Winning the Trade Game with Export

FinanceJeff 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 paid35%... more difficult to finance export vs. domestic operations11%... 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 CREDIT3. DOCUMENTARY COLLECTION4. OPEN ACCOUNT

Download: Trade Finance Guide (export.gov/tradefinanceguide)

Survey #1What terms do you primarily use when selling to foreign buyers?

1. Full payment in advance2. Full payment prior to shipment3. Full payment prior to buyer receipt4. Letter of credit5. Documentary collection6. Open account with export credit insurance7. Open account8. 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 CREDIT3. DOCUMENTARY COLLECTION4. OPEN ACCOUNT – accounts for about 70%

of all international transactions

– but only about 15% of US companies use it

Consider 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 = $ 2,500Finalize sales with their buyers: 2 mos x $1,250 = $ 2,500Collect 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 report

Due 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 Service

Due 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.aspx

Export 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 exportshttp://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. anotherEvery 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 dealTerms of Sale Exporter risk Competitive Source of Working Capital

Prepayment Very low Not very Foreign buyer’s cash

Letter of Credit * Low Low-Moderate

Exporter’s cash, export loan, or discount the L/C *

Documentary Collection *

Low-Moderate Moderate Exporter’s cash or export loan *

Open Account Moderate-High Very competitive

Exporter’s cash or export loan *

Open Account + credit insurance

Low Very competitive

Exporter’s cash or export loan *

Prepayment + advance payment guarantee *

Low Moderate Foreign buyer’s cash + exporter’s standby letter of credit *

* You’ll need a supportive banking partner

A good international 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 Authority

International Banking

Survey #2

How helpful is your lender to your exporting business?

1. Very helpful2. Helpful but could be better3. Not helpful4. What lender?

Financing for the exporterWhat 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 SBA

SBA 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. Yes2. No3. Unsure

SBA’s export eligibility

• What is an “export”?

Goods or Services

$$$’s

Must be delivered from the USCan’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• Syria

Two 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 LendingThe 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 success

SBA’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 orders

SBA’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 lenders

SBA’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 lenders

SBA’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 lenders

How loan guarantees increase borrowing base

Collateral Without Loan Guarantee With Loan Guarantee

Export Collateral

Value Advance Rate

Borrowing Base

Advance Rate

Borrowing Base

Raw Material $200,000 20% $40,000 75% $150,000

Work in Progress $200,000 0% $0 75% $150,000

Finished Goods $600,000 50% $300,000 75% $450,000

Foreign A/R on Open Account

$400,000 0% $0 80-90% $360,000

Foreign A/R by Letter of Credit

$600,000 70% $420,000 90% $540,000

MAX LOAN $2,000,000 $760,000 $1,650,000

A Study in Standby’s: Using Standby Letters of Credit

The case of the prepayment that wasn’t

The 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 programs2. Yes, from SBA export programs3. 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 AdministrationOffice of International Tradewww.sba.gov/international

Export Finance – loan guaranteesExport Express - $500,000 multi-purpose export developmentInternational Trade Loan (ITL) – $5MM term loansExport Working Capital Program (EWCP) - $5MM revolvers

Export Market Development – grantsState Trade Expansion Program (STEP) – $3,000 grant• www.californiaexport.org and www.californiaexport.org/icep

Export Outreach – guidanceSBA 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

ManagerU.S. Small Business Administration

Office of International TradeSan Francisco, CA

415-902-6027 | jeff.deiss@sba.govwww.sba.gov/international