Winning the Trade Game with Export Finance - Jeff Deiss, Regional Export Finance Manager U.S. Small Business Administration San Francisco, CA ...
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Winning the Trade
Game with Export
Finance
Jeff Deiss, Regional Export Finance Manager
U.S. Small Business Administration
San Francisco, CA
2016 Small Business Exporting Survey * 58% of small businesses have exported. Small firms account for 98% of US export firms. Small firms account for 34% of US export value. For 47% of small exporters, exports are < 10% of sales. For 19% of small exporters, exports are a majority of sales. Major concerns of exporters: 44%... worry about getting paid 35%... more difficult to finance export vs. domestic operations 11%... can’t get financing to offer foreign customers So most small firms aren’t using trade finance in their export development. * http://www.nsba.biz/?p=11263 (survey of 530 business owners)
Financing for the foreign buyer What will it take to get the deal done?
Export Payment Terms Spectrum of Credit Terms for International Sales • From lowest risk to highest risk for the exporter; • From highest risk to lowest risk for the foreign buyer: 1. CASH IN ADVANCE 2. LETTER OF CREDIT 3. DOCUMENTARY COLLECTION 4. OPEN ACCOUNT Download: Trade Finance Guide (export.gov/tradefinanceguide)
Survey #1 What terms do you primarily use when selling to foreign buyers? 1. Full payment in advance 2. Full payment prior to shipment 3. Full payment prior to buyer receipt 4. Letter of credit 5. Documentary collection 6. Open account with export credit insurance 7. Open account 8. Other
1. Cash in Advance 1 of 2 • CASH IN ADVANCE – get full (or partial) prepayment –Lowest risk for seller, but not very competitive –A good place to start an exporting relationship –…or when foreign buyer repayment ability is questionable –Places entire cash flow burden on foreign buyer –Typically only sustainable when exporter has a uniquely desirable product –Wire transfers (via your bank’s SWIFT account) - ideal –Credit cards – more risk, but can be okay for small transactions; work with bank to understand risk
Cash in Advance 2 of
2
• CREDIT CARD
• Watch out for fraud – avoid chargeback’s & fees
• Get verification on larger orders – say > $250
• Ask for fax verification – front & back of credit card
plus ID
• Check with card-issuing bank – using Bank ID
Number (first 8 numbers of credit card) search –
e.g., https://www.binlist.net/
• Identify high fraud risk countries
• Work with your bank on best practices
2. Letter of Credit 1 of 4 • LETTER OF CREDIT – get the foreign buyer’s bank (instead of the buyer) to agree to pay you: –Have your buyer arrange for their bank to commit to pay you once you present agreed-upon documents that prove you’ve fulfilled the order – i.e., the bank issues a Letter of Credit (“L/C”). –The L/C will be honored solely based on the presentation of a complete set of these previously-agreed-upon documents. • If you are concerned about the ability of buyer’s bank (or country) to pay, you can also have your own bank commit to pay you. This is called a “Confirmed L/C”.
Letter of Credit 2 of 4 • From the foreign buyer’s perspective –Note that an L/C requires the buyer to obtain credit from their bank. –Buyer must pay a fee to their bank for the L/C. –Buyer’s Bank will typically require buyer to keep sufficient funds to cover the L/C on deposit in their bank (as collateral), thus tying up buyer cash. –Even so, an L/C allows buyer to delay actual payment till exporter has shipped, allaying many seller concerns.
Letter of Credit 3 of 4 • From the exporter’s perspective –Buyer’s bank’s willingness to issue L/C is like getting a strong credit report from a savvy local financial player. –L/C means you can collect promptly once you’ve fulfilled your end of the bargain (and have the documents in hand to prove it). –A processing fee is charged to exporter for the L/C service, and amending any errors in documentation will add to these fees - $100-$1,000.
Letter of Credit 4 of 4 • Risk? Cost and complexity. –L/C’s are safe, but they can get expensive and complicated. –Requires attention to detail and strict adherence to that detail. You need clear instructions and good systems. –60-80% of L/C transactions have discrepancies! –Biggest concern is L/C termination (“expiry”) – late shipment; late presentation of documents to bank. –Though nearly all end up paying, this may require amendments (which add fees and cause delays). –Use L/C instructions that clearly spell out expectations –Banks reduce L/C’s to an electronic SWIFT transmission
3. Documentary Collections • DOCUMENTARY COLLECTION – use the foreign buyer’s bank like an escrow agent: –Arrange the shipment so that the buyer’s bank gets the documents necessary to pick up the goods, and the bank only delivers the documents upon payment. • Risk? Foreign buyer won’t/can’t pay. Exporter’s recourse is to recover the documents from the buyer’s bank and retrieve the already-shipped goods and look for another buyer. • Used primarily with ocean-shipped exports where delivery documents provide greatest control over shipment’s release.
