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Export Financing, Payment In Advance, Letters Of Credit, Documentary Collections, Consignment, Open
Posted at: International Trade Publications | Posted on: Wednesday 26 September 2007 2:47 am | Poster last visit: Friday 19 April 2024 |
Export Financing
Financing Your Export Sales and Getting Paid
Few would disagree that small businesses should look overseas for profit opportunities. However, to succeed in the international marketplace, small firms must offer their customers competitive payment terms and methods. This chapter discusses how to choose the most appropriate international payment method, how to obtain export financing and, most importantly, how to get paid.
International Payment Methods
A small business exporter’s principal concern is to ensure that he or she gets paid in full and on time for each export sale. It does little good to make a sale if the buyer delays payment so long that the financing cost eats up the profit. Foreign buyers have concerns as well, such as ensuring that their orders arrive on time and as requested. Therefore, it is important that the terms of payment be negotiated carefully to meet the needs of both the buyer and seller. The payment method used can significantly affect the financial risk of the buyer and seller in an export sale. In general, the more generous the sales terms are to a foreign buyer, the greater the risk to the exporter. As shown below, the primary methods of payment for international transactions, ranked in order of most secure to least secure for the exporter, include:
1. Payment in advance
2. Letters of credit
3. Documentary collections (drafts)
4. Consignment
5. Open account
Payment in Advance
Requiring payment in advance as a term of sale is not uncommon, but in many cases is
too expensive and too risky for foreign buyers. Requiring full payment in advance is an
unattractive option for the buyer and can result in lost sales, especially since a competitor
(foreign or domestic) may be willing to offer more attractive terms. Before negotiating
payment terms, determine whether or not your buyer can obtain a comparable product
or service elsewhere and the terms offered. In some cases, such as when the buyer’s
credit worthiness is unknown or if your manufacturing process is specialized, lengthy or
capital-intensive, it may be reasonable to insist upon progress payments or full or partial
payment in advance.
Letters of Credit (LC)
Letters of credit are one of the most common and safest payment methods available.
An export letter of credit is an internationally recognized instrument issued by a bank
on behalf of its client, the buyer. Of course, the buyer pays its bank a fee to render this
service. As a result, some buyers will resist LC terms if the competition is offering more
lenient or less expensive terms. Keep in mind that various payment methods can be used
as marketing tools and therefore should be negotiated carefully by you and the buyer.
An LC is useful if you are unsure of a prospective buyer’s credit worthiness, but are
satisfied with the credit worthiness of your buyer’s bank. Sometimes it is difficult to obtain
reliable credit information about a foreign buyer, but it may be less difficult to do so for
the buyer’s bank. Moreover, this vehicle can be structured to protect the purchaser since
no payment obligation arises until the goods have been satisfactorily shipped or delivered
as promised.
The terms and conditions required for payment under a LC are spelled out in the LC.
When the terms and conditions have been met, as verified through the presentation
of all required documents (that is why export letters of credit also are referred to as
a documentary letters of credit), the purchaser’s bank makes the required payment
directly to the seller’s bank in accordance with the terms of payment. A greater degree of
protection is afforded to the seller when the LC that has been issued by the buyer’s bank
is confirmed by a major U.S. bank. In that case, any risk associated with the foreign bank
and foreign country is moved to a bank in the United States. LCs may be utilized for one-
time transaction, or they can cover multiple shipments, depending on what is agreed to
between the parties. Always make sure you can deliver your order according to the terms
and conditions of the LC before accepting the LC. However, if all parties agree, it can be
amended after it is opened, but at an additional cost. Make sure you review the details of
the letter of credit and the required documentation with a bank that has LC experience.
In addition, it is advised that you initiate a conversation with an international banker
before your buyer opens a letter of credit to ensure that proper language and conditions
are incorporated into the LC.
Letters of credit can take many forms, but a typical transaction might involve the
following steps:
1. The exporter, upon receiving an order for a specified quantity of goods,
sends the buyer (importer) a pro forma invoice defining all conditions of the
transaction.
2. The importer takes the pro forma invoice to the bank and applies for an
LC.
3. After verifying the terms and reaching the appropriate credit decisions, the
importer’s bank opens the LC and sends it to the exporter’s bank.
4. The exporter’s bank authenticates the LC, verifying it was issued by a
viable bank, and either forwards it to the exporter or keeps the original and
sends a copy.
5. The exporter compares the LC with the original pro forma invoice to ensure
that agreed upon terms and conditions have been incorporated in the LC and
that they can be met.
6. The exporter prepares, usually with the help of a freight forwarder, an
invoice and a packing list. These documents must be completed exactly
as specified in the LC. The exporter also prepares a shipper’s letter of
instruction or SLI and any other specialized documents required, e.g.,
export license and certificate of origin. (Check with a freight forwarder to
determine what documents are required in your case.)
7. The freight forwarder receives the goods along with completed paperwork
in accordance with the terms of the LC.
8. After the goods are shipped, the forwarder or exporter submits the LC and
documents to the exporter’s bank.
9. The exporter’s bank verifies that all required documents are in compliance
with the LC and forwards the documents package with a draft to the
importer’s bank with wiring (payment) instructions.
10. The importer’s bank reviews all documentation and, if the documents meet
all requirements, credits the exporter’s bank.
11. The importer’s bank simultaneously debits its customer’s account.
12. The exporter’s bank credits the exporter’s account.
13. The importer’s bank releases documents to its customer. With documents in
hand, the importer picks up the shipment.
Note: Your banker and freight forwarder will become important resources during a
letter of credit transaction. They will help to guide you through these steps.
Documentary Collections
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. Instructions that accompany the draft specify the documents
needed before title to the goods will be passed from seller to buyer.
Because title to the goods does not pass until the draft is paid or accepted, to some degree both
the buyer and seller are protected. However, if the buyer defaults on payment of the draft,
the seller may have to pursue payment through the courts (or possibly, through arbitration, if
such had been agreed upon between the parties). The use of drafts involves a certain level of
risk; but drafts are typically less expensive for the purchaser than letters of credit.
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 may 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 (e.g., payment could be due 30, 60 or 90 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 trusting relationship. In international business transactions, this method
of payment should not be used unless the buyer is credit worthy and the country of
destination is politically and economically stable, or unless the receivables are covered by
export credit insurance. In certain instances it is possible to discount accounts receivable
with a factoring company or other financial institution, referred to below.
