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.
What’s the most important thing about your export program? Getting paid, of course—but there’s so much more that goes into financing your entire supply chain. These banks can help. We’ve selected 25 banks that, in most cases, boast some of the highest assets under management and have strong export services. Many are award winners, some are technology leaders, but all can boost your bottom line by intelligently managing the financial aspect of your global business.
AMERICAN EXPRESS
americanexpressgrowglobal.com | HQ: New York City | Assets: $154.22 billion
“Exporting represents a $928 billion opportunity for U.S. mid-sized companies over the next 10 years, yet only 5 percent of middle market firms currently trade internationally,” says Ed Marsh, American Express export advisor. “With recent policy changes lowering trade barriers—and technology reducing the complexity and cost of connecting with international customers—global markets are even more accessible.” American Express recently introduced a suite of free resources, such as workshops, insight guides and one-on-one connections with experienced exporters through its Grow Global program. One major program goal is to help address such common concerns as the cost to get up and running, whether the exporters can safely get paid if foreign exchange is risky and how they can increase revenue, he says.
Services: American Express also provides financial services for exporters such as its vPayment service. Aimed at exporters who need to pay vendors, this single-use account payment solution enables users to assign a unique account number to each transaction, allowing them the option to authorize each transaction to reduce fraud. In addition, American Express’ FX International Payments, an online platform, allows businesses to send, receive and manage their foreign currency wire payments.
ANZ IN THE USA
anz.com/unitedstates | HQ: Melbourne, Australia | Assets: $435 billion | Locations: Offices in 33 countries, with one in the U.S.
ANZ, an investment bank, specializes in advising major companies, institutions and governments. The New York office works as an offshore partner with these clients, supporting trade and investment between U.S. clients with Australia, New Zealand and Asia partners.
Services: asset and capital solutions; export finance; debt syndication and bilateral loans; foreign exchange, currency options and structured credit derivatives; interest rate risk management; international trade finance; structured finance
BANK OF AMERICA MERRILL LYNCH
bofaml.com | HQ: New York City | Assets: $2.144 trillion | Locations: 4,700 U.S. retail financial centers
Bank of America Merrill Lynch’s CashPro Trade Platform allows users to manage their export business around the globe. One feature enables users to get paid more quickly through invoice discounting solutions. TradePro, part of CashPro, enables exporters to track invoices that are maturing through its Trade Calendar. The bank, which has won numerous awards for its exporter-focused services, also provides customized trade finance solutions.
Services: document presentation and payment; letter of credit confirmations; receivables finance; structured trade finance; bank payment obligations
BB&T
bbt.com | HQ: Winston-Salem, North Carolina | Assets: $208.8 billion |Locations: 2,150 financial centers in 15 states and Washington, D.C.
BB&T has a robust array of digital tools, offering online management of international transactions through BB&T’s online TradeAssist platform. To freight forwarders, the bank also offers BB&T TradePartner, a service that provides guidance on handling international trade for its customers. BB&T SupplyChain360 lets customers and their partners view information during the various steps of the supply chain.
Services: documentary services; export credit insurance; export financing; foreign exchange; international treasury services; letters of credit; online Forex trading
BNP PARIBAS
(Bank of the West and First Hawaiian Bank)
bankofthewest.com | BNP Paribas HQ: Paris | Assets: $2.2 billion (BNP Paribas) | Locations: 735 retail locations between Bank of the West and First Hawaiian Bank
BNP Paribas, a giant global bank, owns BancWest Corp., a holding corporation for Bank of the West and First Hawaiian Bank. Bank of the West provides a variety of export-related services, including banking services in the Pacific Rim. Bank of the West also offers advisory services to exporters.
Services: authorizations to pay suppliers; documentary collections; export letters of credit; foreign accounts receivable insurance; international financing through BNP Paribas; online letters of credit and direct collections; short-term advances known as FastPay to bridge gaps in cash flow; transferrable letters of credit; wire transfers
BNY MELLON
bnymellon.com | HQ: New York City | Assets: $395.3 billion | Locations: 132 in U.S.
BNY Mellon’s Trade Technologies’ Global Trade Management platform offers clients use of web-based letters of credit, purchase order reporting and web-based imaging. The platform enables BNY Mellon to digitally receive and verify original documents presented under letters of credit for Uniforms Customs and Practice (UCP) 600 compliance. The bank can also receive original open account documentation and other original trade documents. The aim is to lower transaction costs, enhance reporting and accelerate international payments.
Services: web-based letters of credit and purchase order reporting
CALIFORNIA BANK AND TRUST
calbanktrust.com | HQ: San Diego | Assets: $11.9 billion | Locations: More than 95 statewide
California Bank and Trust provides its customers access to an international banking group staffed by seasoned bankers. It offers help in analyzing clients’ international trading potential, managing risk, accelerating cash flow, improving profits and reducing costs.
Services: balance reporting; documentary collections; Export-Import Bank of the United States (Ex-Im Bank) programs; foreign exchange services and contracts; letters of credit; short-term buyer financing; SBA export loans
CITIGROUP
citibank.com | HQ: New York City | Assets: $1.9 trillion
Locations: About 3,280 branches worldwide
This giant bank offers a suite of products to exporters in its integrated trade platform, which includes services built around working capital, supply-chain management, trade services and export and agency finance products. It has also taken its services mobile. For instance, Citi Supplier Finance Mobile gives users real-time updates on their payments and discounts from a mobile device, to receivables financing to improve liquidity in the supply chain. On a global basis, Citi has partnered with more than 60 export credit agencies to provide financing to clients who want to expand into higher-risk markets and offer short-term financing to exporters.
Services: commodity trade finance; distribution finance; documentary collections; export and agency finance; insurance letters of credit; integrated payables solutions; letters of credit; trade finance; supplier finance
CITY NATIONAL BANK
cnb.com | HQ: Beverly Hills, California | Assets: $35.6 billion | Locations: 75 offices in Atlanta, Nashville, New York City and Nevada
For companies that want to export goods made in the U.S., City National Bank offers a working capital line of credit. Its programs offer financing for inventory purchases, production, materials and inventory, accounts receivable and revolving or transactional needs, such as purchasing finished products for export.
Services: bankers’ acceptance on exports; documentary collections; export receivable insurance; letters of credit; trade financing
DEUTSCHE BANK TRUST CO. AMERICAS
gtb.db.com | HQ: Frankfurt | Assets: $1.1 trillion
Locations: 2,792 branches around the world
Deutsche Bank operates a large, global network of offices which assist with trade finance, based in cities such as Frankfurt, London, New York and Singapore. The bank’s areas of expertise include management and processing of domestic and cross-border payments, professional risk mitigation for international trade and liability management. It offers a single platform for all of a client’s online banking activities around the world.
Services: banker’s acceptance; card solutions; channel and information solutions; financial supply chain solutions; liquidity management solutions; trade solutions such as trade reimbursements; transaction solutions; wholesale solutions in the Americas, Asia -Pacific and Europe
EAST WEST BANK
eastwestbank.com | HQ: Pasadena, California | Assets: $30 billion (East West Bancorp) Locations: 130 locations worldwide
Among other trade finance servicers, East West Bank provides export financing to U.S. manufacturers using government export credit agencies that include the Ex-Im Bank, the Export-Import Bank of China, and its network of foreign credit insurance agencies. The bank can also facilitate export trade settled in renminbi, and finance exporters that need renminbi working capital for operating in China.
Services: pre-export financing; export financing through Ex-Im Bank, the Export-Import Bank of China, and the bank’s network of foreign credit insurance agencies; letters of credit
FIFTH THIRD BANK
53.com | HQ: Cincinnati | Assets: $142 billion
Locations: 1,300 branches
The Fifth Third Global Trade Direct secure internet portal enables clients to manage their letters of credit, documentary collections and other export activity online. Foreign exchange is a particular specialty. The bank says it has one of the largest trading desks in North America.