4. Open Account • OPEN ACCOUNT • Ship now; get paid later. Payment in 30, 60, 90, … days. • Highest risk for SELLER. If BUYER doesn’t pay, the shipment is long gone. • In a competitive market, buyers will push for open account.
Export Payment Terms
Spectrum of Credit Terms for International Sales
1. CASH IN ADVANCE
2. LETTER OF CREDIT
3. DOCUMENTARY COLLECTION
4. OPEN ACCOUNT – accounts for about 70%
of all international transactions
– but only about 15% of US companies use
itConsider the value of open account to foreign
buyers
• Open Account?
• Low US interest rates vs. high foreign interest rates can
mean competitive advantage.
http://www.global-rates.com/interest-rates/central-banks/central-
banks.aspx
• The base interest rate in the US = 2.25% vs. ....
China = 4.35% Brazil = 6.00%
Mexico = 8.25% India = 5.75%Illustration of open account’s competitive value
• Low US interest rates vs. high foreign interest rates can mean
competitive advantage in your sales strategy.
• The base interest rate in the US = 2.25% vs. Mexico = 8.25%
Example: Mexican buyer must pay $100,000 cash-in-advance, with
cost of borrowing at 15+%:
$100,000 x 15% per annum = $15,000/yr. interest cost = $ 1,250/mo.
interest cost
Time for delivery to arrive: 2 mos x $1,250 = $ 2,500
Finalize sales with their buyers: 2 mos x $1,250 = $ 2,500
Collect from their local buyers: 2 mos x $1,250 = $ 2,500
Total Interest Cost to Mexican buyer = $ 7,500
(7.5% cost premium!)
Potential for re-pricing or increased sales volume!But what about the risk of nonpayment?
Due diligence on foreign buyer’s
creditworthiness #1
• Know your customer (“KYC”) – for export compliance too
• verify buyer’s legal and physical existence
• visiting them is always desirable
• develop a Credit Application form
• Consolidated trade references – get them and check
them
• financial statements – certainly on larger orders
• Consolidated Screening List – www.export.gov/ecr
• get a credit reportDue diligence on foreign buyer’s
creditworthiness #2
• Credit Reports
• Commercial credit reports are increasingly available –
D&B, Coface, Equifax, Graydon, Kroll, etc.
http://www.creditworthy.com/providers/credit_ra.html
• Credit Risk Monitor (CRM) tracks & rates publicly held
companies
• International Company Profile (ICP) from US
Commercial ServiceDue diligence on country’s creditworthiness
• Export-Import Bank’s Country Limitation
Schedule
• http://www.exim.gov/tools/country/country_limits.cfm
• Export.gov/[countryname]
• “Doing Business in ….” Country Commercial Guide
prepared by US Commercial Service
• Euler Hermes Worldwide Economic Risk Map
- http://www.eulerhermes.us/economic-
research/Pages/Country-report-risk-map.aspxExport Credit Insurance
• Insurance providers
1. Export-Import Bank (Ex-Im Bank)
• Federal government agency
• Will do small policies (no minimum); has small business
“mission”
• Will insure most countries; has promote-US-exports “mission”