The Buyer
The Seller
• agrees to buy products
• agrees to be paid via documentary collection
• ships goods and submits shipping documents to bank for
collection or acceptance
• the documents are released to buyer
against payment or acceptance
• seller receives payment at sight or at a time agreed under
the acceptance
Export Financing
In the United States, small businesses typically turn to their local banks for working capital
financing. However, most smaller banks do not retain 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 your bank’s loan
officer will not work with his or her bank’s international staff (or the bank is unwilling to
work with a correspondent), you should consider establishing a second banking relationship
or, if necessary, moving all your accounts to a more aggressive lender with international
banking expertise. So do not be afraid to shop around.
Given the difficulty most small businesses encounter when looking for export financing,
it is imperative that any financial arrangements be made well in advance. To find a
lender willing to consider your request, you must ensure that the purpose of the loan
makes sense for the business, that the request is for a reasonable amount, and that you
can demonstrate clearly how the loan will be repaid. Prospective borrowers also should
understand some key distinctions before beginning discussions with a lender.
Venture Capital
Before approaching a bank for financial assistance, you 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
Small exporters also should understand the distinction between international trade
services and lending for export transactions. Although many banks offer international
trade services, such as advising, negotiating and confirming letters of credit, many
banks’ international divisions are not authorized to lend. Other banks have the authority
to make loans as well as provide related services. You should verify that the bank officer
with whom you are dealing has the authority to lend for an export transaction or can
work with the small business or commercial division of the bank to finance your export
sales.
Working Capital Financing and Trade Financing
It also is important to be aware of the difference between permanent working capital
and trade financing. Permanent working capital is the amount of money needed to pay
short-term liabilities that remain steady over a period of several years, for example, the
non-fluctuating level of accounts receivable that a business maintains. A firm’s ability
to qualify for permanent working capital financing depends on, among other things, its
prospects for generating sufficient net profits over the life of a loan to repay it. Trade
finance, on the other hand, generally refers to financing the fluctuating working capital
needs of a business resulting from specific export transactions. Trade finance loans can
be self-liquidating. If so, the lending bank will place a lien on the export inventory and
accounts receivable of the exporter and require that all sales proceeds financed by the
loan be applied to pay down the loan first before 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 otherwise may 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. 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. Other exporters 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 (available
from the Export-Import Bank and private insurance companies) is often required 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 most common 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 importantly, be able to clearly show how
and when a loan will be repaid.
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 also can also help
process letters of credit, drafts and other methods of payment discussed in this chapter.
Banks also have become increasingly involved in making export loans backed by United
States government 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 Export 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, or any U.S. Export
Assistance Center, can assist you in locating a private trade finance company in your area.
Export Trading and Export Management Companies (ETCs and EMCs)
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 business exporters.
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 delay associated with overseas collections. Factors
purchase export receivables for a percentage fee 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
While similar to factoring, forfaiting generally involves transactions or projects requiring
payment over periods from six months to several years. A promissory note is issued by
the buyer to a third party and the account is purchased without recourse to the exporter;
the debt typically is guaranteed by a bank or a sovereign entity. This is one way that
a small business can arrange financing for its overseas buyer, while at the same time
receiving full payment at, or close to, the time of shipment.
Government Export Financing Resources
Because private sector financing providers will only assume limited risk regarding
foreign transactions, the U.S. government provides 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 loans available to exporters. Federal agencies,
as well as certain state governments, have their own particular programs as noted
below.
U.S. Small Business Administration (SBA)
The SBA provides financial and business development assistance to help small businesses
sell overseas. SBA’s export loans are available under SBA’s guarantee program. As
a prospective applicant, you can 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 agency’s term loan programs locally,
while SBA personnel based in U.S. Export Assistance Centers (USEACs) around the
country administer the specialized trade finance/export working capital loan program.
You can contact the finance division of your nearest SBA or USEAC office for a list of
participating lenders. The USEAC staff also can provide counseling on how to structure
requests for export financing from a lender.
SBA ExportExpress
The SBA ExportExpress loan program combines the SBA’s small business lending
assistance and technical assistance programs to help small businesses that have
traditionally had difficulty in obtaining adequate export financing. Applicants must have
been in business for at least one year, although not necessarily involved in exporting, and
demonstrate that they will be entering a new foreign market, or expanding in an existing
foreign market, to qualify for this loan program. Loan proceeds may be used to finance
export development activities business expansion costs due to increasing exports, or
specific export transactions. These include such things as:
1. Participation in foreign trade shows or trade missions,
2. Translation of product brochures or catalogues for use in overseas markets,
3. General lines of credit for export purposes,
4. Completing service contracts from buyers located outside the United States,
5. Transaction-specific financing associated with completing actual export
orders,
6. Expenses related to the development of foreign markets by the borrower,
including by export trading companies and export management companies,
7. Acquiring, constructing, renovating, modernizing, improving or expanding
productive facilities or equipment to be used in the United States in the
production of goods or services for export.
The website for more details on SBA ExportExpress is: www.sba.gov/oit/exportexpress.html.
Regular Business Loan Program
Small businesses that need money for fixed assets and 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. The standards vary by industry and are determined by either the
number of employees or the volume of annual receipts. Check with your local SBA district
office to determine if your company falls within the small business size standards. Loans
cannot be made to businesses engaged in speculation or investment in rental real estate.
The SBA can guarantee up to 85 percent of a bank loan up to $150,000 and 75 percent
of a loan over $150,000, with the maximum SBA exposure not to exceed $1.5 million
and a loan maximum of $2 million. The lender may charge a maximum interest rate
of 2.75 percentage points above the lowest reported Wall Street Journal prime, or 2.25
percentage points above the lowest reported Wall Street Journal prime if the maturity is
less than seven years.
Export Working Capital Program
The Export Working Capital Program (EWCP) (www.sba.gov/oit/finance/ewcp.html)
was designed to provide short-term working capital to exporters. The program supports
export financing to small businesses when that financing is not otherwise available at
reasonable terms. The program encourages lenders to offer export working capital
loans by guaranteeing repayment of up to $1.5 million or 90 percent of a loan amount,
whichever is less. A loan can support a single transaction or multiple sales on a
revolving basis.