Services: bankers’ acceptances; documentary collections; letters of credit; pre- and post-export financing
HUNTINGTON
huntington.com | HQ: Columbus, Ohio | Assets: $70 billion | Locations: More than 700 locations
Huntington has a long track record of working with exporters and won the prestigious President’s “E Star” Award for Export Service in 2013. This award, presented by the Department of Commerce’s International Trade Administration, recognized the bank’s development of creative financing solutions for exporters and work with regional business and trade promotion groups. The bank’s free Economic Outlook reports can be a helpful resource for exporters looking for insights to what is ahead in their markets.
Services: credit insurance; documentary collection; export financing; foreign buyer finance; international cash letters and check collection; letters of credit
HSBC BANK USA
us.hsbc.com | HQ: London | Assets: $190.5 billion | Locations: 232 branches in U.S.
When a toy manufacturer that had recently developed a hot new Internet game got a very large order from a big but unfamiliar company in South America, HSBC sprang into action, providing financing after the client signed a letter of credit. For another client, a maker of draperies that got an order from Walmart in Canada, HSBC did the same. Requests like these are common for the global bank, which has outposts in the Americas, Asia-Pacific, Europe and the Middle East, according to Mark Luppi, the bank’s head of business banking. “HSBC is 100 percent focused on companies that do cross-border business,” he says.
Services: currency exchange; documentary collections; letters of credit; wire transfers; working capital loans; wire transfers from clients’ computers through HSBC.net
J.P. MORGAN CHASE AND CO.
jpmorgan.com | HQ: New York City | Assets: $2.4 trillion | Locations: 5,400 branches in U.S.
J.P. Morgan Chase has long been committed to global trade. In one recent initiative, it funded the Exchange, a network that helps metropolitan leaders put innovative global strategies to work. The Exchange is part of the Global Cities Initiative, a joint project with the Brookings Institution. The bank has brought its services into the digital era with tools such as Trade Channel, a web-based, trade transaction management platform which helps exporters manage purchase orders, payments and more. Trade Channel is designed to speed payment cycles.
Services: bank-to-bank reimbursements; bank payment obligation; document preparation; export finance; letters of credit; open account processing; private sector insurance; supply chain finance; various trade-related loans
M&T BANK
mtb.com | HQ: Buffalo, New York | Assets: $97.1 billion | Locations: More than 650 branches, mostly in northeast U.S. and Toronto, Canada.
M&T Bank—awarded the Presidential “E” Award for excellence in international trade—is active in working with the government to encourage exporting. M&T Bank and PNC Bank have partnered with the U.S. Commercial Service in Turkey to help U.S. firms go after business in the country. Trade and project financing can be hard to come by in the country, with Turkish banks sometimes reluctant to lend, according to Export.gov. M&T Bank is also very active in Sub-Saharan Africa. It is a large producer of loans to foreign buyers supporting U.S. exporters, according to Export.gov.
Services: export credit insurance; documentary collections; financing to international buyers of U.S-exported capital equipment and services; foreign deposited checks; letters of credit; working capital financing
PNC BANK
pnc.com | HQ: Pittsburgh, Pennsylvania | Assets: $362 billion | Locations: About 2,600 locations in 19 states and the District of Columbia and one commercial branch in Canada
PNC is a heavy user of two of Ex-Im Bank programs—specifically the Working Capital Guarantee program and the Medium Term Insurance program. The bank has received the Presidential “E” Award for excellence in exporting, awarded by the U.S. Department of Commerce. It is also a founding stockholder in Private Export Funding Corp. (PEFCO), a private organization that helps finance the sale of U.S. exports.
Services: banker’s acceptance financing; documentary collections; financing for importers of American-made equipment, machinery and services; foreign exchange; letters of credit, regulatory and compliance assistance, trade finance
REGIONS
regions.com | HQ: Birmingham, Alabama | Assets: $125 billion | Locations: 1,630 branches in 16 states in the Southeast
Regions offers global trade specialists throughout the Southeast and historically has been one of the most active Ex-Im Bank lenders in the U.S. and is a top issuer of letters of credit. Working with the U.S. Small Business Administration, its branches have offered Export Working Capital Financing.
Services: collections; letters of credit; foreign exchange; post-export financing; treasury management and global payments; working capital financing
SAFRA NATIONAL BANK OF NEW YORK
safra.com | HQ: New York City | Assets: More than $13 billion | Locations: Safra banks are in 156 locations around the world.
This private bank is affiliated with Banco Safra SA, a large private bank in Brazil. It serves individuals who have a high net worth, large businesses and international corporations—providing a full array of trade-financing services to customers.
Services: documentary collections; import, export and forfeit financing; letters of credit; performance and bid bonds
SANTANDER BANK
santanderbank.com | HQ: Madrid | Assets: $80.47 billion | Locations: More than 670 branches in northeast U.S.
Santander has an International Desk Team located in 14 major markets. These bankers support their clients’ needs in their local markets, helping them navigate the regulatory and financial systems, arranging introductions to their network of third-party accounting and legal professionals, and helping them establish their overseas banking and business processes.
The bank has developed a Trade Portal that helps exporters navigate: where to trade, which trading partners to work with, how to connect with suppliers and importers, how to execute as an exporter and how to get established overseas. The portal provides access to more than 40 worldwide databases, market intelligence on 185 countries and information about more than 150,000 suppliers and importers.
Services: banker’s acceptance financing; documentary collections; letters of credit; open account; receivables discounting; standby letters of credit; structured trade loans
SILICON VALLEY BANK
svb.com | HQ: Santa Clara, California | Assets: $42 billion
Locations: 34 offices around the world, including six branch offices
Located in the nation’s innovation hub, Silicon Valley Bank has a particular expertise in working with high-growth companies. The bank is active in international trade financing and was named Lender of the Year by the Ex-Im Bank in 2011.
Services: currency exchange; documentary collections; international trade financing; letters of credit
STANDARD CHARTERED
sc.com | HQ: London | Assets: $33 billion
Locations: 4 in the U.S.
This international bank earns 90 percent of its income and profits in Africa, Asia and the Middle East. Its clients have access to more than 25 international export credit and multilateral agencies, such as Sinosure from China, K-sure and Kexim from Korea, and the Ex-Im Bank.
Services: bank line discounting; credit bills negotiation; document preparation; export bills for collection; export invoice financing; letters of credit; pre-shipment export financing
Recent SunTrust research found that more than 17 percent of businesses plan to enter or expand into international markets in the next five years. SunTrust, a regional bank, has positioned itself to serve those businesses in the states where it has branches: Alabama, Arkansas, Florida, Georgia, Maryland, Mississippi, North Carolina, South Carolina, Tennessee, Virginia, West Virginia, and the District of Columbia. Relationship managers in the branches offer guidance to export clients on the product and services available to meet their needs. “It’s going to depend on the exporter, what their strategy is,” says Susanne Keough, head of Global Trade Solutions. “We listen to what the company’s objectives are.”
Services: currency exchange; documentary collections; letters of credit; wire transfers; working capital loans; loans directly to foreign buyers
U.S. BANCORP
usbank.com | HQ: Minneapolis | Assets: $416 billion
Locations: 3,151 banking offices in 25 states
The U.S. Bank Global Trade Service helps exporters automate many aspects of trade finance, such as letters of credit and documentary collections. The platform enables users to mine their own trade data and perform a detailed analysis of transaction-related data.
WELLS FARGO
wellsfargo.com | HQ: San Francisco | Assets: $1.8 trillion | Locations: 8,700 locations in 36 countries
When a leading processor and manufacturer of scrap metal, recycled auto parts, and finished steel products began exporting to India for the first time in several years, it turned to Wells Fargo for a low-cost way to extend its payment terms with its buyers. The Wells Fargo team met with the company’s buyers in India to present a Usance Letter of Credit Payable at Sight (UPAS) structure for the transactions. The UPAS solution enabled the buyers to extend their payment terms to 180 days and receive a lower interest rate than is available through banks in India, while still providing the exporter with full payment up front for each transaction.
