We hear regularly from clients working to use their capital the best way they can. Some are nervous about using OPM (Other People’s Money) and use strictly their own capital without ever reaching out to other sources. Others don’t have a lot of capital and are searching for ways to make their small amount of capital stretch a whole lot further.
The first type can miss opportunities if they don’t get a clear view of the profit opportunity versus the cost of capital. In many cases they compare the cost of funding with the cost of bank loans, even if bank loans aren’t available. There’s really only one key question to ask: even if finance is more expensive, does the expected profit justify the effort? If yes, the deal is a do. If no, then not.
The second type sometimes takes unnecessary risks because they try to push deals that aren’t set up quite right, because of the prospect of making a generous profit which at times can cause the trader to abandon caution.
And then there’s the part of finance which tends to be invisible to so many players in the marketplace. We get numerous inquiries from clients looking for standby letters of credit, advance payment guarantees, other financial instruments.
In many cases, clients ask for what they’ve been told they need, but here’s a little secret: very often, the other side is asking for something because they heard it somewhere themselves. Everyone wants to secure their side of the trade, without necessarily knowing what will actually do the job most effectively.
It’s like this: the right structure on a trade deal makes it very easy to finance. The wrong structure makes it difficult or impossible. If you take the time to find out the right structure for your deals and then start with deals that are easy to finance, business becomes much easier.
Too often the opposite holds true: clients set up transactions and then try and force the finance to fit the deal. It’s the other way around. The deal should be built around the proper finance structure. It’ll all happen faster and more smoothly that way.
Some of this revolves around letters of credit. You, dear reader, hear us talk about that a lot because letters of credit can unlock an amazing amount of business potential on cross-border trade. We try to apply a certain amount of commonsense to the whole process. After all, if you’ve got a choice between the hard way and the easy way, doesn’t it make sense to find out about the easy way?
Advance Payment Guarantees (APGs)
Lots of foreign orders with manufacturing or construction work in stages involve advance deposits. And the customer often wants a corresponding APG issued back, because the customer doesn’t want to risk losing the deposit. For the supplier, the result is that the deposit and the APG offset each other, leaving NO net advantage to the supplier from the customer’s advance payment.
We were reminded of this recently, when a new client had precisely this problem. This is also a structuring issue, and we have several ways to get get the deal into better shape, based on small changes in the contract and the buyer’s LC structure. The right counterproposal can sometimes break the stalemate that can occur. In some cases, there may be a way to put up the APG without requiring the supplier to tie up all his capital.
We all bump into perverse business situations, especially when it comes to financing opportunities the proper way. On the other hand, you can find out just about anything you need to know. But remember this: you don’t ask, you don’t get. We can’t answer the questions you don’t ask