The EWCP is a combined effort of the SBA and the Export-Import Bank (Ex-Im Bank).
The two agencies have joined their working capital programs to offer a unified approach
to the government’s support of export financing. The EWCP uses a six-page application
form and streamlined documentation with a turnaround time usually 10 days or less. A
letter of pre-qualification is also available from the SBA. SBA, on its own, can guarantee
EWCP loan requests up to $1.1 million, or up to $2.0 million under a co-guaranty
agreement with the Export-Import Bank. Loan requests greater than $2.0 million should
be submitted directly to the Export-Import Bank. When an EWCP loan is combined with
an international trade loan, the SBA’s exposure can go up to $1.75 million. In addition to
the eligibility standards listed on the website, an applicant must have been in business for
a full year (not necessarily in exporting) at the time of application. SBA may waive this
requirement if the applicant has sufficient export trade experience. Export management
companies or export trading companies may use this program; however, title must be
taken in the goods being exported to be eligible.
While most small businesses are eligible for SBA loans, some types of businesses are
ineligible and a case-by-case determination must be made by the agency. Eligibility is
generally determined by business type, use of proceeds, size of business and availability
of funds from other sources.
The proceeds of an EWCP loan must be used to finance the working capital needs
associated with single or multiple export transactions. Proceeds may not be used to
finance professional export marketing advice or services, foreign business travel,
participating in trade shows, or to support staff overseas, except to the extent it relates
directly to the transaction being financed. In addition, proceeds may not be used to make
payments to owners, to pay delinquent withholding taxes, or to pay existing debt.
If the loan is for a single transaction, the maturity should correspond to the length of the
transaction cycle with a maximum maturity of 18 months. If the loan is for a revolving
line of credit, the maturity is typically 12 months, with annual re-issuances allowed.
Five unique requirements of the EWCP loan include the following:
1. Because of the transactional nature of the financing, more information that
normal is needed on the buyer, the production cycle, the ability of the exporter
to perform, and the method of payment used for the transaction.
2. SBA does not prescribe the lender’s fees or the interest rate that may be charged
under this program; both are negotiable between the lender and borrower.
3. SBA guarantees up to 90% (rather than the more normal 75-85%) of an
EWCP loan on amounts up to $1.67 million ($2.0 million under the joint
SBA/Eximbank guaranty program).
4. Collateral is normally limited to the transactional collateral; export inventory,
work-in-process, resulting foreign receivables, and assignments of proceeds
for contracts, letters of credit and credit insurance policies. Personal
guarantees are required of all owners holding 20% or more of a company for
any SBA loan.
5. Because most loans have a term of 12 months or less, the SBA guarantee fee
is only ¼ of 1% of the guaranteed amount on such short-term loans.
SBA considers several factors in reviewing an EWCP application. These questions
include the following:
1. Is there a transaction and is it viable?
2. How reliable is the repayment source?
3. Can the exporter perform under the terms of the deal?
The EWCP offers several advantages for both the exporter and the lender, including
a simplified application form and a quicker turnaround time on SBA’s review and
commitment. Under the program, small businesses also can apply directly to the SBA for
a preliminary commitment for a guaranty. With SBA’s preliminary commitment in hand,
an exporter can look for a lender willing to extend the credit. The lender must apply to
SBA for the final commitment.
The International Trade Loan Program
The most fundamental reason to export is to improve your company’s bottom line, but
to compete and expand abroad can require additional resources domestically. The SBA’s
International Trade Loan Program (ITL) can assist your small business in financing
machinery and equipment, financing real estate and improving a competitive position
that has been adversely affected by import competition.
The applicant must demonstrate either that a) the loan will help the firm to expand or
develop an export market; or b) because the firm has been adversely impacted by imports,
the loan will help the firm upgrade equipment or retool to improve its competitive position.
A business plan should be included in either case.
The SBA can provide guarantees to commercial lenders up to $1.75 million in combined
working capital and fixed asset loan under this program, including any other current,
outstanding SBA loan guarantees (as long as the combined, gross loan amount does
not exceed $2 million). While the fixed asset part of the loan would carry a 75% SBA
guaranty, a companion working capital loan with a 90% guaranty also could be made
under the SBA’s Export Working Capital loan program guidelines.
The SBA offers the competitive rates and terms small businesses need to compete
globally. Note:
1. Rates for loans with maturities under 7 years may not exceed 2.25 percent
over the prime rate.
2. Rates for loans with maturities of 7 years or more may not exceed 2.75
percent over the prime rate.
3. Maturities can be up to 25 years for real estate, up to 15 years for equipment,
and/or up to 10 years for working capital.
The SBA requires the lender to take a first lien position on fixed assets financed under
the ITL, or other acceptable assests of the borrower. Personal guarantees usually are
required to support the credit. Only collateral located in the United States, its territories
and possessions is acceptable for a loan made under this program.
Small Business Investment Company (SBIC) Financing
The Small Business Investment Company (SBIC) program is part of the U.S. SBA. It
was created in 1958 to fill the gap between the availability of venture capital and
the needs of small businesses in start-up and growth situations. SBIC website:
www.sba.gov/INV/
Export-Import Bank of the United States (Ex-Im Bank)
Ex-Im Bank (www.exim.gov/) is an independent U.S. government agency that
supports the financing of U.S. goods and services, turning export opportunities into
real transactions and maintaining and creating more U.S. jobs. It assumes the credit
and country risks that the private sector is unable or unwilling to accept. It does not
compete with private sector lenders but provides export-financing products that fill gaps
in trade financing. It also helps to level the playing field for U.S. exporters by matching
the financing that other governments provide to their exporters. Ex-Im Bank provides
working capital guarantees (pre-export financing); export credit insurance (post-export
financing); and loan guarantees and direct loans (buyer financing). On average, 85
percent of its transactions directly benefit U.S. small businesses. With more than 70
years of experience, Ex-Im Bank has supported more than $400 billion of U.S. exports,
primarily to developing markets worldwide.
Export Credit Insurance Programs
Ex-Im Bank’s export credit insurance allows you to increase your export sales, while
limiting your international risk, by offering credit terms to your international buyers.