Wells Fargo has racked up numerous accolades for its services—winning Global Finance magazine’s “Best Trade Finance Bank in the U.S.” award for 2014 and 2015 and The Asian Banker’s “Best International Trade Finance Bank in Asia Pacific.” The bank continues to add new offerings. For instance, it now provides electronic presentations of export documents through its TradeXchange service, as well as various third-party platforms, notes Daniel Son, head of the bank’s U.S. Trade Division. “Wells Fargo also offers mobile offerings through our Front Office solution, TradeXchange,” says Son, noting that allows customers a secure way to view key trade transaction information from their smartphones. Mobile TradeXchange is accessible through CEO Mobile, Wells Fargo’s free mobile banking service, which runs on web-enabled smartphones with data plans.
Services: credit facilities; currency exchange; documentary collections; letters of credit; open account programs; receivables processing; structured financing; trade and supply chain financing; wire transfers
Andrew Borakove, owner of Gongs Unlimited in Lincoln, Nebraska, sells his musical products all over the world, to everyone from meditation teachers to military personnel stationed in the Middle East. “The military has a history of loving gongs from the Vietnam era,” he says.
Borakove markets the gongs through both his own e-commerce store and venues such as eBay, generating more than $1 million in sales annually. To receive payments from his customers, he often relies on PayPal, which acts as his credit card processor. “PayPal has made international transactions very easy on a small level with individual customers,” he says.
He’s fortunate in finding an international payment solution that has worked well so far. Many exporters discover it isn’t always easy to uncover options that serve the double goals of protecting them from risk and making payments convenient for customers. For exporters who don’t ask for a portion of what they are owed in advance, “receiving a straight wire transfer does create a certain amount of payment risk,” says Susanne Keough, head of SunTrust Bank’s Global Trade Solutions division.
Fortunately, say experts, it’s very possible to reduce the risk of not collecting what you’re owed by choosing the right international payment options. Here are some strategies to use.
ASSESS YOUR RISK
Before you determine what payment option you need, consider how much risk you’re taking on by doing business with a particular overseas client. “The way to assess risk is to assess who the buyer is and what their past behavior is—are they known for paying in a timely fashion?” says Lara Hodgson, president and CEO of NOWaccount, a firm in Atlanta that enables small businesses to get paid on invoices right away and then collects from their clients, including international ones. “Are they in a risky situation? There could be something that happens in their industry.” Paying for credit reports is often the best way to gather this information, if you can afford them, according to industry professionals.
It’s also important to understand the customs in a client’s country that revolve around paying, so you can plan accordingly. “It is important to understand how quickly they will pay—and if they don’t pay, what is the right way to follow up,” says David J. Whelan, managing director of consultancy Bespoke Business Strategy in New York and Los Angeles.
LAY THE GROUNDWORK
Currency fluctuations can be another major risk when working with overseas clients, so be sure to negotiate what currency they will use to pay you and put that information into your written agreement. Most experts recommend asking for payment in U.S. dollars. “If you leave that open—or even worse if they are paying in their currency and things shift—you could end up getting significantly less money in your bank account than you expected,” Whelan advises.
KEEP IT SIMPLE—WHEN YOU CAN
For small retailers and wholesalers who are accepting relatively small payments from international customers, basic payment solutions often work best. Like Borakove, Phyllis Chan, co-founder of Big Apple Buddy, an online store based in New York City that sells U.S. goods such as the Apple watch to international clients, has found that accepting PayPal works well overall. With her business about a year old, she finds that accepting PayPal helps establish credibility with customers. “PayPal is recognized around the world,” she says.
That said, her PayPal experience hasn’t been without bumps. “The main issue we encountered was PayPal put a hold on the account,” she says. “We were doing too much volume on the account.” The hold lasted six months, according to Chan. “That was a pain,” she says.
At Oransi, an eight-employee maker of air purifiers based in Austin, Texas, founder and CEO Peter Mann has taken a different approach. Mann began selling his products, which retail for $299 to $1,500, in China in 2014. He has found it easiest to accept the payment solutions offered through sales platforms he participates in—Alibaba.com, JD.com and an online store set up by Industrial and Commercial Bank of China. Consumers in China, who often don’t have credit cards, are accustomed to using these payment systems, he has found. “That’s where people are comfortable,” he says.
Another option worth considering, if you do business in China, is accepting payments through UnionPay, which issues bank cards in China. “People who are selling small-lot consumer products have done very well using the UnionPay payment system,” says attorney Steve Dickinson, a partner and founder at Harris Moure in Seattle, who advises clients on doing business in China. “That’s worked fine.”
KNOW WHEN TO INVOLVE YOUR BANK
When you’re involved in larger transactions, experts generally recommend relying on wire transfers. They are generally secure, but they aren’t failsafe. “Wire transfers from Asia are pretty good—if they’re made,” says Dickinson. “The problem we’ll have in China is the wire transfer never gets made.”
It’s not necessarily because clients are unscrupulous. Due to tight currency controls, banks in China review documents for wire transfers very carefully, which can take time, says Dickinson. When his clients are shipping something very valuable to China—say, a large shipment of wheat—he advises, “Wait until it shows up in your account before you do anything.”
Holding off will, of course, require some diplomacy. “The Chinese will expect that shipment to be on the ocean, heading to China, before the payment is made,” says Dickinson. “That’s where international payment gets difficult.” In some cases, business owners ask for payments in stages, starting with an initial kickoff payment, say experts.
Mann, who sometimes sells large numbers of his air purifiers to distributors, often opts for an added layer of protection by getting an irrevocable letter of credit from his bank and then seeking payment by wire transfer. An irrevocable letter of credit is a document that guarantees the buyer’s obligations to him; it can’t be revoked unless both parties agree. It runs him about $50. He considers it well worth the money. “The bank is the middleman who protects both parties,” he says. With such safeguards in place, it’s a lot easier to dive into international trade with confidence.
Exporter Fred Crosetto doesn’t mince words when asked what it is like to open a bank account in Asia. “It’s been really hard,” says Crosetto, CEO of Ammex, a global dealer of disposable gloves based in Seattle and founded in 1988. Ammex, which has more than $90 million in revenue, has opened bank accounts at Standard Chartered Bank in China, Hong Kong, Malaysia and the Philippines, where Ammex has established business entities.
A primary challenge to opening a bank account in Asia, says Crosetto, is the Foreign Account Tax Compliance Act (FATCA). Under the law—intended to prevent money laundering—banks and financial institutions around the world must report any accounts owned by Americans and the balances of these offshore accounts to the Internal Revenue Service (IRS), if the combined amount is over $50,000 or, in some countries, register with the IRS. Some banks in Asia see the reporting requirements as too much trouble for too little return and are reluctant to open accounts for Americans, says Crosetto. As he puts it, the banks say, in essence, “We have enough business and we really don’t need or want Americans.”
That can present some challenges to companies in countries such as China with currency controls—government policies that restrict the purchase or sale of foreign currencies by residents or similarly restrict nonresidents from buying or selling the local currency.
According to Alex Schroder, principal of Prisma Group Inc., a business development and investment firm with offices in Raleigh, N.C., and Shanghai that helps clients expand internationally, “Particularly in currency controlled countries, it’s critical to have a local bank account to conduct trade in the local currency.” That is generally true if you decide to employ people locally.
The good news is you often won’t need a bank account in Asia to export there. And if it turns out you do need one, there are plenty of consultants and attorneys available to help you navigate the process. Here are some tips on how to tell if you need a bank account in Asia and how to open one if you do.
DETERMINE IF YOU NEED A BANK ACCOUNT OVERSEAS AT ALL
“In general, it is not necessary for a U.S. exporter to open a bank account in Asia when completing an export sale to a buyer in that region,” says Susanne Keough, head of the Global Trade Solutions division at SunTrust Bank. “The payment for the goods or services will be made by the buyer’s bank in Asia back through the exporter’s bank in the U.S. To facilitate this, there are a variety of payment methods that can be utilized such as wire transfer, letter of credit, or documentary collection.” In documentary collection, in case you’re unfamiliar, an exporter assigns the task of collecting for goods it has sold to its bank.
Small companies trading in small amounts of goods or services can often “work off the grid” and handle many transactions through online processors until they scale up, according to Crosetto. Such options include PayPal, Alipay—a third party online payment solution— and wire transfers, says Crosetto.
