| Export Financing, Grants & Programs is the ultimate PDF for those looking to break into the Exporting market. Published by Infomat Inc., our editors help entrepreneurs plan and navigate their way to industry success! ABSTRACT
Few would disagree that small businesses must look overseas
for profit opportunities in the 1990s. However, to compete
successfully, small firms must offer financing arrangements that
are competitive with exporters of other nations. This chapter
will discuss three major influences on an exporter's ability to
arrange competitive financing:
- today's banking environment
- how to approach a lender
- methods of payment
UNDERSTANDING THE BANKING ENVIRONMENT
In the United States, most small firms turn first to their
local banks for export finance assistance. However, during the
past decade many banks have decided not to focus on export
financing.
The banks' reasons for doing so have varied -- many cut
their international operations due to the huge losses they
incurred on overseas debt; others may have chosen to concentrate
on more lucrative lines of business, such as home equity loans or
mergers and acquisitions.
Consequently, during the 1980s export finance expertise in
many U.S. banks deteriorated. Even today, most smaller banks do
not retain any staff with expertise in international trade. This
is not to say, however, that such help is unavailable -- only
that small businesses must be persistent and tenacious in their
efforts to find it. For example, if a small business loan
officer is unwilling to work with his or her bank's international
staff (or the bank is unwilling to work with a correspondent),
exporters should consider establishing a second banking
relationship or, if necessary, moving all their accounts to a
more aggressive lender. Don't be afraid to shop.
Given the difficulty most small business exporters face when
seeking financing, it is imperative that financial arrangements
be made in advance. Finding a lender willing to consider such a
request requires that the borrower ensure that the purpose of the
loan makes sense for the business, and that the request is a
reasonable amount. Prospective borrowers also should understand
some key distinctions before beginning discussions with a lender.
HOW TO APPROACH YOUR LENDER FOR EXPORT FINANCING
Venture Capitalists and Lenders
Before approaching a bank for financial assistance, small
exporters should understand the distinction between venture
capitalists and lenders. Venture capitalists invest in a
business with the expectation that as the business grows, their
equity in the business will grow exponentially. On the other
hand, lenders are not in the venture capital business -- they
make their money on the difference between the rate at which they
borrow money and the rate at which they lend to their customers.
International Trade Services and Export Lending
Small exporters should also understand the distinction
between international trade services and international trade
lending. Although many banks offer international trade services,
such as advising and negotiating letters of credit, the banks'
international divisions are not authorized to lend money.
International lenders, on the other hand, have the authority to
make loans, as well as provide related services. Exporters
should verify that the bank officer with whom they are dealing
has the authority to lend for an export transaction.
Working Capital Financing and Trade Financing
It is also important to note the difference between general
working capital financing and trade financing. A small firm's
ability to qualify for general working capital financing depends
on, among other things, the strength of its balance sheet and its
prospects for generating sufficient earnings over the life of a
loan to repay it. Trade finance, on the other hand, generally
refers to financing individual transactions (or a series of like
transactions). In addition, trade finance loans are often
self-liquidating -- that is, the lending bank stipulates that all
sales proceeds are to be collected by it, and then applies the
proceeds to pay down the loan. The remainder is credited to the
account of the borrower.
The self-liquidating feature of trade finance is critical to
many small, undercapitalized businesses. Lenders who may
otherwise have reached their lending limits for such businesses
may nevertheless finance individual export sales, if the lenders
are assured that the loan proceeds will be used solely for
pre-export production; and any export sale proceeds will first be
collected by them before the balance is passed on to the
exporter. Given the extent of control lenders can exercise over
such transactions and the existence of guaranteed payment
mechanisms unique to -- or established for -- international
trade, trade finance can be less risky for lenders than general
working capital loans.
Pre-export, Accounts Receivable and Market Development Financing
Exporters should understand the distinctions between the
various types of trade finance. Most small businesses need
pre-export financing to help with the expense of gearing up for a
particular export sale. Loan proceeds are commonly used to pay
for labor and materials or to acquire inventory for export sales.
