Manage risk, increase sales with Progress Payment Financing
Today’s global marketplace is alive with opportunities for U.S. manufacturers to export products to expand their businesses, but exporting into new markets presents challenges that could get in the way of success. To compete with foreign companies, U.S. manufacturers must often offer their customers attractive sales and payment terms.
Foreign buyers in competitive export markets often insist on open account terms that are beneficial for them but risky for the exporter. It can be very challenging to extend credit or offer competitive payment terms to international buyers of commercial equipment or industrial machinery that is customized.
Most manufacturers require cash advances and pre-shipment payments to start building customized equipment. Accordingly, the foreign buyers often seek financing options such as progress payment financing to cover these payments, which provides the manufacturer working capital for the purchase of raw materials, manufacturing expenses, packaging, warehousing and delivery of goods.
To get paid in full and quickly with minimal risk, manufacturers also can partner with financial institutions to offer progress payment financing to their foreign buyers.
What is Progress Payment Financing?
When a purchase of equipment is ordered, manufacturers usually require a significant down payment to begin building the custom equipment or machinery. These payments are typically 40 percent to 60 percent of the cost, and manufacturing time can easily be 4-8 months.
To manage these costs, manufacturers often require progress payments at different milestones—for example:
- 50% deposit to get started
- 30% after manufacturing is completed and the equipment is ready to ship
- 20% final payment upon delivery and acceptance
With a progress payment financing facility, a financial institution enters into a loan or lease at the time of the equipment order, and then disburses all progress payments directly to the manufacturer.
During the time before equipment delivery, the buyer makes monthly interest-only payments on the balance of the funds disbursed by the financial institution. Once the equipment is delivered and accepted, the loan or lease contract with the lender begins in accordance with the agreed upon terms.
“The manufacturing phase is the riskiest phase from the lender’s point of view because money is being disbursed without hard collateral. If anything goes wrong, the lessor bears the most risk of losing money, since there is no equipment to collect and resell.” –James Connor, Acrecent co-founder and CEO
Managing Risk with Progress Payment Financing
International trade poses certain risks to the sellers, buyers and lenders involved in international transactions, including risk of nonpayment and risk of non-delivery.
Payment and Delivery Risks
Payment risk is the risk a seller or manufacturer takes of not getting paid by a buyer. Delivery risk is the risk a buyer takes that the manufacturer may not fulfill its side of the sales agreement and fail to deliver the goods. By financing a deal in its entirety prior to shipping of the goods, it is the lender’s capital that is tied up in the dispute, not the working capital of the buyer or seller.
The high risk of disbursing funds prior to the existence of equipment makes progress payment financing unattractive to banks and traditional financing institutions. On the other hand, leasing companies and smaller direct lenders like Acrecent Financial are happy to design solutions for these types of transactions.
Other Risks of International Trade
Country risk is the risk of investing in a foreign country. Factors usually associated with this risk include economic risks, political risks, (new party in power, civil wars, etc.), commercial risks (lack of knowledge of foreign market, longer transit time) and cargo risks (storms, collisions, theft). These factors will determine whether the overall risk to lenders that are beyond the control of the business that is borrowing money.
Foreign Exchange Risk
U.S. companies buying or selling in currencies other than the U.S. dollar expose themselves to foreign exchange risk. This risk stems from exchange rate fluctuations due to economic, political and speculative reasons. Any adverse movement in the transaction currency in relation to the local currency has the potential to crush a deal and wipe out all profit.
Documentary fraud, counterpart fraud, insurance scams, cargo theft, scuttling and piracy can affect international trade. Transactions with countries that have a reputation for harboring scammers should be avoided. Experience trade services officers usually can detect forged documentary credits, but one should be cautious with transactions that are much larger in value than the norm or that appear too good to be true.
Securing financing for U.S.-manufactured equipment and machinery can be difficult, especially for goods exported to Mexico. Because the risk of nonpayment or payment delays is high, few banks are willing to take on these deals, but non-traditional direct lenders structure risky deals every day.
By establishing partnerships with direct lenders, small- and mid-sized manufacturers can mitigate risk and provide much-needed financing options to their prospective customers.
These partnerships also enable vendors to benefit in the following ways:
- closing deals that are often lost for lack of access to funding
- transferring risks associated with payment delays or nonpayment to the lender
- significantly increasing sales volume
- improving customer satisfaction
- speeding up the collection process
- strengthening their brands
- growing their businesses
Acrecent Financial thrives in such partnerships, providing 100-percent foreign buyer financing for equipment/machinery purchases, including progress payments and soft costs. Progress payments are disbursed 25 days after an application is received and do not require clients to commit to a full contract after the pre-shipment phase. Accrecent’s bilingual team specializes in challenging, complex business financing deals and Mexico exports.
Acrecent holds Master Guarantee Agreements for both loans and leases under the Export-Import Bank of the United States (Ex-Im Bank) and disburses funds prior to obtaining guarantees for a transaction.