Silicon Valley, Calif.-based Waygo, which makes an app that instantly translates Asian languages, including Chinese, Japanese and Korean, has not opened a bank account in China, though it has operations in Shanghai, says CEO Ryan Rogowski. This is because the seven-employee firm, founded in 2011, sells the app through the iTunes store. “Apple takes care of international purchases,” says Rogowski.
SHOP AROUND FOR THE RIGHT BANK
If you do need a bank account, working with a large bank with operations in the U.S. such as Citi, HSBC, or Deutsche Bank may be the easiest route. “What is important is for the exporter to partner with a U.S. financial institution that has expertise in international trade and can advise on export strategies,” says Keough. “This will help optimize the exporter’s cash flow and mitigate payment risk.”
Such banks will offer services to facilitate payments across international borders. “If there is a particular need to collect payment in the local currency of the buyer, then your business can look at options such as foreign currency hedging to ensure your profits do not evaporate,” says Keough. “In addition, if you need to hold local currency in a country, you could open a multi-currency account.”
But don’t rule out overseas banks until you consider the pros and cons. When you open an account with a foreign bank, for instance, “it does allow you to move cash more freely,” says Schroder. And sometimes, even a big international bank may not have a branch near where your operations are. “They will be in major cities like Shanghai, but if your plant is 200 miles away, that is not going to be helpful for your business.”
As an exporting veteran, Crosetto says there are other advantages to using local banks—such as Banco de Oro in the Philippines and Mingsheng Banking Corp. in China. Often, their fees are lower, he says. And because local banks have some rights not given to foreign banks, they may be able to customize their services to your needs more. “A local bank can be a lot more flexible,” he says.
DON’T DO IT ON THE FLY
You can get an idea of how difficult it will be to open a bank account in a given country by checking out the U.S. Department of the Treasury’s website, which has gathered current FATCA agreements negotiated with countries around the world. However, if you open an overseas account, make sure you work with a knowledgeable consultant or attorney so you don’t make mistakes that lead to problems with the IRS. Asking other exporters for a recommendation can be a good way to find a good advisor.
“Every country has its own market conditions, cultural traits, government regulations and business conventions,” says Keough. “Using available resources and finding the right partners—both domestically and locally in your selected market—will be vital to your success. Building long-term partnerships with knowledgeable experts should be a primary goal when embarking on—or expanding—your company’s global business opportunities.”
No matter who you have on your team, don’t expect opening a bank account in Asia to transact business to be a speedy process. “It’s not going to be straightforward,” says Schroder. “It’s going to take several weeks for a foreign company, and the process can involve multiple steps.” In some countries, such as China, you will have to hire an attorney to set up a business entity for you first, and then provide proof that you have done so before you can open an account.
BE WARY OF THE RISKS
One risk in China and other Asian countries is losing operational control of your bank account through the “chop” system, says Crosetto. In this system, companies have a legally binding stamp that anyone in the company can use in lieu of a signature to agree to a document.
Just as in the U.S., many large institutions in Asia have been hacked, so it is important to impose tight controls on your banking activities. Two years ago, someone Crosetto thought was a vendor wrote to Ammex to say it was changing its bank accounts and asking the firm to wire payment for its next two invoices to a new account. Ammex later discovered that the vendor had never received a payment—and Crosetto realized that someone had hacked the supplier’s email network and directed $120,000 to fraudulent accounts. Ammex recovered $60,000, after working closely with its bank and getting advice from the Department of Treasury and FBI. Since then, Ammex has instituted tighter controls on payments. Crosetto considers it an expensive lesson: “The president of the company must now call and personally speak with me, or we are not changing any bank accounts,” he says.
When Deborah Walliser started her San Francisco company, Got Produce? Franchising Inc., she didn’t expect collections to be a big problem. Since 2013, Got Produce? has sold its vast, hydroponic greenhouses to entrepreneurs who want to sell and grow produce in places such as Namibia and Botswana.
These clients, who sometimes partner with non-governmental organizations (NGOs) to purchase the greenhouses, pay Walliser’s company up front, anywhere from $250,000 to $1 million. The structures are in demand because growing plants inside of one can help address local water supply issues. “It only uses 2 percent of the water you would normally use in the field,” says Walliser. As a result, her firm, founded in 2011, is thriving. It anticipates $10 million in revenue for 2015.
But Walliser has a nagging problem to tackle: Once clients start selling the lettuce, tomatoes and other produce they raised, they must pay her franchise company 7 percent of the revenue from these sales as a royalty. Some customers try to get away with not paying at all and some fudge the numbers to pay less, taking advantage of the fact that it is harder for her to go after them from California. That forces her to put “boots on the ground” in the countries where they are located, so she can collect, she says.
“I spend much of my time flying to these distant locations,” Walliser laments.
She is not alone in dealing with this hassle. For many exporters, collecting money owed from clients is a nightmare baked into doing business overseas. When you’re working with clients in distant countries, on many fronts it can be even harder than in the U.S.—from dealing with unfamiliar commercial laws to payment processing.
“Anything that has to do with cross-border payments is painful to deal with,” says Marwan Forzley, a 20-year veteran of the payments industry who is CEO of Align Commerce, a payment services provider for global commerce located in the San Francisco Bay area.
Align, aiming to alleviate some of the pain, offers a technology that lets companies wire money to each other’s bank accounts without sharing their bank account information directly with each other.
Fortunately, there are several key ways to spend less time chasing down money. Here are some tips from entrepreneurs and experts.
WEED OUT DEADBEATS EARLY
Before working with a customer in a new overseas market, do your homework on what it is like to do business there and what the payment customs are. U.S. businesses may favor 30-day payment cycles, but that isn’t true everywhere. The HSBC Global Connections website offers free country guides that can help you get a realistic picture.
Using a market intelligence service such as Accellus World Check can help you get the lay of the land and due diligence on a potential customer quickly, says Mark Luppi, executive vice president and head of business banking for HSBC Bank USA. If you work with an international bank, your banker may be able to assist you, too. “I can make a call into that country and check our database and find out about that particular vendor and customer,” says Luppi.
That said, there’s no substitute for a face-to-face meeting with a customer. “A quick trip can sometimes create the right sort of connection and give you a chance to kick the tires,” says Luppi.
FOLLOW THE MONEY
Before you sell a product to a new customer overseas, make sure you consider upfront costs, know when the product will likely be ordered and when you will realistically be paid. That will help you identify if you need any banking products to maintain good cash flow.
There are a number of products business owners can consider, says Luppi. For instance, with a letter of credit, the bank guarantees you will get paid. You may also want to get trade credit insurance that guarantees accounts receivable. Some policies cover you in the event someone pays you late. “If you are supposed to pay me in 30 days and don’t, I can go to the bank to make me whole,” Luppi says.
FIND A SMOOTH WAY TO PROCESS TRANSACTIONS
If are you are dealing with slow payers, the last thing you need is for cumbersome payment processes to delay the money even longer.
Switching from checks to digital forms of payment can speed things up, but for smaller payments, the fees from methods such as wire transfers can cut into your profits. For such payments it may be worth looking at new, digitally enabled types of payments that are springing up. Align Commerce, for instance, charges fees from 1.9 percent to 2.9 percent to transfer money from a customer’s bank account to your own. “It’s like a credit card on the lower end,” says Forzley. The service is popular, he says, with international consultants and import-export accountants. Other entrepreneurs use services such as PayPal and competitors such as Stripe or Skrill.
NAVIGATE THE LEGAL HAZARDS
Collections are tricky enough in the U.S., where you and your clients must operate under the same legal system. But they can be even more challenging overseas, where U.S. laws may not even apply. The only way to protect yourself is to put systems in place to ensure you get paid even when a foreign government does not honor contracts you have signed with a customer.
At Got Produce?, Walliser learned this the hard way. Once clients started selling the lettuce, tomatoes and other produce they raised in her greenhouses, they owed her company 7 percent of the revenue from these sales as a royalty.
Bringing them to court didn’t always work. “A lot of foreign countries don’t recognize a U.S. contract,” she says. And in some cases, they told her company to back off. “Depending on the economic and diplomatic relations with the U.S., we’ve had some countries say stop harassing our business owners here,” says Walliser. “We’ve run into a lot of that.” In her experience, South Africa and Senegal have been among the most supportive countries with which to do business as an American firm.