Others may be interested in foreign accounts receivable
financing. In that case, exporters can borrow from their banks
an amount based on the volume and quality of such accounts
receivable. Although banks rarely lend 100 percent of the value
of the accounts receivable, many will advance up to 80 percent of
the value of qualified accounts. Foreign credit insurance (such
as Eximbank's Export Credit Insurance Program) is often used to
enhance the quality of such accounts.
Financing for foreign market development activities, such as
participation in overseas trade missions or trade shows, is often
difficult for small businesses to arrange. Most banks are
reluctant to finance such activities because, for many small
firms, their ability to repay such loans depends on their success
in consummating sales while on a mission -- prospects that in
many cases are speculative. Although difficult for many small
firms to do, the recommended source for financing such activities
is through the working capital of the firm or, in certain cases,
through the use of personal credit cards.
Finally, take time to make sure your banker understands your
business and products. Have a detailed export plan ready and,
most important, be able to clearly show how and when a loan will
be repaid.
METHODS USED TO FINANCE EXPORTS
A small business exporter's principal concern should be to
ensure that he or she will be paid in full and on time. Foreign
buyers may have concerns as well, including uncertainty that the
goods ordered will meet the necessary specifications and arrive
in a timely manner. As a result, it is imperative that the terms
of payment be agreed upon in advance and in a manner satisfactory
to both parties.
The payment method exporters use can significantly affect
the financial risk of a particular export sale. In general, the
more generous the sales terms are to a foreign buyer, the greater
the risk to the exporter. The primary methods of payment for
international transactions, ranked in order of most secure to the
exporter to least secure, include:
- payment in advance
- letters of credit
- documentary collections (drafts)
- consignment
- open account
Payment in advance
Paying in advance is often too expensive and risky for
foreign buyers. Yet, this method of payment is not uncommon.
Requiring full payment in advance may cause lost sales to a
foreign (or even another domestic) competitor who is able to
offer more attractive payment terms. In some cases, however,
where the manufacturing process is specialized, lengthy or
capital-intensive, it may be reasonable to insist upon partial
payment in advance, or on progress payments.
Letters of Credit (LC)
A letter of credit is an internationally recognized
instrument issued by a bank on behalf of its client, the
purchaser. The LC actually represents the bank's guarantee to
pay the seller, provided the conditions specified on it are
fulfilled. Of course, the purchaser pays its bank a fee to
render this service.
The rationale behind the use of an LC is reliance by the
seller on the credit worthiness of the bank, which is normally
more reliable than that of the purchaser. It is also easier to
verify by the seller's bank. Moreover, this vehicle can be
structured to protect the purchaser because no payment obligation
arises until the goods have been satisfactorily delivered as
promised.
The conditions of the LC are spelled out on the LC itself.
When the conditions of delivery have been satisfied (usually by
the documented, satisfactory and timely delivery of the goods),
the purchaser's bank makes the required payment directly to the
seller's bank in accordance with the terms of payment (in 15, 30,
60 or 90 days, whichever is specified).
The greatest degree of protection is afforded to the seller
when the LC has been issued by the buyer's bank and confirmed by
the seller's bank. LCs may be utilized for one-time
transactions, or they can cover multi-shipments, depending upon
what is agreed between the parties. Also, make sure you can
deliver within the terms of the LC. It is suggested that you
review the details of such documentation with a bank that has LC
experience.
LETTER OF CREDIT
Buyer
| Agrees to buy product | Agrees to ship goods if LC is opened
| | Requests bank to issue LC | LC assures
payment
if proper documents are
presented
Ships goods and submits
shipping documents to bank
for payment
| Verifies documents for compliance
Payment is made immediately or upon
maturity of accepted draft
| Payment is made when documents received or accepted
|
Documentary Collection (Drafts)
Documentary collections involve the use of a draft, drawn by
the seller on the buyer, requiring the buyer to pay the face
amount either on sight (sight draft) or on a specified date in
the future (time draft). The draft is an unconditional order to
make such payment in accordance with its terms, which specify the
documents needed before title to the goods will be passed.
