Banking On Exports
Options For Financing And What To Consider
Paul M. Hletko is on a mission to reclaim his grandfather’s legacy. The former attorney and guitar player runs FEW Spirits in Evanston, Illinois, exporting its popular craft whiskey and rum everywhere from Australia and New Zealand to Panama.
Before World War II, Hletko’s grandfather, now deceased, ran what has since become a major brewery in the Czech Republic. The Nazis took the brewery, and later it ended up in Communist hands. His grandfather survived and met his grandmother in a holding camp after the war, but all of the ownership records were destroyed, and the family never regained control of the brewery, according to Hletko.
“It struck me that if I didn’t do something to regain the family history, it was going to be gone forever,” says Hletko.
His effort to do that at his five-year-old, now 14-person company has meant overcoming a big challenge: finding financing. Early on, Hletko took an SBA-backed loan from a local community bank of about $500,000 and borrowed additional money on his credit cards. In recent years, as his brand has won recognition, he’s managed to persuade his distributors to pay him in advance for his orders, instead of taking loans. “We have an awful lot of demand for our products from all over the world,” says Hletko. “In our niche, we are one of the leading brands. We get chased.”
But Hletko realizes that customers might not be as flexible as the company continues to grow, so he’s doing research on loans guaranteed by the Export-Import Bank of the United States (EXIM).
Welcome to the world of export financing, where an entrepreneur’s work is never done. Although many business owners manage to finance their company’s growth within the U.S. through cash flow, that gets more difficult overseas. Getting outside credit is a necessity for many firms, given how slowly payments may roll in from customers. “It’s important they think of a whole range of financing solutions as a tapestry they need to weave,” says Ed Marsh, export adviser to American Express.
Fortunately, there are many excellent options available, and now that EXIM was reauthorized in December, loans with bank guarantees are once again available. Here are some strategies to put to work for you.
DO THE MATH
Financing your exporting can pay for itself, but only if you choose countries where the export climate is favorable. In some countries, the economics currently work against U.S. exporters. In China, for instance, U.S. exporters are at a disadvantage at the moment. “The Chinese government is depreciating its currency to attract more business to China,” says CPA Eddie Wong, who leads the Asia practice at Friedman LLP, a New York City accounting firm for which he is a partner. While this is good for U.S. importers who will get better deals from manufacturers in China, it will be more costly to export.
Another country where this is true is Turkey; the lira has fallen precipitously against the dollar, says CPA Magda Szabo, a tax partner at Grassi & Co. in New York City. “For someone in Turkey right now, buying from us is going to cost them,” says Szabo. “It may have a chilling effect on trying to find a market.”
To make sure that financing your export activities is worthwhile in a particular country, check out the International Trade Administration’s Top Markets Series (trade.gov/topmarkets). It ranks future opportunities for particular types of products—such as agricultural products, health IT, and media and entertainment—and identifies the best markets for them.
Also check out your potential customers to assess your need for credit, recommends David Knowles, group marketing director at Creditsafe Group, a provider of business credit reports. You may be dealing with a big company overseas that has little chance of going out of business, but if it is going to take months to pay you, you need to be prepared, he notes. “You can make better decisions if you’ve got better knowledge.”
PUT LETTERS OF CREDIT TO WORK FOR YOU
Most banks that offer financing to exporters offer export letters of credit, which are often used to ensure that an overseas client pays an exporter as promised. These are letters that one bank issues to another bank to guarantee that a payment will be made, as long as the conditions listed in the document are met.
But many exporters don’t realize letters of credit have another purpose, too: “The letter of credit can be used as a financing tool,” says Marta Morrow, a Houston, Texas-based international trade specialist with BOK Financial. “The way the letter of credit is structured allows the exporter to get advanced payment at certain milestones.” For instance, the letter of credit might specify that prior to a manufacturing run the overseas buyer will pay you a portion of what is owed.
This can come in handy for U.S.-based manufacturers who are filling jobs that take many months. “It lets them get working capital while manufacturing or producing,” says Morrow. “Once they meet that milestone they can get another letter of credit to get advanced payments.”
Letters of credit come with fees. Processing fees may range from one-eighth of 1 percent of the value of the transaction to one-tenth of 1 percent, depending on the institution, according to Morrow. Confirmation fees may range from 1 percent to 3 percent.
EXPLORE EXPORT FINANCING
Many business owners who intend to export try traditional bank loans first, because these are familiar. However, export financing can offer more flexibility, according to Marsh. “If they have some domestic and some international business and need more financing, it’s often advantageous to chase it as export financing because it’s so much simpler and more available for them,” he says. Export-specific financing often remains more accessible than traditional SBA-backed loans if liquidity tightens up, he notes. And there’s less red tape. “It’s kind of covenant-light,” he says.
EXIM Bank offers several types of financing. In some cases, EXIM will guarantee loans for commercial banks—typically it guarantees 85 percent of the loan. Banks have a certain “delegator authority” that determines the limit of how much they can lend, without getting special permission from EXIM Bank. The bank’s Global Credit Express Program provides six- or 12-month fixed-rate lines of credit of up to $500,000. EXIM Bank provides fixed-rate financing of up to 12 years for most projects, financing U.S. companies’ international buyers and entrepreneurs’ local costs of up to 30 percent. EXIM Bank also provides Export Credit Insurance, which insures foreign accounts receivable.
TRY TRADITIONAL BANK LOANS
If you have tried other options and still need financing, don’t rule out getting a traditional bank loan. According to Biz2Credit, an online matchmaker between borrowers and lenders based in New York City, loan approval rates at big banks hit a post-recession high in December. That said, their loan approval rate was only 22.9 percent, so you may have to try smaller banks, as well. As Hletko found, his community bank was the most convenient source of financing when he was starting up. Community banks had a loan approval rate of 49.1 percent in December, up from 48.9 percent in November.
Be prepared to shop around if you need a relatively small amount of money, nonetheless. Many banks in recent years have leaned toward making small business loans of $1 million or more. “If you’re looking for under 100 grand, it’s challenging to find the financing and loan guarantees,” says Hletko. Then again, if you approach your business with the same sense of mission he does, the work it takes may seem worthwhile.
Trade Finance Constraints Harmful to SMEs