In case courts are not supportive, Walliser’s company has realized it needs to build strong local relationships. “We go to our clients’ customers and say you can’t pay our client anymore, you have to pay us,” she says. The company has also established joint ventures, teaming up with a local businessperson who has the lay of the land to handle compliance in a given territory, but still retaining majority control. “To get your customers to realize you’re not 20,000 miles away and [unable to] do anything, you have to invest time and have a presence,” she says. And when she can’t show up herself, having local a partner is very handy.
Your product is selling like gangbusters in the U.S.—and you’re certain it’ll be a sleeper in Europe. Should you open a bank account in any European country where you want to build a strong presence?
That question may seem like a no brainer, but not so fast. The laws governing European bank accounts can be tricky to navigate. “Opening a bank account in Europe is not easy unless you are a European,” says Filiberto Amati, a Warsaw-based consultant at Amati & Associates, which advises clients from around the world on growth. While it makes perfect sense to open a bank account in Europe in some cases, in others that’s not the best option. Here are some key questions to ask to help you decide if you need a European bank account.
IS IT WORTH THE EFFORT?
We won’t sugarcoat it. Opening a business bank account in Europe can require a lot of time-consuming paperwork—as well as costly help from professionals, such as an attorney and accountant. Make sure you actually need to invest the time and money before you attempt it.
Let’s say you make a domestic beer you want to sell in Europe. You might decide to open a service center in a European country—such as a small office that works with foreign distributors of your beer—or a small representative office that promotes the beer overseas. These must be registered with the country where you set them up, which, in turn, will help you meet one of the requirements for opening a bank account there, says Amati. “In most EU countries, you can’t open a bank account unless you have a local legal entity in that country,” he advises.
If you plan to set up a legal entity in a European country and hire employees there through that entity, you may find it convenient to have a foreign bank account to cut payroll checks and pay taxes, says Amati. However, if you hire employees from that country, you will then have to comply with the labor laws of that nation, which may be more costly to follow than in the U.S. To follow local labor and accounting law, you will need to hire an attorney who knows the local language, Amati notes.
Also consider the logistics. While some countries will let your tax accountant and attorney open a bank account on your behalf, in others you will have to travel there at least once.
Because of the inconveniences, American companies typically won’t open a European bank account unless they have people working overseas. “Otherwise they don’t need one,” Amati says. Letters of credit and insurance on receivables, often used in exporting, can be managed without having a European bank account, he says.
CONSIDER A GLOBAL BANK
For many businesses that do need to bank in Europe but don’t know where to begin with a European bank, working with a large American bank, such as JP Morgan Chase or Citi, or a bank with a presence in both the Europe and the U.S., such as CreditSuisse, Deutsche Bank or Santander, is a good option, say Amati and other experts.
“They can find very good banks in the U.S. that have branches and outlets in other countries,” says Derrick Ragland, executive vice president and national head of U.S. Middle Market Corporate Banking at HSBC, which does commercial banking in about 60 countries and territories.
Such a bank might, for example, have the capability to set up overseas accounts for customers via correspondent banks or move payroll overseas for short periods, without requiring the customer to have a bank account in a foreign country, Ragland continues.
HSBC’s large international presence allows exporters to open an account without using correspondent banks, he says. “HSBC can provide global cash-management solutions that can simplify working capital needs and eliminate the need for different banking relationships in each country.”
For your banking needs in Europe, there are a couple of major reasons it may make sense to work with a bank that has branches in the U.S. First, it will be easier to build a rapport with your banker. “If you’re just walking into a bank in a new country, you don’t have a relationship there,” Ragland says.
A strong relationship can come in handy if you will need to borrow to finance your European operations. Let’s say you are running a subsidiary in Europe and a local banker, who rarely has a chance to learn about your firm, does not know your business well. “You may not get full credit for the size of your company, because the loan might only be based on the financial strength of your overseas subsidiary,” Ragland cautions.
A bank with a strong presence in the U.S. might also be able to come up with innovative lending solutions you may not have expected. “If you bank with HSBC, we could give you a loan in the U.S. to fund your overseas operations or, if it fits your capital structure better, we might provide a loan in Europe at the same time,” Ragland says. “A lot of banks don’t have that capability.”
KNOW THE LAW
Tax laws governing foreign bank accounts can be a minefield, and the costs of accidentally breaking them are steep, so make sure to get expert advice if you are banking overseas.
One law you need to know about is the Bank Secrecy Act. If you are a U.S. taxpayer with a financial interest or signature authority over foreign financial accounts with a combined value of $10,000 or more at any point during the calendar year, you have to file a Report of Foreign Banks and Financial Accounts (FBAR) form. The form is due June 30, and the cost of falling behind is steep. The penalties for not filing it are $10,000 per year, says Carlos A. Somoza, J.D., LL.M, international tax principal with Kaufman Rossin, a CPA and advisory firm headquartered in Miami, Fla., that advises domestic and international businesses.
“The IRS is placing very heavy compliance on these types of forms,” says Somoza.
Another important law is the Foreign Account Tax Compliance Act (FATCA), a law that was devised to keep Americans from evading taxes through offshore bank accounts. If you set up a foreign bank account as an exporter, you may have certain tax reporting requirements, depending on the size of the account.
In addition, most European countries have entered into agreements with the U.S. in which they will report to the U.S. on the accounts that U.S. taxpayers have opened in their local financial institutions, notes Somoza. The institutions have agreed to report the information to their governments, so they don’t have to do the filings with the U.S. government on their own. “There’s more of a level of comfort for those types of institutions with sharing information with their own government,” Somoza says.
Nonetheless, the foreign banks still face paperwork burdens from doing this. While some don’t want to walk away from U.S. customers’ business, others may not want to open accounts for U.S. taxpayers. “It’s possible some banks have decided to make that business decision,” says Somoza.
Navigating these laws may sound like a headache—and it is. Then again, it doesn’t have to be a DIY project, and really shouldn’t be. “It’s always prudent to seek the advice of a professional—an accountant or attorney—who deals directly with international tax matters,” says Somoza. By investing in the help you need to set things up the right way, you can do your banking overseas with peace of mind.
While hunting for a supplier to make cute sweaters and shoes for dogs, a U.S. pet food firm asked consultant Michael Zakkour to check out a China-based manufacturer. It had advertised on the online marketplace Alibaba.com.
Zakkour dutifully visited the apparel maker’s headquarters in Shenzhen, near Hong Kong.
“They ushered us into this gigantic meeting room,” he says. “It looked like something from the old Mao-Nixon sessions.” An executive from the firm greeted Zakkour with a business card. “We do have a division that does pet supplies, but we have a hard time doing business with U.S. companies,” the executive said. “Another part of our company makes electronic components that are banned on the terrorism list and are considered possible weapons of mass destruction.”
So much for cute puppy apparel.
“Thank you for your time,” Zakkour told him.
That experience several years ago at a previous firm wasn’t the first time Zakkour discovered dramatic surprises when checking out a potential overseas partner. As a result, he tells clients who are looking to engage with an overseas business partner to practice what he calls the 6Ds: “Due diligence. Due diligence. Due diligence.”
“It’s shocking to me how often small and midsize businesses don’t engage in some of the basics,” says Zakkour, principal and head of the China/APAC Group at Tompkins Intl. in New York City and author of China’s Super Consumers, a book about how Chinese consumers are changing China and the world.
Of course, it’s hard to know where to start if your firm is working with an overseas partner for the first time. The potential risk factors to check out—from economic conditions in a potential partner’s country to differences in accounting practices—can seem overwhelming.
The answer, say experts, is to break out of the do-it-yourself mindset many entrepreneurs have and get help from pros such as a seasoned banker, accountant, attorney and, if needed, an investigative firm. “Make sure you surround yourself with people who have had experience in the cross-border segment,” advises Mark Luppi, head of Business Banking at HSBC.
Your accounting firm or law firm may also recommend enlisting the help of counterparts in the country where your partner is located, experts who know the nuances of local laws and practices.