Because title to the goods does not pass until the draft is
paid or accepted, both the buyer and seller are protected.
However, if the buyer defaults on payment of the draft, the
seller may have to pursue collection through the courts (or
possibly, by arbitration, if such had been agreed upon between
the parties). The use of drafts involves a certain level of
risk; but they are less expensive for the purchaser than letters
of credit.
DOCUMENTARY COLLECTIONS
| BUYER | SELLER
|
Agrees to buy products | Agrees to be paid via
documentary collection
Ships goods and submits
shipping documents to bank
for collection or
acceptance
|
Documents released to buyer against payment or acceptance | Seller
receives payment at sight upon acceptance |
Consignment
When goods are sold subject to consignment, no money is
received by the exporter until after the goods have been sold by
the purchaser. Title to the goods remains with the exporter
until such time as all the purchase conditions are satisfied. As
a practical matter, consignment is very risky. There is
generally no way to predict how long it might take to sell the
goods; moreover, if they are never sold, the exporter would have
to pay the costs of recovering them from the foreign consignee.
Open account
An open account transaction means that the goods are
manufactured and delivered before payment is required (for
example, payment could be due 14, 30, or 60 days following
shipment or delivery). In the United States, sales are likely to
be made on an open-account basis if the manufacturer has been
dealing with the buyer over a long period of time and has
established a secure working relationship. In international
business transactions, this method of payment cannot be used
safely unless the buyer is credit worthy and the country of
destination is politically and economically stable. However, in
certain instances it might be possible to discount open accounts
receivable with a factoring company or other financial
institution, referred to above.
The following diagram assesses the relative strengths and
weaknesses of each method of payment:
| METHOD | USUAL TIME OF PAYMENT |
GOODS
AVAILABLE TO BUYER | RISK TO EXPORTER | RISK TO
IMPORTER |
Cash in advance | Before shipment |
After payment | None | Dependent upon exporter shipping
goods |
Letter of credit | After shipment when documents complying with LC are
presented | After payment | Very little | Relies
on exporter to ship goods |
| Documentary Collection Sight Draft | On presenta tion of draft to
buyer | After payment | If draft unpaid, must dispose of
goods |
Relies on exporter to ship goods |
Documentary Collection- Time Draft | On maturity of draft |
Before payment | Relies on buyer to pay draft; no control of
goods | Almost none |
Consignment | After sale | Before payment | High
| Low |
| Open Account | After shipment as agreed | Before
payment | Relies on buyer to pay his account |
None |
PRIVATE SECTOR EXPORT FINANCING RESOURCES
Commercial Banks
International trade transactions traditionally have been
financed by commercial banks. Commercial banks can make loans
for pre-export activities. They can also help process letters of
credit, drafts and other methods of payment discussed in this
chapter. Banks have also become increasingly involved in making
export loans backed by United States government export loan
guarantees.
Many larger banks have international departments which can
help with your company's particular export finance needs. If
your bank does not have an international department, it probably
has a correspondent relationship with a larger bank that can
assist you.
Private Trade Finance Companies
Private trade finance companies are becoming increasingly
more commonplace. They utilize a variety of financing techniques
in return for fees, commissions, participation in the
transactions or combinations thereof. International trade
associations, such as a District Export Council, can assist you
in locating a private trade finance company in your area.
Export Trading and Management Companies
Both EMCs and ETCs provide varying ranges of export
services, including international market research and overseas
marketing, insurance, legal assistance, product design,
transportation, foreign order processing, warehousing, overseas
distribution, foreign exchange and even taking title to a
supplier's goods. All of these services can leverage the limited
resources of small businesses.
Factoring Houses
Factoring houses, also called factors, purchase export
receivables on a discounted basis. Using factors can enable the
exporter to receive immediate payment for goods while at the same
time alleviating the hassles associated with overseas
collections.
