Low Margins Equal High Numbers
I wrote in a previous article about “Country Risk Premium”. Its true rating agencies like Standard & Poor’s, Moody’s, and FITCH assign ratings based on risk. The Country Risk Premium mandates cost of money. For instance, the United States rate is exactly 250. The effective interest rate penalty is 0% for the United States. The United States is an AAA Rated country (for the most part). Mexico is exactly 800 points. Mexico’s credit rating is BBB+ (Lowest form of Investment grade). The risk penalty for Mexico is 2.25%. Compare this to Lebanon which is 6.00% or Jamaica at 9.00%.
Typically these rates are tied to something called LIBOR. LIBOR is among the most common of benchmark interest rate indexes to make adjustments to loans. You have 1 month LIBOR Rate, 3 month LIBOR Rate, 6 month LIBOR Rate and 1 year LIBOR Rate. The rates go from about 2.50–2.75% (markets change and affect them slightly).
If you go to Jamaica you can expect to borrow money for the Risk Premium Rate plus the LIBOR rate. If you are AAA Credit you are going to take out a loan for 11.50% per year. People in Jamaica accept high cost of money. People in countries like this pay premium for conventional services.
As a Professional Entrepreneur one of the things you can take advantage of is “Trade Offset Contracts”. Professional Entrepreneurs explore markets that demand a “premium” for their services. One of the services I look to provide is public private partnership financing with governments. I will give you an example of a Trade Offset Contract.
What is a Trade Offset Contract?
Offset Contracts are provisions to an import agreement, between an exporting foreign company, or possibly a government acting as intermediary, and an importing public entity. These two entities make the exporter do activities in order to satisfy the importing company’s requirements for acquisition of goods and/or services.
What does this mean?
It means that you can get involved with government to give local businesses what they need. Period. Local businesses service local citizens. Sometimes local businesses provide necessities of life (water, food, toiletries, et cetera).
In my analysis of offset trade transactions I found something shocking. From 1991 to present the default rate I discovered, through the World Trade Organization (WTO) data bases, was less than .075%. What that means is if you undertook a properly structured Offset Agreement the likelihood you would be successful is 99.925%.
If you go to a country like Jamaica, provide Rice to local grocery stores (that are sponsored by Government Payment Subsidies) you have a .075% of not getting paid. That is less than a 1% chance of failure. I like those odds. Great Professional Entrepreneurs always play odds in their favor.
How much you think someone pays for the price of guaranteeing an international trade contract? Guarantees are in the form of Letter of Credits (LCs) or Demand Guarantees (DGs). I’ll give you a few seconds of suspense…businesses pay anywhere from 3–10% of the face value.
How long does it take to get a shipment complete?
The time depends on where you are shipping from. The other factor is how long it takes third parties to confirm the provisions of the offset contract (usually its an Advising Bank — Yes banks do this service). In principle… 3–5 weeks max. I want you to think about something for a minute.
If you did nothing but make someone feel good (knowing that the product they put on a ship isn’t going to be stolen) by organizing a guarantee for payment (remember the LC or DG) that had a 99.925% chance of working would you say that is safe? Would you say 3–10% every 3–5 weeks on your money is a good deal?
The answer is yes.
Trade offsets beat high risk investments like hard money lending, real estate, and the stock market.
Focus on transaction deals. Focus on deals not subject to market. Find private companies in other countries that work close with government. Form a partnership to provide necessities to local communities. Form a Public Private Partnership. Make low margin returns (3–10%) on your money with high frequency shipping time periods (3–5 weekly turns).
Who said partnership with government couldn’t be profitable?
About Christopher: Christopher Knight Lopez is a Professional Entrepreneur. Christopher has opened over 7 businesses in his 14-year career. Christopher’s purpose is to take advantage of various market-driven opportunities. Christopher is a certified Master Project Manager (MPM) and Accredited Financial Analyst (AFA). Christopher previously held his Series 65 securities license. Christopher also has his General Lines — Life, Accident, Health & HMO. Christopher has managed a combined 286mm USD in reported Assets Under Management & Assets Under Advisement. Christopher has work experience in 29 countries, raised over 50mm USD for various businesses, and grossed over 7.5mm in his personal career. Christopher worked in the highly technical industries of: biotechnology, finance, securities, manufacturing, real estate, and residential mortgages. Christopher is a United States Air Force Veteran. Christopher has a passion for family, competitive sports, fishing, martial arts and advocacy for entrepreneurs. Christopher provides self-help classes for up-and-coming entrepreneurs. Christopher’s passion to mentor comes from belief that entrepreneurs need guidance. The world is full of conflicting information about entrepreneur identity. See more at www.christopherklopez.com