While assembling such a team is a financial investment, doing so can help you avert expensive disasters. “It’s the cost of doing business,” says David Levy, an attorney in the Litigation, Risk Management and Arbitration Practice at Kleinberg Kaplan in New York City.
Here’s how to line up your A-team and cover your bases.
TAKE THE PULSE
Make sure you understand the regulatory and political climate of any country you’re entering before you start hunting for partners. There may be issues brewing that you need to take into account.
“You don’t want to be in a situation that is not going to meet U.S. regulations or is not sustainable,” says Luppi.
One place to get started is HSBC’s Global Connections website (https://globalconnections.hsbc.com/us/en), which offers free trade forecast reports for many countries. Luppi says other good resources are the database LexisNexis and Thompson Reuters’
Accelus World-Check, which provides intelligence profiles of countries and individuals around the world. These require paid subscriptions.
Make sure you research labor market regulations and cultural practices that may affect the cost of doing business, advises Suzanne Garber, a former managing director for FedEx in Brazil who is now based in Philadelphia and serves on the board of directors of several small and mid-sized organizations that are globalizing. For instance, notes Garber, in some countries, employers have to consider the implications of laws offering significant paid leave for parents.
Cultural practices that affect the workplace of a potential partner may also add to the ongoing cost of an overseas alliance. “There are some countries where the employees are afforded a hot meal for lunch,” notes Garber. “The country would have to pick up the tab.”
FIND PARTNERS WHO ARE PRE-SCREENED
If you don’t have many contacts in a country you plan to enter, Garber recommends getting in touch with the chamber of commerce for the locale where you want to operate. The chambers often have screened local businesses that want to do business with U.S. companies. Also ask the U.S. Embassy if it sponsors trade junkets where you can visit local firms that may be a good fit. Trade organizations in your industry that have international members can also be a good source of contacts, Garber says.
“The closer you can get to a personal recommendation, the better,” she says.
Business brokers can also be a valuable resource, says Levy. “There is a certain amount of vetting business brokers do in advance,” he says. “In some instances, the business broker can be a useful conduit for fact-finding and confirmation.”
Also research the credit history and financial performance of potential partners, advises Matthew Debbage, president and COO of U.S. operations for Creditsafe, a provider of credit reports for companies around the world that has its U.S. office in Allentown, Pa.
Pay attention to such factors as whether they are paying bills late or are involved in court disputes, he advises. And check out the track record of key officers of the company and the performance of their past companies. Did they thrive—or go bankrupt? “When you start piecing this together, the data tells lots and lots of stories,” Debbage says.
DON’T ASSUME YOU’RE COMPARING APPLES TO APPLES.
Having your accounting firm work with a local audit team to analyze a distant company’s financials can help you avoid misunderstandings stemming from differences in accounting practices, advises Johanna Nielsen, an audit partner on the Capital Markets and Private Equity Team at Citrin Cooperman in New York City. Often, such differences may be industry specific. Many American companies aren’t aware of the labor-related costs companies in other countries face. “I had one situation where a U.S. company purchased a French entity and didn’t understand how costly it would be to terminate some of its employees,” says Nielsen. “It ended up costing the U.S. company three times what it estimated to acquire this entity.”
PROCEED CAREFULLY
Right at Home, an Omaha, Neb.-based provider of in-home senior care and assistance, operates in eight countries outside of the U.S. and has more than 450 locations on five continents. When it expands across borders, it does so through master franchisees.
These are well-capitalized businesspeople in each country who buy the rights to sell all of the franchises there.
For Right at Home, finding a master franchisee who can bring knowledge of the local culture, customers and business world is important, says Brian Petranick, the company’s president and CEO.
The chain looks for industry-specific experience, too, but doesn’t consider it mandatory. “It generally is a little easier if we find someone who has been in a service-based business before, specifically in healthcare,” says Petranick.
To make sure potential master franchisees are a good fit, the firm asks them to submit a business plan. If they pass through the initial vetting successfully, they are asked to run a pilot office of the chain for a year before they start franchising. That way, they learn the business model prior to awarding franchises, he says.
BUILD IN AN ESCAPE HATCH
Excited as you may be about a partnership, it’s important to take into account the possibility that you may someday want to unwind it or disagree with your partner. When the partner is located in another country, it is especially important to address these scenarios, because dealing with international “counterparties” could bring added complications, warns Levy.
Creating a contractual “exit scenario” can sometimes prevent or avoid the need for litigation if you do decide to separate, he says. “If you don’t provide for how things might come apart you’re missing a potential opportunity to protect your own business going forward,” says Levy.
Pay close attention to paperwork designating where you’ll work out any disputes—and negotiate for a convenient and most favorable venue—because these factors may affect the outcome, Levy continues. If you’re in New York, for instance, negotiate the deal so any disputes will be governed by New York law and you will be able to handle legal matters exclusively in New York courts, he says. “You don’t want to, for example, find yourself in a dispute with your Nigerian business partner over distribution of profits and dragged to a Nigerian court.”
Of course, the hope is that it will never come to that. When you’ve done the right due diligence up front, creating successful partnerships is a lot easier.
CONSIDERATIONS FOR CHOOSING PROJECT FINANCING AS YOUR NEXT FUNDING OPTION
When telecom provider Digicel needed financing to build out its services in markets such as Papua New Guinea and Haiti, it turned to project finance, provided by sources including the International Finance Corporation (IFC), a member of the World Bank Group. The IFC had a mandate to lend in these areas to promote business, says Brian Devine, group head of Investor Relations at Digicel, which is active in 32 markets in the Caribbean, Central America and Asia-Pacific.
“We’ve gone into some risky countries,” says Devine. “It is important to have the right partner.”
Thanks to such financing, Digicel, launched in Jamaica 13 years ago, recently embarked on a contract worth $7 million to improve access to telecommunications infrastructure and services in Papua New Guinea. Digicel will be installing 59 communications towers across the country, bringing voice services to about 500,000 people.
Digicel is not alone in finding that project finance can be an ideal form of financing for infrastructure and industrial projects in emerging markets where financing might otherwise be hard to obtain. In project finance, individual companies or partners in a joint venture will typically use loans, bonds, equity or a combination of these options. While the deals tend to be complicated and can require a lot of up-front legwork, entrepreneurs often like this type of financing because the loans are completely or mostly secured by collateral and borrowers aren’t personally liable.
“The financing is done specifically out of the cash flows of the project,” explains Devine. “Lenders will typically only have a claim on those assets in the project.”
That said, project finance is not always a readily available solution. After the East Asian financial crisis that started in mid-1997, many projects with this type of financing stalled, thanks to factors like weak and unenforceable contracts and lack of planning for currency risks, notes a recent World Bank report. Private lenders and investors lost much of their appetite to support projects at the time.
Project finance has rebounded considerably since then, but in recent months it has slowed in some parts of the world, with global project finance volumes for the first half of 2014 dipping to a five-year low, according to the data from the firm Dealogic reported in the International Business Times. Volume was down 30 percent compared to the same period in 2013. Only 416 projects were completed around the world in the first half of 2014, not far above the 363 projects completed in the first half of 2009, according to the reported findings.
Meanwhile, Thompson Reuters found that in the first quarter of 2014, $41.9 billion worth of project-finance deals closed globally, down 7.5 percent from the same period in 2013. However, deal flow in the Americas was healthy. For the first three months of 2014, there were $14.1 billion worth of transactions, up 75.2 percent from the first quarter of 2013.
Is your business a good candidate for using project finance? Consider these questions:
1. Are you planning a big project in an emerging market where you want to reduce risks?
For many types of overseas ventures, more traditional financing such as a bank loan are perfectly adequate. Project finance is often used when companies in joint ventures want to build a substantial sized facility and don’t want the project on their individual balance sheets. “Maybe a series of different companies want to develop an oil field, an airport or road,” says Duncan Caird, a managing director at HSBC and head of Project and Export Finance.
According to Caird, the various parties involved will often set up a special purpose vehicle to obtain project financing that works for all concerned. “You need to design the financing for who the stakeholders are and what they need,” Caird says.