Factors purchase export receivables for a percentage fee at
2-7 percent below invoice value, depending on the market and type
of buyer. The percentage rate will depend on whether the factor
purchases the receivables on a recourse or non-recourse basis.
In the case of a non-recourse purchase, the exporter is not bound
to repay the factoring house if the foreign buyer defaults or
other collection problems arise. Therefore, the percentage
charge will be greater with non-recourse purchases.
Forfaiting Houses
Similar to factoring, exporters relinquish their rights to
future payment in return for immediate cash. Where a debt
obligation exists between the parties, it is sold to a third
party on a non-recourse basis, but is guaranteed by an
intermediary bank.
One U.S. exporter which used forfaiting found the benefits
substantial:
Ed Lamb, President of Custom Die and Insert of Lafayette,
Louisiana, was able to sell a 180-day letter of credit through a
forfaiting house and got paid 178 days sooner. Forfaiting
enabled Custom Die and Insert to consummate a $2.3 million-dollar
export order to the Middle East.
GOVERNMENT EXPORT FINANCING RESOURCES
Because private sector financing providers will only assume
limited risk regarding foreign transactions, the U.S. government
has become increasingly involved in providing export financing
assistance.
U.S. government export financing assistance comes in the
form of guarantees made to U.S. commercial banks which in turn
make the loans to exporters. Federal agencies, as well as
certain state governments, have their own particular programs as
noted below:
U.S. Small Business Administration (SBA)
SBA provides financial and business development assistance
to help small businesses develop export markets. The SBA assists
businesses in obtaining the capital needed to explore, establish
or expand international markets. SBA's export loans are
available under SBA's guarantee program. As a prospective
applicant, you should request that your lender seek SBA
participation, if the lender is unable or unwilling to make a
direct loan.
The financing staff of each SBA district and branch office
administers the financial assistance programs. You can contact
the finance division of your nearest SBA office for a list of
participating lenders. The business development staff of each
SBA district and branch office can provide counseling on how to
request export financial assistance from a lender.
Borrowers can use different SBA loan programs and types of
loan guarantees simultaneously, as long as the total
SBA-guaranteed portion does not exceed the agency's $750,000
statutory loan guarantee limit to any one borrower. The lender
may charge a maximum interest rate of 2.75 percentage points
above the New York prime interest rate, or 2.25 percentage points
above New York prime if the maturity is less than seven years.
Regular Business Loan Program
The SBA can guarantee up to 90 percent of a bank loan up to
$155,000. For larger loans, the maximum guaranty is 85 percent
up to $750,000.
Small businesses that need money for fixed assets and for
working capital may be eligible for the SBA's regular 7(a)
business loan guarantee program. Loan guarantees for fixed-asset
acquisition have a maximum maturity of 25 years. Guarantees for
general purpose working capital loans have a maximum maturity of
seven years. Export trading companies (ETCs) and export
management companies (EMCs) also may qualify for the SBA's
business loan guarantee program.
To be eligible, the applicant's business generally must be
operated for profit and fall within size standards set by SBA.
Loans cannot be made to businesses involved in creation or
distribution of ideas or opinions, such as newspapers, magazines
and academic schools. Other types of ineligible borrowers
include businesses engaged in speculation or investment in rental
real estate.
Export Revolving Line of Credit Program
The Export Revolving Line of Credit (ERLC) Program offers a
credit line up to 36 months. Any number of withdrawals and
repayments can be made as long as they do not exceed the dollar
limit of the credit line, and the disbursements are made within
the stated maturity period. Loan maturities are generally for 12
months, with options to renew.
Loans can be used to finance labor and materials for
manufacturing or wholesaling for export, to develop foreign
markets or to finance foreign accounts receivable. Foreign
business travel and participation in trade shows are also among
the eligible uses, but a regular 7(a) business loan may be more
appropriate for these purposes.
