FINANCING
FINANCING
Why do we need financing in the import/export business?
To start, expand, or take advantage of opportunities, all businesses need new money sooner or later. By new money, we mean money that we have not yet earned, but which can become the engine for growth.
For the importer, financing offers the ability to pay for the overseas manufacture and shipment of foreign goods destined for the United States market. For the exporter, financing could mean working capital to pay for international travel and the marketing effort. New money also can be loans to foreign buyers so that buyers can purchase an exporter's goods.
American importers seldom have problems finding financing. United States dollars are plentiful, and if you do the homework phase well and you have purchase orders for the product(s), banks or factors are waiting to assist.
The Bank
Commercial banking is the primary industry that supports the financing of importing and exporting. Selection of a banking partner is an essential part of the teamwork required for international trade success.
When shopping for a bank, look for the following:
1. A strong international department
2. Speed in handling transactions (Do they want to make money on your money—called the float?)
3. The bank's relationship with overseas banks (That is, do they have corresponding relationships with banks in the countries in which you wish to do business?)
4. Credit policy?
Forms of Bank Financing
Loans for international trade fall into two categories: secured and unsecured.
Secured Financing.
Banks are not high risk takers. To reduce their exposure to loss, they often ask for collateral. Financing against collateral is called secured financing and is the most common method of raising new money. Banks will advance funds against payment obligations, shipment documents, or storage documents. Most common of these is advancement of funds against payment obligations or documentary title. In this case, the trader pledges the goods for export or import as collateral for a loan to finance them. The bank maintains a secure position by accepting as collateral documents that convey title such as negotiable bills of lading, warehouse receipts, or trust receipts.
How a Banker's Acceptance Works.
Another popular method of obtaining secured financing is the Banker's Acceptance (B/A). This method involves a time draft presented to a bank by an exporter. The bank stamps and signs the draft "accepted" on behalf of its client, the importer. By accepting the draft, the bank undertakes and recognizes the obligation to pay the draft at maturity, and has placed its creditworthiness between the exporter (drawer) and the importer (drawee).
Banker's acceptances are negotiable instruments that can be sold in the money market. The B/A rate is a discount rate which is generally 2 to 3 points below the prime rate. With the full creditworthiness of the bank behind the draft, eligible B/As attract the very best of market interest rates. The criteria for eligibility are:
1. You must create the B/A within 30 days of the shipment
of the goods
2. The maximum tenure is 180 days after shipment
3. It must be self-liquidating
4. You cannot use it for working capital purposes
5. The credit recipient must attest to no duplication
Unsecured Financing.
In truth, unsecured financing is for those companies which have a sound credit standing with their bank or have had long-term trading experience. It usually amounts to expanding existing lines of working credit. For the small importer/exporter, the bank probably will limit unsecured financing to a personal line of credit.
Factors
A factor is an agent who will, at a discount (usually 5% to 8% of the gross), buy receivables. In the United States, banks do 95% of the factoring; private specialists do the remainder. The factor makes a profit on the collection and provides a source of cash flow for the seller, albeit, less than if the business had held out to make the collection itself.
For example, suppose you had a receivable of $1000.00. A factor might offer you a $750.00 advance on the invoice and charge you 5% on the gross of $1000.00 per month until collection. If the factor makes the collection within the first month, he would only keep $50.00 and return $200.00. If it takes 2 months, the factor would keep $100.00 and return only $150.00, etc.
The importer benefits from having the cash to reorder products from overseas. For a manufacturer, the benefit can be cash flow available for increased or new production.
Other Private Sources
The Private Export Funding Corporation (PEFCO) was established in 1970 and is owned by 54 banks, seven industrial corporations, and an investment banking firm. PEFCO operates with its own capital stock, an extensive line of credit from the United States government's EXIMBANK, and the proceeds of its secured and unsecured debt obligations. It provides medium- and long-term loans, subject to EXIMBANK approval, to foreign buyers of United States goods and services. PEFCO generally deals in sales of capital goods with a minimum commitment of about $1 million—there is no maximum.
Government Sources
The global debt problem has had a deleterious impact on United States exporters. Many nations are short on foreign exchange, and wbat they have is earmarked for priority national imports and to service large international credit commitments. Nevertheless, because the United States government and various state governments are assisting in managing the debt crisis and its impact, more sources of competitive financing are available today to support exporting than at any other time in our history. The major complaint is that not enough firms are taking advantage of the programs.