2. Will you be able to execute the project on schedule?
Since project financing is based on the cash flow from a project, it’s best suited for projects that show a strong likelihood of producing revenue on an expected timetable. To secure project financing, entrepreneurs need to make a strong and realistic case their undertaking will come to fruition on time.
Because the loans in project finance are usually non-recourse loans—meaning the lenders can’t pursue you as an individual for the debt—lenders will carefully consider a project from every logistical angle before approving a deal. Global tax and advisory firm Ernst & Young (EY) found in a recent report that even among very well-funded “mega projects” in the oil and gas industry run by major companies, a high percentage fail to finish on time or on budget. A firm without deep pockets may be especially vulnerable.
“We make sure the project will get completed on time and to cost,” says Caird. “If it doesn’t there are mechanisms in place to manage that risk.”
Delays on a project can jeopardize your ability to stay current on repaying your lenders, so banks are likely to inquire about logistical scenarios that could cause delays. Construction is a key area where projects can go awry.
“You need to make sure you have the right people with the right plans doing the construction,” says Caird.
Lenders will also look at factors like whether you will have access to the raw materials you need and whether the existing infrastructure of the area where you will launch the project is developed enough to support it. “If you build an airport you need to have roads, cars and trains,” Caird says.
That you have planned for other potential scenarios that could derail you, whether that is an unusually cold winter that slows progress on a job or labor unrest, is also something lenders want to see.
“If it takes you longer to build because of the weather, strikes, or the insurance hasn’t come through, there could be a need for more capital,” explains Caird. Even if there is no serious disaster, something like slow-moving government approvals for specific aspects of a project may affect its cash flow.
3. What are the costs of the deal?
In project financing, the interest rates you pay aren’t the only cost of a deal. The contracts for project financing can get extremely complicated, requiring a substantial investment in up-front legal help. “You’ve got to define the project very clearly in economic and legal terms,” says Andy Brogan, Global Oil & Gas Transactions leader at Ernst & Young. “Getting all that done and documented tends to cost quite a bit of money.”
For that reason, project finance tends to be used for larger-scale projects where the payoff will offset that cost. To find out if it will be worthwhile for you to pursue it, Brogan recommends getting advice from a professional who specializes in debt raising in the market you plan to enter. “They can tell you pretty quickly if this project is of a size and nature where project financing will be an advisable proposition,” he says.
4. What are your financing options?
Finding a lender interested in doing project finance may require you to get creative. “Your typical bank is going to take a long look at Haiti and Papua New Guinea and probably pass, given the political and geographic risks,” says Digicel’s Devine. Digicel has worked successfully with the IFC since 2002, when the bank supported one of its projects in Jamaica. The bank typically serves as a lead investor. “It’s gone very well,” Devine says. “It’s been a very fruitful relationship.”
Digicel has found that the cost of project financing has been competitive with other financing options available in the countries where it does business. However, many factors can affect the cost of project financing so it is important to check out your options thoroughly. For instance, the term of your loan can add substantially to the overall cost of a project. “The longer the debt, the more expensive,” says Caird.
On some projects, the planners start out relying on traditional bank loans and move on to project financing later, to limit the duration of the project-finance loan.
“Sometimes people like to use bank loans first, so they can build the project before it reaches its operational and cash-flow stage and reduce the cost of the debt,” says Caird. Realizing a big dream in a developing economy often requires getting the smallest details right.
6 QUESTIONS FOR FUNDING A JOINT VENTURE WITH A FOREIGN PARTNER
When Steve Levine struck a deal to bring his indoor air-purification technology to customers in China, he kept the financing simple. AtmosAir Solutions, based in Fairfield, Conn., worked out a licensing arrangement in which Shanghai-based Shanghai Hangsheng would sell the U.S. company’s technology in China. “We are supplying their company with our technology so we can put clean air into cars, buses and trains in China,” says Levine, CEO of AtmosAir Solutions.
AtmosAir Solutions’ partners were very eager. “They actually put up the money for the initial venture,” says Levine, whose profitable 10-year-old firm has revenue in the low seven figures. Every time AtmosAir Solutions sells Shanghai Hangsheng a set number of units, the Chinese company issues a letter of credit to cover the price.
Levine is excited about the freedom this gives him to grow his green business. “Our goal is to create a much cleaner, healthier environment,” he says.
With exports increasing by $2 billion in May to a record high of $195.5 billion, more U.S. companies are likely to find themselves working out deals like this as they spot opportunity abroad.
Licensing and distributorship are some of the most common ways that small and midsize firms finance deals involving overseas partners. “In midsize companies, their first foray is to find a distributor who wants to add to their product range,” says Martin Brown, executive vice president and head of Large Corporate, Commercial Banking, HSBC Bank USA, N.A. “That’s 90 percent of it.”
Getting trade credit is also common. But sometimes, if you embark on a really significant project overseas with a joint venture (JV) partner you may need to secure financing from a bank or other lender.
That can get thorny and raise plenty of questions to negotiate: What financing arrangements are best under the circumstances? Who will go after the money? And what happens if the deal falters? Will one of you get stuck holding the bag? “You’re stepping outside of the familiar,” says Martin.
DO YOU HAVE A CRACKERJACK ADVISORY TEAM?
You may be able to wing it with a do-it-yourself approach to law and finance in the U.S., but it won’t serve you well in an overseas market. “My suggestion would be to find a good lawyer, accountant and bank to understand the market,” says Brown. “There is an awful lot of help available.”
The type of financing you choose may actually dictate that you need legal counsel overseas. That’s true if you opt for secured financing instead of unsecured, according to attorney Henry M. Beck Jr., a partner with Halloran & Sage LLP in Hartford, Conn.
“Using secured financing and protecting security interests in assets around the globe require use of local counsel,” he says.
HOW BIG ARE YOUR PLANS?
If you are looking at a major deal like building a facility with a potential partner, you will need to get creative. Say you currently make shoes in China and your business is taking off. You want to open a new $20 million factory in India with a local company there. Both parties may need to put in some equity and raise some debt through the JV, based on factors like the value of your real estate.
“There are really two ways people finance it,” says Brown. “They raise the money here, either in debt or equity and downstream it through a subsidiary in the form of a loan or equity. Or, especially for substantial projects which are going to create significant asset value, they seek to finance it in the JV itself. Each partner will guarantee their share.”
In a JV, it is possible to raise debt and only take responsibility for the share you own in the project, he notes. “The types of debt most likely to be available are things like receivables financing,” he says.
But that is not always the least expensive option. “Many companies find the most flexible and least expensive financing is borrowing here in the U.S. and downstreaming either debt or equity into the JV,” Brown says.
WHICH PARTNER HAS THE BEST CONNECTIONS TO CAPITAL?
Debating who secures financing for a deal may be a moot argument if one partner is in a much stronger financial position than the other. “Largely, I would say it’s going to end up being financed by either the partner that is going to be controlling the venture or the partner that has the best access to funds,” says Halloran & Sage’s Beck.
WHAT DEALS ARE AVAILABLE AT HOME?
If you’re the lucky one with the job of securing financing, look for it close to home first or through your bank’s correspondent bank overseas. “Your best position is if you can finance it locally in the U.S. using your local banks and your local collateral,” says Beck. “You’re familiar with the bank and you’re using collateral that’s in your control.” You may also be able to tap into government-backed loans that encourage exporting if you stick with U.S.-based financing. The Export-Import Bank of the U.S., for instance, offers exporters government-backed, medium- and long-term loans.
Looking for financing in another country, by contrast, can bring added costs to the deal. “If you have to reach overseas for collateral or have to take financing out under another jurisdiction, you’re getting into heavier transactional costs,” says Beck.
HOW MUCH DO YOU TRUST YOUR PARTNER?
There’s no point going after financing if your potential partner is in shaky condition or has a poor reputation. Before you agree to talk with your bank, invest some time in rigorous due diligence. “The availability and reliability of public records differ from country to country,” says Ken Springer, president of Corporate Resolutions Inc., a NYC-based international investigations firm.
There are a number of former U.S. government investigators who can help you with this, reaching out to local sources to complement any review of publicly available information and confirm a potential partner’s reputation. “You need experienced assets on the ground,” Springer says.
