How to Export to Mexico, Safely and Profitably
By T. John Keevan-Lynch
Many years ago I exported spare parts for off-highway trucks and mobile cranes to mines in Mexico and South America.
Early on, I quoted $200,000 for a list of Fiat Allis Genuine spare parts to a large open pit mine in Mexico, payable by a Confirmed Sight letter of credit (L/C) with me picking up all the L/C charges outside Mexico.
A competitor quoted $220,000, same list, 30 days open account payment terms.
To my chagrin, I lost the order. Why? The payment terms were more important to the buyer than price.
Going forward, I knew I had to offer open account payment terms if I was to be competitive. I could do this for small quotes that I could finance myself (i.e., “carry the:Account Receivable (A/R) on my balance sheet”). But for large quotes that I could not carry on my balance sheet because I didn’t have the capital to finance myself, I would have to reduce my margins even more to entice a buyer to buy from me on L/C terms.
To protect myself from the risk of non-payment on the small open account sales, I purchased an Eximbank export credit (non-payment) insurance policy. The policy covered 95% of my invoice value (including profit) on sales of product whose US content was 51% or more (calculated using the product’s Cost-of-Goods-Sold (CGS)) and exported from the US. The premium rate was $0.55 per $100.00 invoiced.
To compensate for the risk, cost and aggravation of open account terms, I added an additional 9% margin to my L/C price and quoted 30 days open account terms, “subject to credit approval”.
If l won the order and Eximbank approved the buyer, off l shipped.
Worst case: if l had to file a claim, I lost my 5% co-insurance, my 0.55% premium paid and whatever interest carrying costs I might have had. Still ahead of the game.
Best case: if the buyer paid me 30- 45 days after due date (typical in Mexico for a “good” buyer), I earned 9% on my money for a 90 day turn (30 days open account plus 45 days slow pay) times 4 turns a year = 36% annual return on my money.
If Eximbank did not approve the buyer’s credit, I would tell the buyer that I could not get credit approval for this sale but I could offer him a “one-time-only” 10% discount if he paid me