Small Business Administration (SBA)
Under the SBA's regular (7A) guarantee program, small companies that can show reasonable ability to pay can get seven-year working capital loans for about 2.25% over prime. The maximum maturity might be up to 25 years, depending on the use of the loan proceeds. The SBA's export revolving-line-of-credit guarantee program provides preexport financing for the manufacture or purchase of goods for sale to foreign markets and to help a small business penetrate or develop a foreign market. The maximum maturity for this financing is 18 months. The SBA, in cooperation with the Export-Import Bank, participates in loans between $200,000 and $1,000,000 with a maximum maturity of 18 months.
Export-Import Bank
For those exporters who have found a sale, but the buyer can't find the financing in her or his own country, the Export-Import Bank has funds available to provide credit support in the form of loans, guarantees, and insurance for small businesses. Rates between 9.85% and 12.25% are available for a 5-to 10-year maturity period for both goods and services. The Medium-Term Credit Program has more than $300 million available for small businesses facing subsidized foreign competition. The Small Business Credit Program has about $7 billion available, with direct credit for exporting medium-term goods; competition is not necessary. The Exim Working Capital Program guarantees the lender's repayment on capital loans for exports.
The Agency for International Development (AID)
This organization, a subordinate division of the United States State Department, provides loans and grants to Third World nations for developmental and foreign policy reasons. Under the AID Development Assistance Program, more than $2 billion are available at rates of 2% and 3% over 40 years. The AID Economic Development Fund has about $3.5 billion, at 2% and 3% interest rates. Generally, these funds are available through invitations to bid through the Commerce Daily Bulletin, a publication available from the Government Printing Office, Washington, D.C. 20402.
The International Development Cooperation Agency (IDCA)
This organization sponsors a Trade and Development Program (TDP), which provides approximately $21 million on an annual basis for friendly countries to procure foreign goods and services for major development projects. Often, these funds support smaller firms in subcontract positions.
<em>SUCCESS STORY: A Philippino man, who became an American^ citizen, still had many island contacts. He started his successful rattan furniture import business by obtaining an SBA guaranteed bank loan.</em>
Why do we need financing in the import/export business?
To start, expand, or take advantage of opportunities, all businesses need new money sooner or later. By new money, we mean money that we have not yet earned, but which can become the engine for growth.
For the importer, financing offers the ability to pay for the overseas manufacture and shipment of foreign goods destined for the United States market. For the exporter, financing could mean working capital to pay for international travel and the marketing effort. New money also can be loans to foreign buyers so that buyers can purchase an exporter's goods.
American importers seldom have problems finding financing. United States dollars are plentiful, and if you do the homework phase well and you have purchase orders for the product(s), banks or factors are waiting to assist.
The Bank
Commercial banking is the primary industry that supports the financing of importing and exporting. Selection of a banking partner is an essential part of the teamwork required for international trade success.
When shopping for a bank, look for the following:
1. A strong international department
2. Speed in handling transactions (Do they want to make money on your money—called the float?)
3. The bank's relationship with overseas banks (That is, do they have corresponding relationships with banks in the countries in which you wish to do business?)
4. Credit policy?
Forms of Bank Financing
Loans for international trade fall into two categories: secured and unsecured.
Secured Financing.
Banks are not high risk takers. To reduce their exposure to loss, they often ask for collateral. Financing against collateral is called secured financing and is the most common method of raising new money. Banks will advance funds against payment obligations, shipment documents, or storage documents. Most common of these is advancement of funds against payment obligations or documentary title. In this case, the trader pledges the goods for export or import as collateral for a loan to finance them. The bank maintains a secure position by accepting as collateral documents that convey title such as negotiable bills of lading, warehouse receipts, or trust receipts.
How a Banker's Acceptance Works.
Another popular method of obtaining secured financing is the Banker's Acceptance (B/A). This method involves a time draft presented to a bank by an exporter. The bank stamps and signs the draft "accepted" on behalf of its client, the importer. By accepting the draft, the bank undertakes and recognizes the obligation to pay the draft at maturity, and has placed its creditworthiness between the exporter (drawer) and the importer (drawee).