The insurance:
1. Reduces nonpayment risk,
2. Enables you to extend competitive credit terms to buyers,
3. Helps you export to new markets with more confidence, and4. Increases cash flow.
Ex-Im Bank’s insurance covers buyer nonpayment for commercial risks (e.g., bankruptcy
and protracted default) and certain political risks (e.g., war or the inconvertibility
of currency). This product can replace cash-in-advance, letters of credit and other
documentary sales. These policies also allow you to provide qualifying international
buyers with advantageous terms of credit. In today’s competitive global marketplace,
you may be able to increase sales by providing this “open account” financing feature.
This insurance also enhances the quality of your balance sheet by transforming export-
related accounts receivable into receivables insured by the U.S. government. With
this insurance in place, lenders are more likely to advance against these receivables to
increase your working capital cash flow. Ex-Im Bank can do business in most markets.
However, it may be limited or unable to offer financing in certain countries under certain
circumstances.
Note: All applications for short-term and medium-term insurance are subject to an
objective credit criteria. To ensure consistent and transparent credit analysis, Ex-Im
Bank has developed credit standards to facilitate timely application processing.
Small Business Initiative
The Small Business Initiative is committed to supporting small business exporters. Small
businesses can access all Ex-Im Bank financing products, including specialized small
business financing tools such as our working capital guarantee and export credit insurance.
With the working capital guarantee and insurance products, small businesses can increase
sales by entering new markets, expanding their borrowing base and offering buyers financing
while carrying less risk. Often, small sized exporters do not have adequate cash flow or cannot
get a loan to fulfill an export sales order. The Ex-Im Bank working capital guarantee assumes
90 percent of the lender’s risk so exporters can access the necessary funds to purchase raw
materials or supplies. The Ex-Im Bank participates with the SBA in making working capital
loans to small businesses for amounts between $1.67 million and $2 million
Ex-Im Bank’s insurance policies protect exporters from foreign buyer default and allow
exporters to extend credit to their foreign buyers. For qualifying small businesses,
enhanced coverage is offered. To qualify as a small business, the U.S. exporter (together
with affiliates) must simply meet the U.S. Small Business Administration’s definition
of a small business and have export credit sales of less than $5 million. Features of this
small business policy include no first-loss deductible, simplified premium-rate schedule,
and enhanced assignment (for qualified exporters) — an attractive financing feature that
allows your lender to advance on the insured receivables with limited risk.
Ex-Im Bank works with small businesses at the local level through its five regional
offices and a nationwide network of nearly 40 City/State Partners. Distribution channels
also include 120 delegated authority lenders in 28 states that can directly commit Ex-
Im Bank’s guarantee on working capital loans. And insurance brokers in every state
can assist with Ex-Im Bank’s export credit insurance applications. In addition, Ex-Im
Bank participates in approximately 20 trade shows and sponsors more than 20 exporter
seminars every year, including events involving small exporters as well as exporters of
environmentally beneficial goods and services.
Pre-Export Finance Program
The Ex-Im Bank’s Working Capital Program (www.exim.gov/products/work_cap.html)
enables U.S. exporters to obtain loans to produce or buy goods or services for export.
These working capital loans, made by commercial lenders and backed by an Ex-Im Bank
guarantee, provide you with the liquidity to accept new business, grow international
sales and compete more effectively in the international marketplace. This program helps
fulfill export sales orders, turn export-related inventory and accounts receivable into
cash and expand access to financing. Eligible exporters must be located in the United
States, have at least a one-year operating history, and have a positive net worth.
Exporters may use the guaranteed financing to:
1. Purchase finished products for export,
2. Pay for raw materials, equipment, supplies, labor and overhead to produce
goods and/or provide services for export,
3. Cover standby letters of credit serving as bid bonds, performance bonds or
payment guarantees, and
4. Finance foreign receivables.
There is no minimum or maximum transaction amount. Ex-Im Bank assumes 90 percent
of the bank loan, including principal and interest. For qualified loans to minority,
woman-owned or rural businesses, Ex-Im Bank can increase its guarantee coverage
to 100 percent. Our pre-qualified commercial lender partners, working under Ex-Im
Bank’s delegated authority, can expedite the loan process by committing our guarantee
without prior Ex-Im Bank approval. Most of Ex-Im Bank’s working capital guarantees
are provided through these lenders.
Typically, loan terms are for one year but can be up to three years. The loan can be either
transaction-specific or revolving. These guaranteed working capital loans are secured by
export-related accounts receivable and inventory (including work-on-process) tied to an
export order. For standby letters of credit issued under the guaranteed loan, Ex-Im Bank
requires collateral for 25 percent of the value of the letter of credit.
Direct Loan
Ex-Im Bank assists exporters by providing fixed-rate loans to creditworthy international
buyers, in both the private and public sector, for purchases of U.S. goods and services.
Ex-Im Bank loans to international buyers generally are used to finance the purchase of
U.S. capital equipment or services for large-scale projects. These funds also can be used
for refurbished equipment, software, and certain banking and legal fees, as well as some
local costs and expenses. Military or defense items generally are not eligible nor are
sales to military buyers (certain exceptions exist).
Guarantee Program
Ex-Im Bank also assists exporters by guaranteeing term financing to creditworthy
international buyers, in both the private and public sector, for purchases of U.S. goods
and services. This is generally used for financing purchases of U.S. capital equipment
and services, which must be shipped from the United States to an international buyer.
Ex-Im Bank can do business in most markets. However, it may be limited or unable to
offer financing in certain countries and under certain terms.
Commodity Credit Corporation (CCC)
The Commodity Credit Corporation, U.S. Department of Agriculture, administers
export credit guarantee programs (www.fas.usda.gov/excredits/exp-cred-guar.html)
for commercial financing of U.S. agricultural exports. The programs encourage exports
to buyers in countries where credit is necessary to maintain or increase U.S. sales, but
where financing may not be available without CCC guarantees.
Two programs underwrite credit extended by the private banking sector in the United
States (or, less commonly, by the U.S. exporter) to approved foreign banks using dollar-
denominated, irrevocable letters of credit to pay for food and agricultural products sold
to foreign buyers. The Export Credit Guarantee Program (GSM-102) covers credit terms
up to three years. The Intermediate Export Credit Guarantee Program (GSM-103) covers
longer credit terms up to 10 years.
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 Ex-Im
Bank and can provide specialized export finance counseling. Details of these programs
are available through each state department of commerce or trade office.
Once an exporter determines the kind of export financing assistance to be used and which
payment method, the next step is to arrange for delivery of the goods to the buyer’s
destination.
