3. Financial Tools for Risk Aversion
3.4. The Comparison among Financial Tools
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The most important factor for banks to consider is People. Banks will judge a company by the character of chairperson. Also, the efficiency of management team and financial manager are all careful evaluated by banks in the process of reviewing credits.
(2) Purpose
In general, borrowing purpose is also considered, because borrowers may borrow money for other usage and finally turn out to be a bad loan. However, in the case, the purpose of Stand-by LC deal is no doubt to facilitate the transaction with the function of reducing the worry and uncertainty between exporter and importer.
(3) Payment
Banks will consider the whole asset of a company and its ability of making profits in business. If a company is not good at making money, it will become very difficult for banks to give the credit of issuing Stand-by LC.
(4) Protection
Banks prefer to ask fixed deposits or collateral as the protection of credits, unless the applying company is a big company with perfect financial structure or this company is the subsidiary of famous group, such as AU, Asus, or Foxconn conglomerates.
(5) Prospective
The prospective in terms of industry or products is also the major factor for consideration.
For example, solar-cell companies used to be popular in the recent years due to green issue. However, the volatile subsidized policy and the over-supply manufacturing situation has turned the market from the blue sea to the red one, seriously damaging the profitability of solar-tech related companies.
3.4. The Comparison among Financial Tools
After the introduction of three financial tools for risk aversion, Taiwanese exporters shall have clear picture of the operation way and understand each of different financial tools to
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Table 3.2: Comparison of Financial Tools
Items
1 Property Private Government Private Private
2 Risk
Operation Package Sale Case by Case &
Package Sale
Clients Big clients All clients All clients Big clients
8 Funding None Export Credit Advance funding None
9 Collection Sellers themselves
EXIM Bank of
R.O.C Import Factor None
10 Limitation None Only Taiwanese
Clients None Local
applicants
In addition to Export Insurance, International Factoring, and Standby LC, the table includes Commercial Credit Insurance as the standard for comparison by categories of the following 10 different aspects, such as Property, Risk Coverage, Product Lines, Way of Operation, Application, Risk Sense, Target Clients, Funding Offer, Collection, and some limitation briefly explained as the following:
(1) Property
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Except Exim bank is a government-owned institution, else three are typically private-based entity. The only difference between public and private organization is the operating target. Mostly private firms tend to maximize shareholder’s benefits and will be more care about price and profit as well. As for public unit, especially Exim bank, the mission is to assist Taiwanese exporters to successfully sell oversea. Therefore, in the case, sometimes exporters may have some room for the negotiation of risk and price.
(2) Risk Coverage
There are two kinds of risk involved in the scope of Trading Risk. One is Political Risk, the other is Credit Risk. Political Risk is uneasy to foresee and unusual to happen.
Moreover, once involved in Political Risk, it takes time to fix out and may need to suffer a huge loss until political issues being solved. Therefore, private companies are not willing to take political risk and simply offer the cover for Credit Risk. As for the cover ratio, the ratio (80-100%) is mainly decided on the case by case basis with consideration of different situations. In general, insurers or factors would like to keep every player in the skin of the game so that they could somewhat avoid Moral Hazard21 of any party who likes to cheat during the transaction.
(3) Product Lines
Commercial Insurance Company is the only one who do not involve in the business of Letter of Credit, because they think the risk and amount of L/C is quite low without much room for making profits. Therefore, they do not offer any product to cover the risk of L/C.
Else three would leverage different products and ways to cover all the risk. As for Exim bank and Factors, they separately provide different products to cover L/C risk, such as L/C Export Insurance and Forfeiting service22.
21 Moral hazard occurs when a party insulated from risk behaves differently than it would behave if it were fully exposed to the risk. http://en.wikipedia.org/wiki/Moral_hazard
22 Forfeiting Service is a method of export trade financing, especially when dealing in capital goods
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sharply increase its business achievements. Also, it is much more cost-efficient to do the package deal under the limitation of human resources and administration fees. This principle suits for any institution, including all insurance companies, Factors, and banks.However, one important mission of Exim bank is to assist SME23marketing oversea.
Therefore, Exim bank has to provide case by case products for the convenience of Taiwanese exporters; Stand-by LC is normally reviewed at the case by case basis.
(5) Application
To start the application, most institutions, including Commercial insurance company and Exim bank, require exporters to provide the financial statements and payment records of importers so that they could verify buyers’ credit and risk. As for International factoring, applicants only need to provide simple information of buyers and Factor will leverage its international network through members to see if any foreign import factor will take the risk. In the case, it is not necessary to provide financial statements to Export factor. Lastly, Stand-by LC issuing banks may not ask financial reports of foreign buyers, instead they will ask financial reports of local applicants. The reason is that the risk of Stand-by LC issuing bank are mainly depending on the local applicants- the final firewall of promissory notes guaranteed by the importer's bank. The amount advanced is always 'without
recourse' to the exporter, and is less than the invoice or note amount as it is discounted by the bank.
The discount rate depends on the terms of the invoice/note and the level of the associated risk.
http://www.investorwords.com/7315/forfeiting.html
23 In general, the definition of SME is its capital restraint (Under NT$ 80 million) or the current employees (Under 200 people). http://www.tri.org.tw/ceo/
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only for the complicated bureaucracy, but also for the poor network and international exposure compared to other organizations.
(7) Target Clients
For commercial companies, business always comes after big clients. Therefore, subject to limited resources, they will only focus on big clients for the profit concern. As for Exim bank, though big clients can bring in a lot of premiums revenues, Exim bank still has to take care of Taiwanese SME. It is more like a policy concern than profit concern.
(8) Funding Offer
Only Exim bank and Factoring companies offer provide funding for those applicants, such as Export Credit and Advance funding. Else institutions will focus on the risk aversion as well as risk protection.
(9) Collection
About collection, none of the institutions will collect once involving in commercial disputes. If not, the applicant shall get prepared of all the shipping document and claim.
At the stage of collection and claim, Exim bank and Factors will help for collection through their network, however commercial insurance companies have lower possibility to do the afterwards procedure of collection. The other concern is that sometimes the collection fees and related costs are already more than the shipment loss. In that case, it is not necessary to go through procedure thereafter.
(10) Limitation
Most institutions, except Exim bank, have no special limitation for the qualification of applicants. As long as the buyers or the applicants are good, commercial insurance companies, factors, and issuing banks are all willing to take the risk. As for Exim bank, the foreign entity is not allowed to apply for Export Insurance and Export Loan. Because government resource is scarce, Exim bank has to focus on Taiwanese enterprises, which are already very difficult to take good care of each company. In recent years, Exim bank
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promoted a special product named “Global- sure”, which could cover Taiwanese OBU companies in some limitation. With the increasing speed of globalization, the nationality of applicants may not still an issue in the international business.