Banker's acceptances are negotiable instruments that can be sold in the money market. The B/A rate is a discount rate which is generally 2 to 3 points below the prime rate. With the full creditworthiness of the bank behind the draft, eligible B/As attract the very best of market interest rates. The criteria for eligibility are:
1. You must create the B/A within 30 days of the shipment
of the goods
2. The maximum tenure is 180 days after shipment
3. It must be self-liquidating
4. You cannot use it for working capital purposes
5. The credit recipient must attest to no duplication
Unsecured Financing.
In truth, unsecured financing is for those companies which have a sound credit standing with their bank or have had long-term trading experience. It usually amounts to expanding existing lines of working credit. For the small importer/exporter, the bank probably will limit unsecured financing to a personal line of credit.
Factors
A factor is an agent who will, at a discount (usually 5% to 8% of the gross), buy receivables. In the United States, banks do 95% of the factoring; private specialists do the remainder. The factor makes a profit on the collection and provides a source of cash flow for the seller, albeit, less than if the business had held out to make the collection itself.
For example, suppose you had a receivable of $1000.00. A factor might offer you a $750.00 advance on the invoice and charge you 5% on the gross of $1000.00 per month until collection. If the factor makes the collection within the first month, he would only keep $50.00 and return $200.00. If it takes 2 months, the factor would keep $100.00 and return only $150.00, etc.
The importer benefits from having the cash to reorder products from overseas. For a manufacturer, the benefit can be cash flow available for increased or new production.
Other Private Sources
The Private Export Funding Corporation (PEFCO) was established in 1970 and is owned by 54 banks, seven industrial corporations, and an investment banking firm. PEFCO operates with its own capital stock, an extensive line of credit from the United States government's EXIMBANK, and the proceeds of its secured and unsecured debt obligations. It provides medium- and long-term loans, subject to EXIMBANK approval, to foreign buyers of United States goods and services. PEFCO generally deals in sales of capital goods with a minimum commitment of about $1 million—there is no maximum.
Government Sources
The global debt problem has had a deleterious impact on United States exporters. Many nations are short on foreign exchange, and wbat they have is earmarked for priority national imports and to service large international credit commitments. Nevertheless, because the United States government and various state governments are assisting in managing the debt crisis and its impact, more sources of competitive financing are available today to support exporting than at any other time in our history. The major complaint is that not enough firms are taking advantage of the programs.
Small Business Administration (SBA)
Under the SBA's regular (7A) guarantee program, small companies that can show reasonable ability to pay can get seven-year working capital loans for about 2.25% over prime. The maximum maturity might be up to 25 years, depending on the use of the loan proceeds. The SBA's export revolving-line-of-credit guarantee program provides preexport financing for the manufacture or purchase of goods for sale to foreign markets and to help a small business penetrate or develop a foreign market. The maximum maturity for this financing is 18 months. The SBA, in cooperation with the Export-Import Bank, participates in loans between $200,000 and $1,000,000 with a maximum maturity of 18 months.
Export-Import Bank
For those exporters who have found a sale, but the buyer can't find the financing in her or his own country, the Export-Import Bank has funds available to provide credit support in the form of loans, guarantees, and insurance for small businesses. Rates between 9.85% and 12.25% are available for a 5-to 10-year maturity period for both goods and services. The Medium-Term Credit Program has more than $300 million available for small businesses facing subsidized foreign competition. The Small Business Credit Program has about $7 billion available, with direct credit for exporting medium-term goods; competition is not necessary. The Exim Working Capital Program guarantees the lender's repayment on capital loans for exports.
The Agency for International Development (AID)
This organization, a subordinate division of the United States State Department, provides loans and grants to Third World nations for developmental and foreign policy reasons. Under the AID Development Assistance Program, more than $2 billion are available at rates of 2% and 3% over 40 years. The AID Economic Development Fund has about $3.5 billion, at 2% and 3% interest rates. Generally, these funds are available through invitations to bid through the Commerce Daily Bulletin, a publication available from the Government Printing Office, Washington, D.C. 20402.
The International Development Cooperation Agency (IDCA)
This organization sponsors a Trade and Development Program (TDP), which provides approximately $21 million on an annual basis for friendly countries to procure foreign goods and services for major development projects. Often, these funds support smaller firms in subcontract positions.
<em>SUCCESS STORY: A Philippino man, who became an American^ citizen, still had many island contacts. He started his successful rattan furniture import business by obtaining an SBA guaranteed bank loan.</em>
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