Source: Breaking into the Trade Game; A U.S. Small Business Administration International Publication
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Financing Your Export Sales and Getting Paid
Few would disagree that small businesses should look overseas for profit opportunities. However, to succeed in the international marketplace, small firms must offer their customers competitive payment terms and methods. This chapter discusses how to choose the most appropriate international payment method, how to obtain export financing and, most importantly, how to get paid.
International Payment Methods
A small business exporter’s principal concern is to ensure that he or she gets paid in full and on time for each export sale. It does little good to make a sale if the buyer delays payment so long that the financing cost eats up the profit. Foreign buyers have concerns as well, such as ensuring that their orders arrive on time and as requested. Therefore, it is important that the terms of payment be negotiated carefully to meet the needs of both the buyer and seller. The payment method used can significantly affect the financial risk of the buyer and seller in an export sale. In general, the more generous the sales terms are to a foreign buyer, the greater the risk to the exporter. As shown below, the primary methods of payment for international transactions, ranked in order of most secure to least secure for the exporter, include:
1. Payment in advance
2. Letters of credit
3. Documentary collections (drafts)
4. Consignment
5. Open account
Payment in Advance
Requiring payment in advance as a term of sale is not uncommon, but in many cases is
too expensive and too risky for foreign buyers. Requiring full payment in advance is an
unattractive option for the buyer and can result in lost sales, especially since a competitor
(foreign or domestic) may be willing to offer more attractive terms. Before negotiating
payment terms, determine whether or not your buyer can obtain a comparable product
or service elsewhere and the terms offered. In some cases, such as when the buyer’s
credit worthiness is unknown or if your manufacturing process is specialized, lengthy or
capital-intensive, it may be reasonable to insist upon progress payments or full or partial
payment in advance.
Letters of Credit (LC)
Letters of credit are one of the most common and safest payment methods available.
An export letter of credit is an internationally recognized instrument issued by a bank
on behalf of its client, the buyer. Of course, the buyer pays its bank a fee to render this
service. As a result, some buyers will resist LC terms if the competition is offering more
lenient or less expensive terms. Keep in mind that various payment methods can be used
as marketing tools and therefore should be negotiated carefully by you and the buyer.
An LC is useful if you are unsure of a prospective buyer’s credit worthiness, but are
satisfied with the credit worthiness of your buyer’s bank. Sometimes it is difficult to obtain
reliable credit information about a foreign buyer, but it may be less difficult to do so for
the buyer’s bank. Moreover, this vehicle can be structured to protect the purchaser since
no payment obligation arises until the goods have been satisfactorily shipped or delivered
as promised.
The terms and conditions required for payment under a LC are spelled out in the LC.
When the terms and conditions have been met, as verified through the presentation
of all required documents (that is why export letters of credit also are referred to as
a documentary letters of credit), the purchaser’s bank makes the required payment
directly to the seller’s bank in accordance with the terms of payment. A greater degree of
protection is afforded to the seller when the LC that has been issued by the buyer’s bank
is confirmed by a major U.S. bank. In that case, any risk associated with the foreign bank
and foreign country is moved to a bank in the United States. LCs may be utilized for one-
time transaction, or they can cover multiple shipments, depending on what is agreed to
between the parties. Always make sure you can deliver your order according to the terms
and conditions of the LC before accepting the LC. However, if all parties agree, it can be
amended after it is opened, but at an additional cost. Make sure you review the details of
the letter of credit and the required documentation with a bank that has LC experience.
In addition, it is advised that you initiate a conversation with an international banker
before your buyer opens a letter of credit to ensure that proper language and conditions
are incorporated into the LC.
Letters of credit can take many forms, but a typical transaction might involve the
following steps:
1. The exporter, upon receiving an order for a specified quantity of goods,
sends the buyer (importer) a pro forma invoice defining all conditions of the
transaction.
2. The importer takes the pro forma invoice to the bank and applies for an
LC.
3. After verifying the terms and reaching the appropriate credit decisions, the
importer’s bank opens the LC and sends it to the exporter’s bank.
4. The exporter’s bank authenticates the LC, verifying it was issued by a
viable bank, and either forwards it to the exporter or keeps the original and
sends a copy.
5. The exporter compares the LC with the original pro forma invoice to ensure
that agreed upon terms and conditions have been incorporated in the LC and
that they can be met.
6. The exporter prepares, usually with the help of a freight forwarder, an
invoice and a packing list. These documents must be completed exactly
as specified in the LC. The exporter also prepares a shipper’s letter of
instruction or SLI and any other specialized documents required, e.g.,
export license and certificate of origin. (Check with a freight forwarder to
determine what documents are required in your case.)
7. The freight forwarder receives the goods along with completed paperwork
in accordance with the terms of the LC.
8. After the goods are shipped, the forwarder or exporter submits the LC and
documents to the exporter’s bank.
9. The exporter’s bank verifies that all required documents are in compliance
with the LC and forwards the documents package with a draft to the
importer’s bank with wiring (payment) instructions.
10. The importer’s bank reviews all documentation and, if the documents meet
all requirements, credits the exporter’s bank.
11. The importer’s bank simultaneously debits its customer’s account.
12. The exporter’s bank credits the exporter’s account.
13. The importer’s bank releases documents to its customer. With documents in
hand, the importer picks up the shipment.
Note: Your banker and freight forwarder will become important resources during a
letter of credit transaction. They will help to guide you through these steps.
Documentary Collections
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. Instructions that accompany the draft specify the documents
needed before title to the goods will be passed from seller to buyer.
Because title to the goods does not pass until the draft is paid or accepted, to some degree both
the buyer and seller are protected. However, if the buyer defaults on payment of the draft,
the seller may have to pursue payment through the courts (or possibly, through arbitration, if
such had been agreed upon between the parties). The use of drafts involves a certain level of
risk; but drafts are typically less expensive for the purchaser than letters of credit.
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 may 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 (e.g., payment could be due 30, 60 or 90 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 trusting relationship. In international business transactions, this method
of payment should not be used unless the buyer is credit worthy and the country of
destination is politically and economically stable, or unless the receivables are covered by
export credit insurance. In certain instances it is possible to discount accounts receivable
with a factoring company or other financial institution, referred to below.
