Doing business internationally presents its obstacles. For foreign manufacturers attempting to export equipment into the United States, and for rental companies or distributors trying to bring equipment in from overseas, one of the biggest obstacles is the upfront payments before a machine can be shipped, plus the time going through customs. GE Commercial Finance has a program it believes can solve the problem. RER editor Michael Roth sat down at the Bauma Trade Fair in Munich, Germany, with GE’s trade finance sales director Scott Brennan and one of GE’s customers, Shaun Montgomery of Hartl Powercrusher, a manufacturer of crushing and screening equipment with U.S. headquarters in Sparks, Nev.
RER: What has been the biggest obstacle for a dealer or rental company to import equipment to the United States?
Brennan: We focus on providing financing to dealers and distributors and rental houses in a variety of industries. That’s our primary business. We’d been getting complaints from our customers that it was difficult to bring product in. You have to buy a letter of credit, you have to put 30 percent down to import, so if you think about it from a cash-flow perspective, if you’re an importer, 60 days before the goods ship you need to pay the exporter 30 percent on a $1 million order. So you have to give them $300,000. When the goods ship you have to give them another $300,000 and then you pay the remaining $400,000 when the goods hit Customs. So you’ve been out of pocket $1 million for 60 to 90 days, and the goods haven’t even arrived. Then they sit in Customs for 15 days, and then they spend another 15 days getting to your facility.
You still haven’t made a dime. Now you have to wait to rent or sell that equipment to generate income. So our customers were saying they conceivably they could be out of pocket $1 million for 120 days and seen absolutely no income. It’s a big problem.
RER: Why wouldn’t a typical bank loan solve the problem?
Brennan: If you go to the bank, if the bank advances 70 percent, you still have to put $300,000 down and tie up your cash. Then you have to pay the bank a fee, then the bank sends the letter of credit to the exporter’s bank who charges them another fee. It is not a customer-friendly model. In the age of the Internet, and “e” everything, that process is basically the same as when the Dutch were importing coffee in the 1700s. Literally for 300 years, there has been no innovation in the trade finance model.
RER: What did GE Trade Finance come up with to deal with this situation?
Brennan: We created a program where up to 60 days before the order ships we will give the exporter a firm payment confirmation; the importer doesn’t have to pay a dime. When the goods ship, the exporter sends us the documentation and verifies that what was shipped is what was ordered. So from the importers’ perspective, if they order a $200,000 machine and these guys try to slip a $500,000 machine by, we’ll catch it. Or the other way around, and as part of the cost of our program, we provide the importer a payment relief period of up to six months in this example. So they’ve got six months to sell or rent that machine before they have to pay a dime to anyone.
So if you look at the cash flow example, the importer places his order and pays nothing up front. Six months after he receives the machine, if it’s unsold, then he makes his first payment. If he hasn’t sold the machine, or if he doesn’t have a contract to rent it, he still doesn’t have to pay me the entire $500,000 that day. We give him an additional 54 months to pay us off. So he pays roughly 2 percent plus the interest charges every month before he pays it off. A rental company pays a marginal fee and the going rate for a monthly rental, and that gives them an opportunity to generate a lot of cash flow without ever coming out of pocket for this $500,000 piece of equipment. It totally changes the economics of the deal.
RER: Shaun, how does it help your dealers?
Montgomery: There is such a demand for crushing and screening machines globally that the days of calling a manufacturer and saying “I need a machine tomorrow,” or “In a very short time” are over. This flooring program allows the dealer to have the machines on the ground, for up to six months, as GE does for us at the moment, without paying anything. He’s got six months to sell it, but, more importantly, he’s actually got that machine on the ground. Customers can actually come around and kick the tracks. It makes a big difference when you’re actually trying to sell a machine.
Try to sell a machine off a brochure! Here the machine actually comes and sits on your floor and the customer can actually come in and see it.
RER: In how many countries are you introducing this program?
Montgomery: We’ve started this initiative with G.E. in the States and we’re looking into using G.E. in different regions of the world. We’ve had meetings with guys from the U.K. We’re looking into that. At the moment, we’re using it very effectively in the United States. The next step is where GE actually swings that into a finance package that is built around the end user. So right from the bottom, the guy who’s actually buying the machine through the dealer to us, it’s quite an attractive package.
Brennan: We do a lot of rental-purchase options if the deal is right, so the distributor will bring the unit in, put it on rent for several months and then convert that into a sale. It’s a great way to put the product out there, they generate a little cash, and the end user essentially gets to kick the tires before he makes the commitment. The typical program that we would see before is the finance company agreeing to purchase the units from the importer after they’ve cleared customs.
Montgomery: That’s what many of our dealers do. In some regions of the world it’s more popular than others. In the U.S., a lot of deals are done that way. Eastern Europe for example, if the guy wants the machine, the guy will just buy the machine.
RER: Are you working with a lot of different manufacturers now?
Brennan: Yes, we’re talking with quite a few manufacturers in this space. We actually do other industries beyond just construction. As I said, it’s a new initiative that has only been around 18 months but I don’t see how a foreign manufacturer trying to crack into the North American market could do it without this kind of package.
RER: You’ve been involved in rental for many years, what was your role before that?
Brennan: We did what everybody else did, we would buy the units when they cleared customs and put it into a 60-month program that the dealer funded. The big difference here is we eliminate the need for the down payment. We provide the guarantee for the exporter and we provide that free period now for the importer where they pay nothing for a period of time.
And we’re uniquely positioned in the industry to do that. One of the other services we provide to offset the risk, is if an importer goes bankrupt and the goods are on the water, it is not the exporter’s problem. They get to sleep at night; it’s my problem. But because I know the industry I know virtually everybody else who might possibly be interested in picking up that machine. I can do what we call move it sideways and transfer that unit to a different dealer, where a local bank is going to have a hard time doing that. If I’m a bank in Charlotte, N.C., and the dealer there goes bankrupt, what am I going to do? I’m going to take it to auction, I’m going to sell it for a lot less than what it’s worth, and I’m going to decimate the market for these guys. Or the exporter is put in the position where it has to buy the unit back just to stop it from being sold at a lower value at auction.
