GSCFMI Insights: Interest Rates, Payment Methods and Sales Opportunities
Barron, Jacob, Business Credit
The conversation about different types of payment methods that companies can offer their international customers tends to revolve around risk reduction. A letter of credit (LC), credit insurance or some other slightly more secure payment option often isn't considered necessary when the buyer is creditworthy and is expected to pay anyway. It's the marginal accounts, or the transactions a company's a little less sure about, that are most often targets for options that provide a stronger guarantee than open-account terms.
But ask Craig Schurr, senior vice president and manager of international banking at FirstMerit Bank in Akron, what he thinks about payment methods and he'll tell you that this way of thinking is backwards. Using different payment methods shouldn't just be about cutting your risk or guaranteeing payment; it should be about increasing sales and building relationships with your customers. "In banking we always say where there's risk, there's reward," he said. "Don't view risk as a bad thing, view risk as an opportunity."
"If we're exporters, instead of just viewing things as reducing risk, I think there are opportunities to expand your customer base and improve bottom-line performance by using the appropriate methods to finance buyers," Schurr said, noting that the key for identifying these opportunities in today's world is interest rates. "Companies that look for markets with high interest rates that are willing to properly structure transactions to build finance into their sales tools will do much better over the long haul by improving relationships with the companies they're doing business with."
Though the US Federal Reserve has taken steps to taper its ongoing economic stimulus efforts, so far their actions have consisted of a reduction in bond purchases. The Fed has yet to raise its historically-low interest rates and with Chair Janet Yellen's well-documented commitment to accommodative monetary policy, it's unlikely to do so for some time, at least until the employment market in the US recovers.
In other countries, rates are rising, and in some cases rising rapidly, which savvy international credit professionals should recognize as an opportunity. Money in the US is inexpensive right now, but it's not inexpensive everywhere. If an exporter can think like a bank, it can use items like a letter of credit to offer cheaper money to their customers operating in countries with higher interest rates, offering a cost benefit to their customer while still building in a bigger profit for the company.
"We continue to have low interest rates in the US. At the same time, you have some countries like Turkey that doubled interest rates less than two weeks ago," Schurr said in early February. "So now a Turkish buyer is faced with paying twice the amount of interest to borrow working capital to pay a US exporter, unless they have export financing from US companies who can afford to do that because they have access to a lower cost of cash, period."
So, for example, if there's a US exporter that's able to borrow money at a decent rate of around 3-4% and they have a buyer in Turkey that's borrowing at a much higher rate of around 17-18%, the exporter could bill at an extra 7% and build this finance factor into their sales price. "If they understand their customer is at 17% or 18%, they're splitting the difference with them," Schurr said. "They're enhancing their bottom line too. They're making an additional 7% by becoming a bank by becoming a financier to the transaction."
Thinking of transactions in these terms also serves an important relationship-building function for companies smart enough to spot the opportunities to help their customers' cost of capital. "The company that's not willing to do trade finance for their customers, they're saying 'I don't care that you're going to have to pay 20% more for my product. If you want it, pay me," Schurr said. …