Applicants must satisfy eligibility criteria established for
all SBA loans. Also, the applicant must have been in business --
not necessarily exporting -- for at least 12 months' continuous
operation before filing an application. The 12-month requirement
may be waived by the SBA regional office, if the firm's
management has sufficient export experience or enough management
ability to warrant an exception.
The International Trade Loan Program
The International Trade Loan Program provides long-term
financing to help small businesses compete more effectively and
to expand or develop export markets.
Loan maturities cannot exceed 25 years, excluding the
working capital portion of the financing. The SBA's guarantee
cannot exceed 85 percent of the loan amount. The agency's
maximum share for facilities or equipment loans is $1 million,
plus $250,000 for working capital.
Proceeds may be used to purchase or upgrade facilities or
equipment, and to make other improvements that will be used
within the U.S. to produce goods or services.
No debt payment is allowed. Proceeds can be used to buy
land and buildings; build new facilities; renovate, improve or
expand existing facilities; and purchase or recondition
machinery, equipment and fixtures. The working capital portion
of the borrowing could be in the form of either an ERLC or a
portion of the term loan.
Applicants must establish either of the following to meet
eligibility requirements:
- Loan proceeds will significantly expand existing export
markets or develop new ones.
- The applicant's business is adversely affected by
import competition.
Small Business Investment Company (SBIC) Financing
A Small Business Investment Company (SBIC), approved and
licensed by the SBA, may also provide equity or working capital
exceeding the agency's $750,000 statutory maximum. SBICs can
invest in export trading companies in which banks have equity
participation as long as other SBIC requirements are met.
Export-Import Bank of the United States (Eximbank)
Eximbank is an independent federal government agency
responsible for assisting the export financing of U.S. goods and
services through a variety of information service and insurance,
loan and guarantee programs. Eximbank has undertaken a major
effort to reach more small business exporters with better
financing facilities and services, to increase the value of these
facilities and services to the exporting community, and to
increase the dollar amount of Eximbank's authorizations
supporting small business exports.
Eximbank's export financing hotline provides information on
the availability and use of export credit insurance, guarantees,
direct and intermediary loans extended to finance the sale of
U.S. goods and service abroad.
Briefing programs are offered by Eximbank to the small
business community. The program includes regular seminars, group
briefings and individual discussions held both within the Bank
and around the country.
Export credit insurance programs reduce an exporter's risk
and can be obtained through an insurance broker or from
Eximbank's Insurance Division. A wide range of policies is
available to accommodate many different export credit insurance
needs. Insurance coverage:
- protects the exporter against the failure of foreign
buyers to pay their credit obligations for commercial or
political reasons;
- encourages exporters to offer foreign buyers
competitive terms of payment;
- supports an exporter's prudent penetration of higher
risk foreign markets; and
- gives exporters and their banks greater financial
flexibility in handling overseas accounts receivable.
During the first two years, the new-to-export insurance
policy offers a short-term (up to 180 days) insurance policy
geared to meet the particular credit requirements of smaller,
less experienced exporters. Under the policy, Eximbank assumes
95 percent of the commercial and 100 percent of the political
risk involved in extending credit to the exporter's overseas
customers. This policy frees the smaller exporter from "first
loss" commercial risk deductible provisions that are usually
found in regular insurance policies. The special coverage is
available to companies which are just beginning to export, or
have an average annual export credit sales volume of less than
$2,000,000 for the past two years, and meet the SBA definitions
of small business.
The umbrella policy also covers short-term receivables of
companies with only limited experience in export trade. These
policies are available to commercial lenders, state agencies,
finance companies, export trading and management companies,
insurance brokers and similar agencies to insure their clients'
receivables. Exporters are eligible if they have average annual
export credit sales of less than $2,000,000 for the past two
years and meet the SBA definitions of small business.
Loan Programs
The Working Capital Loan Guarantee Program assists small
businesses in obtaining crucial working capital to fund their
export activities. The program guarantees 100 percent of the
principal and interest on working capital loans extended by
commercial lenders to eligible U.S. exporters. The loan may be
used for pre-export activities such as the purchase of inventory,
raw materials, the manufacture of a product or for marketing.
