contentious UK property rights laws.

A consignment agreement and/or agency agreement might also be a practical solution and would ensure a percentage of sales income for the importer. However this would require Ace Equipment to fully research the UK market to ensure that this particular importer would make the best agent or consignee and whether or not the equipment market is strong enough to ensure purchase of our products there. The importer's full disclosure of its financial standing and current sales records might be impressive enough to make minimum stocking orders a reality following a first successful sales record on their request terms contingent on adequate or superior performance as rights of action. Conversely, the importer's balance sheet and assets might send Jaroslovsky running for the hills.

This credit request might just be an indicator of necessary export market development in the UK unless this is a one off sale. Making a quick deal could be the worst move Jaroslovsky could make. Following the global success of Caterpillar, Ace might prefer to develop a solid distributor and/or dealership network in the UK themselves as a benchmark to their future performance there and reap the profits of the middle man as well. This would require a cooling of Jaroslovsky's heels. This buyer might represent a future agent or distributor or might not. How willing are they to negotiate payment terms for this contract? No sales at any price or without weighing the risks and opportunities. Maybe its time to get a new salesman?

"Caterpillar Realized It: More Effective Frontline Leaders" (DDI)

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