Financing international trade can be risky since a variety of factors-anything from bad weather to political instability to poor craftsmanship-can prevent, delay or impede completion of a transaction that involves third-party production and transit of a product. Although exports and imports experience all the problems that domestic shipments do, the problems are harder to resolve since the parties are in different countries. Because of their fear of trade disputes, banks are reluctant to provide trade financing.

As a result, banks typically require customers to post collateral for 100% of funds advanced. Unfortunately, many small- and mid-sized companies typically are unable to meet such hefty collateral requirements. Alternative lenders will provide financing but at significantly higher rates (as much as 3% interest per month). Small- and mid-sized companies cannot afford this option either. Rather than miss opportunities, companies involved in trade should consider a new alternative financing structure called Risk-Transfer from Boyd, Brown and Company Inc., an international trade banking firm.

Problems with exports can be harder to resolve than with domestic shipments.

Because trade transactions frequently are fought with risk ranging from credit and financing problems to quality errors and late deliveries by overseas manufacturers, Risk-Transfer was designed to surround an entire trade transaction with insurance against every point of possible outcome.

Risk-Transfer eliminates the problem of trade disputes, which is the leading problem facing lenders and importers/exporters. The credit insurance and guarantees offered by governmental agencies or private insurers invariably exclude coverage when trade disputes occur. For example, the Export-Import Bank (Exlm Bank) will provide assurance that the buyer will pay for the goods, but it will not cover risks related to shipping the wrong goods or the wrong assortment. In fact, there is no other financing product, credit insurance or guarantee available that protects the parties involved in the case of a trade dispute.

With Risk-Transfer, the risks of trade disputes are mitigated to the satisfaction of a third-party insurance underwriter so that an insurance policy can be issued to protect lenders when a trade dispute cannot be settled amicably. The insurer provides protection to the lender in the event that the product does not comply with the specifications of the purchase order. In short, this means that the lender can count on the insurance company to liquidate its loan if the normal trade settlement does not.

RISK IS TRANSFERRED

By covering purchase orders with proprietary specification compliance insurance, Risk-Transfer achieves just what its name implies: it transfers the risk of transactions from the lender to the insurance company. As a result, Risk-Transfer fills the void in the credit market resulting from lenders' strict collateral requirements. It protects lenders by covering purchase orders with the specification compliance insurance and logistics management services that transfer the risk of transactions from the risk-averse lenders to the risk-accepting insurance company. If the transaction is based upon a valid purchase order, the specification compliance insurance provides the collateral required by banks and other lenders.

As part of the Risk-Transfer system, Boyd, Brown provides worldwide on-site inspections for specifications compliance and logistics management services to monitor the progress of trade transactions and ensure that goods are delivered on time. Those services include:

* verifying the validity of purchase orders;

* ensuring that reasonable time is allowed for production and delivery of that product;

* satisfying the insurance underwriter that proper inspection programs are in place to give confidence that the buyer's specifications will be met, which qualifies the shipment and permits claims if the goods do not meet the buyer's requirements on arrival;

* ensuring that the parties responsible for transportation, customs clearance and delivery are competent and adequately insured;

* arranging for credit insurance, when appropriate, to guarantee payment in the event of buyer default for reasons not already covered by the specification compliance insurance; and

* monitoring the progress of each shipment to confirm the satisfactory completion of the transaction.

Part of the Risk-Transfer package is the completion of a comprehensive quality assurance inspection. If the inspection indicates that the goods meet requirements, then a Certificate of Compliance is issued. The inspection includes the following:

* Review and confirm required manufacturing/processing specifications at manufacturing/processing facility;

* In-process inspection of the merchandise confirmed by written report of the findings;

* final random inspection of the merchandise prior to shipment to verify the shipment meets the specifications contained in the buyers contract.

Risk-Transfer presents a win-win situation; all parties to international trade can benefit. Banks can use the specification compliance insurance to meet the full colleralization of financed transactions, enhance their commercial lending business and enhance customer relationships. Importers and exporters expand their business without risk and enhance customers relationships.

Trade disputes are one of the biggest problems with international deals.

VINCENZO CASE STUDY

In April of 1996, VinCenzo International, an importer and designer of specialty tins, received a purchase order for 200,000 tins from Calvin Klein for a back-to-school promotional campaign. Calvin Klein was offering lead pencils in special commemorative tins. But when Keith Armato, president of VinCenzo International, asked his bank to finance the letters of credit to import the tins, his bank turned him down-despite the fact that VinCenzo was a loyal bank customer.

After a comprehensive search of both banks and trade finance companies, Boyd, Brown identified Boston-based Cambridge Trade Finance Co. as a potential leader for VinCenzo. Cambridge was willing to finance VinCenzo due to the little risk it faced as a result of Risk-Transfer. VinCenzo chose Cambridge over a commercial bank because it needed the financing immediately and did not have time to fulfill the significant paperwork requirements typically required by banks.

In addition to the specification compliance insurance, Risk-Transfer provided on-site evaluation of the tin manufacturer in Shenzhen, China, and inspected the goods for conformity to the specifications of the purchase order. As a result, Cambridge could advance funds with full confidence that the loans will be repaid either from the transaction proceeds or by the insurance company.

VinCenzo was able to ship Calvin Klein's tins-as well as over a half million other tins-within the first three weeks of the program. And now that VinCenzo's Risk-Transfer program is in place with Cambridge, the importer also guaranteed financing from Cambridge for future letters of credit, thus eliminating future financing concerns.

According to Armato, the inspection and financial system allowed VinCenzo to give its customers an increased level of confidence that the products they order will meet all of their requirements.

In 1995, U.S. merchandise trade far exceeded $1.2 trillion, with more than $200 billion used as collateral. Industry experts expect this figure to grow even more over the next decade as a result of various international trade pacts and the overall globalization of business; however, collateral is not growing fast enough to keep pace with the rate of trade. Risk-Transfer allows banks, importers and exporters to meet that need and increase their share of the market without taking on unnecessary risk.

Jim Boyd is a principal with Boyd, Brown and Co. and can be reached at 312-527-6600.