Chapter 15: Financing Export Transactions

IN THIS CHAPTER

  • Factors to consider in making financing decisions
  • Private sources of financing
  • Government sources of financing
 

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SUMMARY

Contract negotiation and closure are important in exporting, but ultimately, your company must get paid. Because of the intense competition for export markets, making a sale often depends on your ability to offer attractive payment terms. You should be aware of the many financing options open to you so that you can choose the most acceptable one to both the buyer and your company. In many cases, government assistance in export financing for small- and medium-sized businesses can increase your options. Before making financing decisions, you should consider:

  • The need for financing to make the sale.
  • The length of time the product is being financed.
  • The cost of different methods of financing.
  • The risks associated with financing the transaction.

The need for preshipment financing and for postshipment working capital.

Foreign buyers often press exporters for longer payment periods, which may be necessary to be competitive. One useful guide for determining the appropriate credit period will be the normal commercial terms in your industry for internationally traded products. In any case, when exporting, your company should follow the same careful credit principles it follows for domestic customers. Obtaining cash immediately is usually a high priority with exporters. Methods for doing this include converting receivables to cash at a discount with a bank; expanding working capital resources; arranging for third-party financing; and engaging in countertrade, or accepting goods, services, or other instruments in trade for whole or partial payment. Overall, there is a wide variety of sources for financing exports.

Commercial Banks
A logical first step if you’re seeking to finance short-term export sales is to approach the local commercial bank your company already uses. The bank will be familiar with your financial standing, credit need, repayment record, and ability to perform. It may also have a section dedicated to international business. Alternatively, you may wish to approach a commercial bank with an international department. An intermediate approach is to retain a relationship with your bank but seek a referral to a correspondent bank that has an international department.

The responsibility for repaying a working capital loan ordinarily rests with you, the seller, even if the foreign buyer fails to pay. In some cases, especially when you ship capital goods, you may want the commercial bank to make medium-term loans directly to the foreign buyer to finance the sale. In any case, you can work with your bank to deal with the risks of exporting in several ways, including by seeking loan backing and/or guarantees by the United States Export-Import (Ex-Im) Bank and Small Business Administration, or by using various arrangements or instruments such as discounting and banker’s acceptances.

Export Intermediaries
In addition to acting as export representatives, many export intermediaries, such as export trading companies and export management companies, can help finance export sales. They may provide short-term financing, or they may simply purchase the goods to be exported directly from the manufacturer, thus eliminating both the risks to the manufacturer that are associated with the export transaction and the need for financing.

Government Assistance Programs
Several federal, state, and local government agencies offer programs to assist exporters with their financing needs. Some are guarantee programs that require the participation of an approved lender; others provide loans or grants to the exporter or to a foreign government.

Government programs generally aim to improve exporters’ access to credit rather than to subsidize the cost at below-market levels. They include:

  • Export-Import Bank, which provides export credit insurance, as well as offering loan guarantees to lenders, direct loans to exporters on market-related credit terms, and loans to foreign buyers. It can help with both preexport and postexport financing.
  • U.S. Small Business Administration, which, in partnership with national, regional, and community lenders, provides loan guarantees for export working capital and acquisition of plant and equipment, as well as capital for enabling small businesses to commence or expand export activity. Its Export Working Capital Program (EWCP), International Trade Loan Program, and Export Express program guarantee and/or expedite loans for export working capital or other uses.
  • U.S. Department of Agriculture, which provides a number of programs that back various types of financing for the export of U.S. agricultural products.
  • Overseas Private Investment Corporation (OPIC), which facilitates U.S. foreign direct investment in developing nations and emerging market economies by offering political risk insurance, all-risk guarantees, and direct loans. U.S. exporters often can benefit from the construction and equipping of new facilities financed by OPIC, although the recipients of OPIC transactions are U.S. investors.

Multilateral Development Banks (MDBs)
The objective of these international financial institutions, which are owned by member governments, is to promote economic and social progress in their developing member countries. Increasingly, MDBs are providing funding to private-sector entities for private projects in developing countries. These projects present many opportunities to U.S. companies.

State and Local Export Finance Programs
Several cities and states have funded and operate export financing programs, including preshipment and postshipment working capital loans and guarantees, accounts receivable financing, and export insurance. To be eligible for these programs, an export sale must generally be made under a letter of credit or with credit insurance coverage. A certain percentage of state or local content may also be required.

This chapter’s Success Story is Patton Electronics, which worked extensively with the Ex-Im Bank, making the institution a key component in financing its international receivables. Patton now has thousands of resale channels in about 125 countries on nearly every continent for products made in the United States, and exporting provides about 75 percent of its total revenue.


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