Eximbank requires the working capital loan to be secured with
inventory of exportable goods, accounts receivable or by other
appropriate collateral.
Direct and Intermediary Loans
Eximbank provide two types of loans, direct loans to foreign
buyers of U.S. exports and intermediary loans to fund responsible
parties that extend loans to foreign buyers of U.S. capital and
quasi-capital goods and related services. Both the loan and
guarantee programs cover up to 85 percent of the U.S. export
value, with repayment terms of one year or more.
Direct loans of any size and long-term loans to
intermediaries are offered at the lowest interest rate permitted
under the Organization for Economic Cooperation and Development
(OECD) arrangement for the market and term.
Medium-term intermediary loans are structured as "standby"
loan commitments. Under this arrangement, the intermediary may
borrow against the remaining undisbursed loan at any time during
the term of the underlying debt obligation. There is a
prepayment fee if it is triggered by prepayment of the foreign
borrower.
Guarantee Programs
Guarantees of the Eximbank provide repayment protection for
private sector loans to credit worthy buyers of U.S. capital
equipment and related services. The guarantee is available alone
or may be combined with an intermediary loan.
Most guarantees provide comprehensive coverage of both
political and commercial risks but political risks only coverage
is also available. The guarantee covers 100 percent of principal
and interest. In the event of a default, the guaranteed lender
must file a claim no less than 30 and no more than 150 days after
the default. The claim will be paid within five business days
after receipt.
Customary repayment terms for capital goods in international
trade are:
Contract Value | Maximum Term |
| Less than $75,000 | 2 years |
| $75,000 - $150,000 | 3 years |
| $150,000 - $300,000 | 4 years |
| $300,000 or more | 5-10 years* |
* depending on the nature
of the sale and the OECD classification of the buyers'country.
Loans for projects and large product acquisitions, such as
aircraft and capital-intensive machinery, are eligible for longer
terms while lower unit value items such as automobiles and
appliances receive shorter terms.
Commodity Credit Corporation (CCC)
The United States Department of Agriculture's Commodity
Credit Corporation (CCC) operates Export Credit Guarantee
Programs to provide United States agricultural exporters or
financial institutions a guarantee that they will be repaid for
short- and intermediate-term commercial export financing to
foreign buyers. These programs protect against commercial or
noncommercial risk if the importer's bank fails to make payment.
Under one program, the CCC will guarantee credit terms of up to 3
years and under another, credit terms from 3 to 10 years are
guaranteed. (For more details, see Part II, The Exporter's
Directory.)
State Export Financing Programs
A number of state-sponsored export financing and loan
guarantee programs are available. Many cities and states have
established cooperative programs with the Eximbank and can
provide specialized export finance counseling. Details of these
programs are available through each state department of commerce
or trade office.
Arkansas, California, Delaware, Georgia, Indiana, Louisiana,
Maine, Maryland, Massachusetts, Michigan, Minnesota, New Jersey,
New York, Nevada, North Carolina, Oklahoma, Pennsylvania, South
Carolina, Texas, Utah, Virginia, Washington, and Wisconsin all
provide direct or indirect export financing assistance.
Government trade programs
Export to Mexico and Canada under the North American Free Trade Agreement (NAFTA). See how you can benefit from reduced tariffs and other trade benefits.
Find out how you can benefit from the African Growth and Opportunity Act (AGOA). The AGOA provides incentives for the use of U.S. textile components in the sub-Saharan African countries.
Find out how you can benefit from the United States-Caribbean Basin Trade Partnership Act (CBTPA). The CBTPA provides incentives for the use of U.S. textile components in the Caribbean and Central American countries.
Other programs that promote the use of U.S. textile components in overseas production.
Government Programs --Federal and State government programs that help U.S. companies develop their export potential.
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PRODUCT DETAILS
Published: January 2007
Region: USA
Format: Editorial
SKU: infpu0001754 |
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