The Buyer
The Seller
• agrees to buy products
• agrees to be paid via documentary collection
• ships goods and submits shipping documents to bank for
collection or acceptance
• the documents are released to buyer
against payment or acceptance
• seller receives payment at sight or at a time agreed under
the acceptance
Export Financing
In the United States, small businesses typically turn to their local banks for working capital
financing. However, most smaller banks do not retain 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 your bank’s loan
officer will not work with his or her bank’s international staff (or the bank is unwilling to
work with a correspondent), you should consider establishing a second banking relationship
or, if necessary, moving all your accounts to a more aggressive lender with international
banking expertise. So do not be afraid to shop around.
Given the difficulty most small businesses encounter when looking for export financing,
it is imperative that any financial arrangements be made well in advance. To find a
lender willing to consider your request, you must ensure that the purpose of the loan
makes sense for the business, that the request is for a reasonable amount, and that you
can demonstrate clearly how the loan will be repaid. Prospective borrowers also should
understand some key distinctions before beginning discussions with a lender.
Venture Capital
Before approaching a bank for financial assistance, you 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
Small exporters also should understand the distinction between international trade
services and lending for export transactions. Although many banks offer international
trade services, such as advising, negotiating and confirming letters of credit, many
banks’ international divisions are not authorized to lend. Other banks have the authority
to make loans as well as provide related services. You should verify that the bank officer
with whom you are dealing has the authority to lend for an export transaction or can
work with the small business or commercial division of the bank to finance your export
sales.
Working Capital Financing and Trade Financing
It also is important to be aware of the difference between permanent working capital
and trade financing. Permanent working capital is the amount of money needed to pay
short-term liabilities that remain steady over a period of several years, for example, the
non-fluctuating level of accounts receivable that a business maintains. A firm’s ability
to qualify for permanent working capital financing depends on, among other things, its
prospects for generating sufficient net profits over the life of a loan to repay it. Trade
finance, on the other hand, generally refers to financing the fluctuating working capital
needs of a business resulting from specific export transactions. Trade finance loans can
be self-liquidating. If so, the lending bank will place a lien on the export inventory and
accounts receivable of the exporter and require that all sales proceeds financed by the
loan be applied to pay down the loan first before 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 otherwise may 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. 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. Other exporters 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 (available
from the Export-Import Bank and private insurance companies) is often required 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 most common 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 importantly, be able to clearly show how
and when a loan will be repaid.
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 also can also help
process letters of credit, drafts and other methods of payment discussed in this chapter.
Banks also have become increasingly involved in making export loans backed by United
States government 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 Export 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, or any U.S. Export
Assistance Center, can assist you in locating a private trade finance company in your area.
Export Trading and Export Management Companies (ETCs and EMCs)
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 business exporters.
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 delay associated with overseas collections. Factors
purchase export receivables for a percentage fee 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
While similar to factoring, forfaiting generally involves transactions or projects requiring
payment over periods from six months to several years. A promissory note is issued by
the buyer to a third party and the account is purchased without recourse to the exporter;
the debt typically is guaranteed by a bank or a sovereign entity. This is one way that
a small business can arrange financing for its overseas buyer, while at the same time
receiving full payment at, or close to, the time of shipment.
Government Export Financing Resources
Because private sector financing providers will only assume limited risk regarding
foreign transactions, the U.S. government provides 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 loans available to exporters. Federal agencies,
as well as certain state governments, have their own particular programs as noted
below.
U.S. Small Business Administration (SBA)
The SBA provides financial and business development assistance to help small businesses
sell overseas. SBA’s export loans are available under SBA’s guarantee program. As
a prospective applicant, you can 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 agency’s term loan programs locally,
while SBA personnel based in U.S. Export Assistance Centers (USEACs) around the
country administer the specialized trade finance/export working capital loan program.
You can contact the finance division of your nearest SBA or USEAC office for a list of
participating lenders. The USEAC staff also can provide counseling on how to structure
requests for export financing from a lender.
SBA ExportExpress
The SBA ExportExpress loan program combines the SBA’s small business lending
assistance and technical assistance programs to help small businesses that have
traditionally had difficulty in obtaining adequate export financing. Applicants must have
been in business for at least one year, although not necessarily involved in exporting, and
demonstrate that they will be entering a new foreign market, or expanding in an existing
foreign market, to qualify for this loan program. Loan proceeds may be used to finance
export development activities business expansion costs due to increasing exports, or
specific export transactions. These include such things as:
1. Participation in foreign trade shows or trade missions,
2. Translation of product brochures or catalogues for use in overseas markets,
3. General lines of credit for export purposes,
4. Completing service contracts from buyers located outside the United States,
5. Transaction-specific financing associated with completing actual export
orders,
6. Expenses related to the development of foreign markets by the borrower,
including by export trading companies and export management companies,
7. Acquiring, constructing, renovating, modernizing, improving or expanding
productive facilities or equipment to be used in the United States in the
production of goods or services for export.
The website for more details on SBA ExportExpress is: www.sba.gov/oit/exportexpress.html.
Regular Business Loan Program
Small businesses that need money for fixed assets and 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. The standards vary by industry and are determined by either the
number of employees or the volume of annual receipts. Check with your local SBA district
office to determine if your company falls within the small business size standards. Loans
cannot be made to businesses engaged in speculation or investment in rental real estate.
The SBA can guarantee up to 85 percent of a bank loan up to $150,000 and 75 percent
of a loan over $150,000, with the maximum SBA exposure not to exceed $1.5 million
and a loan maximum of $2 million. The lender may charge a maximum interest rate
of 2.75 percentage points above the lowest reported Wall Street Journal prime, or 2.25
percentage points above the lowest reported Wall Street Journal prime if the maturity is
less than seven years.
Export Working Capital Program
The Export Working Capital Program (EWCP) (www.sba.gov/oit/finance/ewcp.html)
was designed to provide short-term working capital to exporters. The program supports
export financing to small businesses when that financing is not otherwise available at
reasonable terms. The program encourages lenders to offer export working capital
loans by guaranteeing repayment of up to $1.5 million or 90 percent of a loan amount,
whichever is less. A loan can support a single transaction or multiple sales on a
revolving basis.
The EWCP is a combined effort of the SBA and the Export-Import Bank (Ex-Im Bank).