Even if potential partners are honest, it doesn’t mean they know how to operate successfully in the country you hope to enter. “It’s important to have good partners that understand the overseas location,” says Brown. “You’re relying on something other than your own good business judgment. That can be riskier than expanding into a different state or a different product within your country.”
Also ask your attorney what financial protections you will have if your JV falls apart. Not every country has insolvency laws similar to those in the U.S. Some countries have modeled their laws after those in the U.S. “but not perfectly,” says Beck.
SHOULD YOU FORM A SUBSIDIARY?
Sometimes, it makes sense to bypass both a distributorship or JV and finance a deal entirely through your own company by setting up an overseas outpost. When Burton Snowboards in Burlington, Vt., launched an new overseas expansion into China recently with the help of Beck’s firm, it set up a wholly owned subsidiary, says general counsel Jaime Heins. “Historically we had operated on an agency-type model, analogous to a distributor,” said Heins. “In order for us to get momentum as a brand in that market, we needed to have a physical presence and really start to invest in that market.”
Of course, this isn’t something to take lightly. Burton’s finance team is working with Beck’s firm to identify foreign counsel. “Getting that total knowledge in the early stage formation process was critical,” says Heins. “You really need that local law firm knowledge to make sure you’re checking every box you need to early in the process—as opposed to being surprised down the road.”
6 QUESTIONS AND TIPS FOR GETTING TRADE CREDIT INSURANCE
War, revolution, economic upheaval, currency fluctuations. There are plenty of ugly scenarios that can keep overseas clients from paying invoices.
Fortunately, there’s a relatively inexpensive way that exporters can avoid insomnia: trade credit insurance. This type of insurance protects you in case an overseas buyer can’t pay an invoice, usually covering 90 percent to 100 percent of what is owed, according to the Export-Import (EXIM) Bank of the United States. It can be purchased through an independent broker or from EXIM Bank. While you can also get protection by requiring a letter of credit, these are expensive for buyers.
Trade credit insurance can also help you grow your business, opening up new financing options with banks and other asset-based lenders. “Trade credit insurance allows borrowing on what may otherwise be receivables that wouldn’t qualify to borrow against,” says Jim Quirk, practice leader for trade credit and political risk at Wells Fargo Insurance Services. “With one of your largest single assets being your accounts receivable,” he says, “it provides a potentially better credit profile.”
With this financing, you may be able to go after opportunities otherwise closed to your business. “This is one of the few types of insurance coverage that makes money or can expand sales for a company,” Quirk says.
Trade credit insurance can also be helpful for businesses that are using their own sales to fuel growth. “Even if you’re self-financing, if you’re moving rapidly or growing fast, you can get beyond yourself in terms of your own ability to absorb risk,” says Dorothy Erlanger, a Richmond, Va.-area business consultant who has advised many firms around the world in areas such as marketing, who also teaches in the International Business Certificate Program at Virginia Commonwealth University.
The key to getting the most out of trade credit insurance is shopping wisely. Buy the wrong policy and you may not have all of the protection you need to avoid a loss. Here are some questions to guide you in choosing the right policy.
DO YOU NEED TRADE CREDIT INSURANCE AT ALL?
If an unpaid bill by an overseas client is big enough to bring your company down or make a serious dent in your universe, as the expression goes, chances are you need trade credit insurance.
Similarly, if you are entering a country where you don’t understand the legal climate and want to protect against snafus you can’t begin to anticipate, trade credit insurance may give you peace of mind.
“Our perspective is you can always credit-insure, as long as you have trade receivables,” says Jochen Duemler, CEO and head of Euler Hermes Americas, which partners with HSBC Bank to provide trade credit insurance to the institution’s commercial banking customers in the U.S. “We have no formal technical restrictions in terms of industries or where you are in terms of industries. We are in all industries, more or less.”
One small-business client of Euler Hermes Americas is a 10- to 15-person, Miami-based exporter of electronic-technology parts to South America. “Our trade credit insurance allowed them to give more competitive credit terms in the markets they developed for themselves,” Duemler says. “It allowed them to say, ‘I will give you 60-day payment terms instead of asking for a letter of credit, because I am credit insured.’”
Erlanger says that in her business, she has seen trade credit insurance used mainly by sellers of big-ticket products, rather than services. “Typically, I see it much more for higher-value items, things like medical devices,” says Erlanger.
Sometimes, companies will buy trade credit insurance when they want to work with a client that is stable but is likely to pay slowly.
“You might be selling to a hospital system in the country and payment might be delayed or prolonged, but it is such an attractive situation you want to go ahead,” she says.
HOW MANY BUYERS DO YOU NEED TO INSURE?
Most trade credit insurance policies that cover you for multiple buyers will cost you 1 percent or less of insured sales, according to EXIM Bank.
Prices will vary considerably, though, if you only want to cover a single buyer. For instance, if you have one client who owes you $1 million and only want trade credit insurance for this account, you may have to pay higher rates than you would for a multi-buyer policy that also covers clients who owe you much smaller amounts.
“By definition, a single-debtor policy is cherry picking,” says Gary Mendell, president of Meridian Finance Group, a firm that sells trade credit insurance out of Santa Monica, Calif. “Underwriters will want to get their hands around ‘Why you are covering this one? What do you do that we don’t know?’ The cost of single-buyer coverage tends to be higher as a result.”
But, he adds, “The most important thing is not the pricing; it’s pretty low. The most significant decision factor is: Can you get your customer underwritten?” Once you select a policy, the insurer will decide what level of credit you can extend to that buyer.
If you are new to exporting, it may be worth considering EXIM Bank’s Small Business Multi-Buyer Insurance, designed for firms that are dipping a toe into international waters. Instead of paying premiums up front, you are allowed to wait until you ship. The program is limited to businesses with three years of operating history that sell up to $7.5 million in exports on credit annually.
WHAT SCENARIOS SHOULD I PROTECT AGAINST?
Typically, you’ll need coverage for both commercial and political risk, says Quirk. A commercial risk might be insolvency by a client. A political risk might be one involving currency conversion. “You want to make sure the policy is addressing both of those,” says Quirk.
Find out how an insurance company will protect you if a worst-case scenario takes place—and make sure you are comfortable with it.
For instance, when U.S.-based clients for Euler Hermes needed to collect unpaid receivables after clients in Brazil faced a devalued currency several years back and could not pay them on time, the insurance company helped work out installment plans with the customers. “They work themselves out of the debt in three to four years’ time,” explains Duemler. Each insurer has its own approach.
DO YOU FULLY UNDERSTAND THE RISKS YOU FACE?
If you are doing business mostly from afar, it will be hard to get a clear grip on the risks you face. Businesses that don’t have an office or a plant overseas will need to rely more on their insurance company’s guidance.
“You might want to make sure the underwriter you are considering has extensive or actual on-the-ground resources in the key countries you may be trading in—or, for some of the smaller countries, a significant underwriting presence in the area,” says Quirk. For instance, if you are trading in China, you would ideally want to know that the insurance company has an office in Mainland China.
Even if you visit a distant market on occasion to meet with potential clients, you may not be able to pick up on credit risks from a brief get-together—especially if you get together in a hotel lobby and not at their headquarters. “The people that are easiest to get a meeting with are not necessarily the clients you want to do business with,” says Quirk.
HAVE YOU FOUND THE RIGHT INSURER?
“What you need is a partner who really listens to you, understands your business and brings in industry experts who are specialized,” says Duemler. For instance, if you sell chemicals, your insurer will ideally connect you to its in-house specialist on the chemical industry.
Your insurance partner will be a daily presence in your business life—so consider that when choosing one. For instance, if you find a new buyer, you may need the insurance company to assess the credit risk. If things are going well with an export client, you may need to ask the insurance company to raise its credit limit.
READ THE FINE PRINT
Buying the wrong policy can leave you with a false sense of security. Make sure you choose a plan that does not include clauses where the insurance can be cancelled or reduced suddenly, advises Erlanger. “Have it reviewed by a banker or lawyer who can read it very carefully,” she says. You’ll sleep a lot better at night knowing you can collect on a claim if disaster strikes.