• Requires majority US content; limited on military-related exports
http://www.exim.gov/products/insurance/
2. Private insurers – Euler Hermes, Atradius, Coface, etc.
• Fast, flexible service for larger scale exporters
• Private policies become cost competitive around $3+ million in
A/R as it costs about $15,000 to sign up.Example of Export Credit Insurance from Ex-Im Bank • Ex-Im Bank’s “Express Insurance” • Multi-buyer policy for small exporters (≤ $7.5 MM export A/R annually) • 95% against political risk (foreign government action) • 95% against commercial risk (buyer action) • Cost = $0.65/$100 of insured A/R (≤ 60 day A/R terms) • Just $650 for $95,000 of protection on a $100,000 sale. • Ex-Im does in-house underwriting on buyers ≤ $100,000 • Up to 10 foreign buyers can be insured • $500 application deposit – applied against first premiums
Setting Credit Policy
The financing you offer is part of your value
proposition
The quality of your product
+ The cost of your product
+ The profit you need
+ The delivery role you undertake (INCOTERMS)
+ The payment terms you offer (Terms of Sale)
+ The currency terms you offer (Currency)
+ The risk mitigation measures you need
= The total cost of the product to the buyer
… and the competitiveness of your product vs. another
Every exporter needs a range of well-thought-through
export pricing options to negotiate from
Be sure to make your offer clear in your Pro Forma Invoice Let’s make a deal
Terms of Sale Exporter risk Competitive Source of Working Capital
Prepayment Very low Not very Foreign buyer’s cash
Letter of Credit * Low Low- Exporter’s cash, export loan,
Moderate or discount the L/C *
Documentary Low-Moderate Moderate Exporter’s cash or export loan
Collection * *
Open Account Moderate-High Very Exporter’s cash or export loan
competitive *
Open Account + Low Very Exporter’s cash or export loan
credit insurance competitive *
Prepayment + Low Moderate Foreign buyer’s cash +
advance payment exporter’s standby letter of
guarantee * credit *
* You’ll need a supportive banking partnerA good international
International Banking
banking partner
• A bank that offers:
• International Payment Methods
• Collections
• Commercial letters of credit
• Standby letters of credit
• Foreign Exchange Services
• FX Receipts
• FX Payments
• Hedging
• Export Working Capital Loans
• SBA EWCP or Export Express
lender
• ExIm Delegated AuthoritySurvey #2 How helpful is your lender to your exporting business? 1. Very helpful 2. Helpful but could be better 3. Not helpful 4. What lender?
Financing for the exporter What do you need to get the deal done?
SBA works with lenders to unlock the financing
you need.
How?
With “7(a)” loan
guarantees for
commercial lenders
on loans up to
$5MM.SBA assistance is limited to ”small businesses”
• What is a “small” business?
• SBA’s traditional small business definition defines
small businesses by NAICS code:
Industry Category Small Business Size Standard
*
Ag producers $750,000/year revenue
Wholesalers 100-250 employees
Retailers $7.5 - 38 MM/year revenue
Manufacturers 500-1,500 employees
Professional services $7.5 - $38.5 MM/year revenue
* There are lots of exceptions, so check with SBASBA assistance is limited to ”small businesses”
• Or… you can use SBA’s “Alternate Size Standard”:
• Tangible net worth of ≤ $15 million, and
• 2-year average NET income after taxes (excluding
carryover losses) of ≤ $5 million
• So small business can actually be pretty
BIG ...Survey #3 Is your company a “small business” as defined by SBA? 1. Yes 2. No 3. Unsure
SBA’s export eligibility
• What is an “export”?
Goods or Services
$$$’s
Must be delivered from the US
Can’t be “drop-shipped” (e.g., China assembly to EU
market, never entering the US)
SBA has no US content requirement.
Licensed defense exports are eligible.SBA’s export eligibility
• “No go” zones?
• SBA follows Export-Import Bank’s “Country
Limitation Schedule” prohibited countries.
• Currently just five countries are off limits:
• Bolivia
• Cuba
• North Korea
• Iran
• SyriaTwo types of financing that an exporter needs 1. To fulfill export orders – working capital – for production and pre-shipment costs (raw materials, inventory, labor, etc.); post-shipment carrying costs (assuring sufficient cash flow while offering competitive terms) 2. To position the firm for export success – fixed assets, equipment, permanent working capital, debt restructuring – to improve competitive position and be more efficient
SBA Export Lending The highest % guarantee – the Export BOOST!
The “EXPORT BOOST”
• Typical SBA loan guarantees range from 50% to
75%
• SBA export loans receive:
90%
• Why? Because exports are critical to national
economic successSBA’s 3 Export Programs
Specialized 7(a) loan guarantees for financing an exporter:
1. International Trade Loan (ITL)
• Positioning the firm to export
2. Export Express
• Smaller loans for either need
3. Export Working Capital
Program (EWCP)
• Fulfilling export ordersSBA’s export financing programs #1
International Trade Loan (ITL)
“Positioning the firm for export success”
• 90% guarantees on term loans up to $5 million
• Financing for projects that improve the competitive
position of US exporter so as to increase exporting
• Equipment, real estate, refinancing, permanent working
capital (No transfers of ownership)
• The loan may also support the borrower’s domestic
operations too.
• The business must have a clear export plan and target.
• FY2018: $399MM, 255loans, 96 lendersSBA’s export financing programs #2
Export Express
“Fast-track for smaller export loans”
• Sized to meet the need of most small exporters.