The two agencies have joined their working capital programs to offer a unified approach
to the government’s support of export financing. The EWCP uses a six-page application
form and streamlined documentation with a turnaround time usually 10 days or less. A
letter of pre-qualification is also available from the SBA. SBA, on its own, can guarantee
EWCP loan requests up to $1.1 million, or up to $2.0 million under a co-guaranty
agreement with the Export-Import Bank. Loan requests greater than $2.0 million should
be submitted directly to the Export-Import Bank. When an EWCP loan is combined with
an international trade loan, the SBA’s exposure can go up to $1.75 million. In addition to
the eligibility standards listed on the website, an applicant must have been in business for
a full year (not necessarily in exporting) at the time of application. SBA may waive this
requirement if the applicant has sufficient export trade experience. Export management
companies or export trading companies may use this program; however, title must be
taken in the goods being exported to be eligible.
While most small businesses are eligible for SBA loans, some types of businesses are
ineligible and a case-by-case determination must be made by the agency. Eligibility is
generally determined by business type, use of proceeds, size of business and availability
of funds from other sources.
The proceeds of an EWCP loan must be used to finance the working capital needs
associated with single or multiple export transactions. Proceeds may not be used to
finance professional export marketing advice or services, foreign business travel,
participating in trade shows, or to support staff overseas, except to the extent it relates
directly to the transaction being financed. In addition, proceeds may not be used to make
payments to owners, to pay delinquent withholding taxes, or to pay existing debt.
If the loan is for a single transaction, the maturity should correspond to the length of the
transaction cycle with a maximum maturity of 18 months. If the loan is for a revolving
line of credit, the maturity is typically 12 months, with annual re-issuances allowed.
Five unique requirements of the EWCP loan include the following:
1. Because of the transactional nature of the financing, more information that
normal is needed on the buyer, the production cycle, the ability of the exporter
to perform, and the method of payment used for the transaction.
2. SBA does not prescribe the lender’s fees or the interest rate that may be charged
under this program; both are negotiable between the lender and borrower.
3. SBA guarantees up to 90% (rather than the more normal 75-85%) of an
EWCP loan on amounts up to $1.67 million ($2.0 million under the joint
SBA/Eximbank guaranty program).
4. Collateral is normally limited to the transactional collateral; export inventory,
work-in-process, resulting foreign receivables, and assignments of proceeds
for contracts, letters of credit and credit insurance policies. Personal
guarantees are required of all owners holding 20% or more of a company for
any SBA loan.
5. Because most loans have a term of 12 months or less, the SBA guarantee fee
is only ¼ of 1% of the guaranteed amount on such short-term loans.
SBA considers several factors in reviewing an EWCP application. These questions
include the following:
1. Is there a transaction and is it viable?
2. How reliable is the repayment source?
3. Can the exporter perform under the terms of the deal?
The EWCP offers several advantages for both the exporter and the lender, including
a simplified application form and a quicker turnaround time on SBA’s review and
commitment. Under the program, small businesses also can apply directly to the SBA for
a preliminary commitment for a guaranty. With SBA’s preliminary commitment in hand,
an exporter can look for a lender willing to extend the credit. The lender must apply to
SBA for the final commitment.
The International Trade Loan Program
The most fundamental reason to export is to improve your company’s bottom line, but
to compete and expand abroad can require additional resources domestically. The SBA’s
International Trade Loan Program (ITL) can assist your small business in financing
machinery and equipment, financing real estate and improving a competitive position
that has been adversely affected by import competition.
The applicant must demonstrate either that a) the loan will help the firm to expand or
develop an export market; or b) because the firm has been adversely impacted by imports,
the loan will help the firm upgrade equipment or retool to improve its competitive position.
A business plan should be included in either case.
The SBA can provide guarantees to commercial lenders up to $1.75 million in combined
working capital and fixed asset loan under this program, including any other current,
outstanding SBA loan guarantees (as long as the combined, gross loan amount does
not exceed $2 million). While the fixed asset part of the loan would carry a 75% SBA
guaranty, a companion working capital loan with a 90% guaranty also could be made
under the SBA’s Export Working Capital loan program guidelines.
The SBA offers the competitive rates and terms small businesses need to compete
globally. Note:
1. Rates for loans with maturities under 7 years may not exceed 2.25 percent
over the prime rate.
2. Rates for loans with maturities of 7 years or more may not exceed 2.75
percent over the prime rate.
3. Maturities can be up to 25 years for real estate, up to 15 years for equipment,
and/or up to 10 years for working capital.
The SBA requires the lender to take a first lien position on fixed assets financed under
the ITL, or other acceptable assests of the borrower. Personal guarantees usually are
required to support the credit. Only collateral located in the United States, its territories
and possessions is acceptable for a loan made under this program.
Small Business Investment Company (SBIC) Financing
The Small Business Investment Company (SBIC) program is part of the U.S. SBA. It
was created in 1958 to fill the gap between the availability of venture capital and
the needs of small businesses in start-up and growth situations. SBIC website:
www.sba.gov/INV/
Export-Import Bank of the United States (Ex-Im Bank)
Ex-Im Bank (www.exim.gov/) is an independent U.S. government agency that
supports the financing of U.S. goods and services, turning export opportunities into
real transactions and maintaining and creating more U.S. jobs. It assumes the credit
and country risks that the private sector is unable or unwilling to accept. It does not
compete with private sector lenders but provides export-financing products that fill gaps
in trade financing. It also helps to level the playing field for U.S. exporters by matching
the financing that other governments provide to their exporters. Ex-Im Bank provides
working capital guarantees (pre-export financing); export credit insurance (post-export
financing); and loan guarantees and direct loans (buyer financing). On average, 85
percent of its transactions directly benefit U.S. small businesses. With more than 70
years of experience, Ex-Im Bank has supported more than $400 billion of U.S. exports,
primarily to developing markets worldwide.
Export Credit Insurance Programs
Ex-Im Bank’s export credit insurance allows you to increase your export sales, while
limiting your international risk, by offering credit terms to your international buyers.
The insurance:
1. Reduces nonpayment risk,
2. Enables you to extend competitive credit terms to buyers,
3. Helps you export to new markets with more confidence, and4. Increases cash flow.
Ex-Im Bank’s insurance covers buyer nonpayment for commercial risks (e.g., bankruptcy
and protracted default) and certain political risks (e.g., war or the inconvertibility
of currency). This product can replace cash-in-advance, letters of credit and other
documentary sales. These policies also allow you to provide qualifying international
buyers with advantageous terms of credit. In today’s competitive global marketplace,
you may be able to increase sales by providing this “open account” financing feature.
This insurance also enhances the quality of your balance sheet by transforming export-
related accounts receivable into receivables insured by the U.S. government. With
this insurance in place, lenders are more likely to advance against these receivables to
increase your working capital cash flow. Ex-Im Bank can do business in most markets.
However, it may be limited or unable to offer financing in certain countries under certain
circumstances.
Note: All applications for short-term and medium-term insurance are subject to an
objective credit criteria. To ensure consistent and transparent credit analysis, Ex-Im
Bank has developed credit standards to facilitate timely application processing.
Small Business Initiative
The Small Business Initiative is committed to supporting small business exporters. Small
businesses can access all Ex-Im Bank financing products, including specialized small
business financing tools such as our working capital guarantee and export credit insurance.
With the working capital guarantee and insurance products, small businesses can increase
sales by entering new markets, expanding their borrowing base and offering buyers financing
while carrying less risk. Often, small sized exporters do not have adequate cash flow or cannot
get a loan to fulfill an export sales order. The Ex-Im Bank working capital guarantee assumes
90 percent of the lender’s risk so exporters can access the necessary funds to purchase raw
materials or supplies. The Ex-Im Bank participates with the SBA in making working capital
loans to small businesses for amounts between $1.67 million and $2 million
Ex-Im Bank’s insurance policies protect exporters from foreign buyer default and allow
exporters to extend credit to their foreign buyers. For qualifying small businesses,
enhanced coverage is offered. To qualify as a small business, the U.S. exporter (together
with affiliates) must simply meet the U.S. Small Business Administration’s definition
of a small business and have export credit sales of less than $5 million. Features of this
small business policy include no first-loss deductible, simplified premium-rate schedule,
and enhanced assignment (for qualified exporters) — an attractive financing feature that
allows your lender to advance on the insured receivables with limited risk.
Ex-Im Bank works with small businesses at the local level through its five regional
offices and a nationwide network of nearly 40 City/State Partners. Distribution channels
also include 120 delegated authority lenders in 28 states that can directly commit Ex-
Im Bank’s guarantee on working capital loans. And insurance brokers in every state
can assist with Ex-Im Bank’s export credit insurance applications. In addition, Ex-Im
Bank participates in approximately 20 trade shows and sponsors more than 20 exporter
seminars every year, including events involving small exporters as well as exporters of
environmentally beneficial goods and services.
Pre-Export Finance Program
The Ex-Im Bank’s Working Capital Program (www.exim.gov/products/work_cap.html)
enables U.S. exporters to obtain loans to produce or buy goods or services for export.
These working capital loans, made by commercial lenders and backed by an Ex-Im Bank
guarantee, provide you with the liquidity to accept new business, grow international
sales and compete more effectively in the international marketplace. This program helps
fulfill export sales orders, turn export-related inventory and accounts receivable into
cash and expand access to financing. Eligible exporters must be located in the United
States, have at least a one-year operating history, and have a positive net worth.
Exporters may use the guaranteed financing to:
1. Purchase finished products for export,
2. Pay for raw materials, equipment, supplies, labor and overhead to produce
goods and/or provide services for export,
3. Cover standby letters of credit serving as bid bonds, performance bonds or
payment guarantees, and
4. Finance foreign receivables.
There is no minimum or maximum transaction amount. Ex-Im Bank assumes 90 percent
of the bank loan, including principal and interest. For qualified loans to minority,
woman-owned or rural businesses, Ex-Im Bank can increase its guarantee coverage
to 100 percent. Our pre-qualified commercial lender partners, working under Ex-Im
Bank’s delegated authority, can expedite the loan process by committing our guarantee
without prior Ex-Im Bank approval. Most of Ex-Im Bank’s working capital guarantees
are provided through these lenders.
Typically, loan terms are for one year but can be up to three years. The loan can be either
transaction-specific or revolving. These guaranteed working capital loans are secured by
export-related accounts receivable and inventory (including work-on-process) tied to an
export order. For standby letters of credit issued under the guaranteed loan, Ex-Im Bank
requires collateral for 25 percent of the value of the letter of credit.
Direct Loan
Ex-Im Bank assists exporters by providing fixed-rate loans to creditworthy international
buyers, in both the private and public sector, for purchases of U.S. goods and services.
Ex-Im Bank loans to international buyers generally are used to finance the purchase of
U.S. capital equipment or services for large-scale projects. These funds also can be used
for refurbished equipment, software, and certain banking and legal fees, as well as some
local costs and expenses. Military or defense items generally are not eligible nor are
sales to military buyers (certain exceptions exist).
Guarantee Program
Ex-Im Bank also assists exporters by guaranteeing term financing to creditworthy
international buyers, in both the private and public sector, for purchases of U.S. goods
and services. This is generally used for financing purchases of U.S. capital equipment
and services, which must be shipped from the United States to an international buyer.
Ex-Im Bank can do business in most markets. However, it may be limited or unable to
offer financing in certain countries and under certain terms.
Commodity Credit Corporation (CCC)
The Commodity Credit Corporation, U.S. Department of Agriculture, administers
export credit guarantee programs (www.fas.usda.gov/excredits/exp-cred-guar.html)
for commercial financing of U.S. agricultural exports. The programs encourage exports
to buyers in countries where credit is necessary to maintain or increase U.S. sales, but
where financing may not be available without CCC guarantees.
Two programs underwrite credit extended by the private banking sector in the United
States (or, less commonly, by the U.S. exporter) to approved foreign banks using dollar-
denominated, irrevocable letters of credit to pay for food and agricultural products sold
to foreign buyers. The Export Credit Guarantee Program (GSM-102) covers credit terms
up to three years. The Intermediate Export Credit Guarantee Program (GSM-103) covers
longer credit terms up to 10 years.
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 Ex-Im
Bank and can provide specialized export finance counseling. Details of these programs
are available through each state department of commerce or trade office.
Once an exporter determines the kind of export financing assistance to be used and which
payment method, the next step is to arrange for delivery of the goods to the buyer’s
destination.
Source: Breaking into the Trade Game; A U.S. Small Business Administration International Publication
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