• 90% guarantees on loans ≤$350,000 (75% on ≤$500,000)
• For any “export development activity” – term or revolving working
capital (must be at least 70% for export); fixed assets; refinancing
• Ideal for export promotion and development uses like IP protection
and international legal expenses, web site translation & localization,
trade shows, foreign marketing activities, travel to meet foreign
buyers.
• May be used for small Standby L/C’s (with 25% collateral
requirement).
• Use lender’s own underwriting/collateral/monitoring standards, with
delegated approval authority
• FY2018: $15MM, 59 loans, 35 lendersSBA’s export financing programs #3
Export Working Capital
Program (EWCP)
“Working capital to fulfill the export order”
• 90% guarantees on loans up to $5 million
• Pure export working capital line, usu. revolving
• Typically 1 year loans; re-issued annually
• Advance rates of 75-90% on export sales
• Structure: (1) Asset-Based, (2) Transaction-Based, or (3)
Standby Letter of Credit
• Ideal companion to domestic commercial creditline since it
need only be secured by export working assets
• Monthly monitoring of line is required
• SBA’s lowest guaranty fee (0.25%)
• FY2018: $320MM, 162 loans, 71 lendersHow loan guarantees increase borrowing base
Collateral Without Loan Guarantee With Loan
Guarantee
Export Value Advance Borrowing Advance Borrowing
Collateral Rate Base Rate Base
Raw Material $200,000 20% $40,000 75% $150,000
Work in
$200,000 0% $0 75% $150,000
Progress
Finished
$600,000 50% $300,000 75% $450,000
Goods
Foreign A/R
on Open $400,000 0% $0 80-90% $360,000
Account
Foreign A/R
by Letter of $600,000 70% $420,000 90% $540,000
Credit
MAX LOAN $2,000,000 $760,000 $1,650,000A Study in Standby’s: Using Standby Letters of
Credit
The case of the prepayment that wasn’tThe case of the prepayment that wasn’t
• An exporter uses cash-in-advance as it mantra
• The prepayment provides the working capital
needed for fulfilling purchase orders
• A foreign buyer agrees to prepay, but their condition…
• A performance bond
• The exporter asks their lender; they have a solution…
• A standby letter of credit
• The cost? A bank fee and cash collateral maintained
on deposit = 100% of the face amount to the
standby L/C
• The exporter’s access to their prepayment WC is
frozen!Solution – The case of the prepayment that wasn’t
How to get a standby L/C without locking up the
prepayment?
• Export Working Capital Program (EWCP) or Export
Express
SBA-backed Standby Letter of Credit
• 90% guarantee from SBA on a lender’s standby L/C
• Only 25% of face amount of L/C is required as
collateral
• Collateral is typically cash on deposit with the
lender…
• or even other acceptable assets (like inventory
associated with the order)Solution – The case of the prepayment that
wasn’t
The value of an EWCP/Export Express Standby Letter of
Credit
• Allows an exporter to give a performance standby L/C
without tying up 100% of their prepayment
• With only 25% collateral required, 75% of the prepayment remains
available for working capital needs
Strategy: When asking for
prepayment, consider offering a
standby L/C advance payment
bond to soften the terms.Survey #4 Has your business ever received financing help from SBA? 1. Yes, from regular SBA programs 2. Yes, from SBA export programs 3. No
Bonus program:
STEP
• State Trade Expansion Promotion (CA-STEP)
grants
• California received a $650,000 grant from SBA for 2019.
• The program is run by the State of California and offers:
1. Reduced-cost opportunities to participate in
selected foreign trade shows and missions.
2. Competitive opportunities for up-to-$3,000 grant to
reimburse small businesses for other export
market development work.
• Apply at https://californiaexport.org/ or
https://californiaexport.org/icep/ (for customized help)U.S. Small Business Administration Office of International Trade www.sba.gov/international Export Finance – loan guarantees Export Express - $500,000 multi-purpose export development International Trade Loan (ITL) – $5MM term loans Export Working Capital Program (EWCP) - $5MM revolvers Export Market Development – grants State Trade Expansion Program (STEP) – $3,000 grant • www.californiaexport.org and www.californiaexport.org/icep Export Outreach – guidance SBA Export Business Planner: https://www.sba.gov/sites/default/files/articles/SBA_Export_Business_Planner.pdf US Export Assistance Centers - https://2016.export.gov/california/
Thank You!
Jeff Deiss, Regional Export Finance
Manager
U.S. Small Business Administration
Office of International Trade
San Francisco, CA
415-902-6027 | jeff.deiss@sba.gov
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