The COVID-19 pandemic caused a major decline in global trade in the first half of 2020, due to government-mandated shutdowns across the world. In the United States, exports fell by 17.4% from January to September, when compared to the same period in 2019. However, as businesses and people adjust to the new normal, U.S. exports have begun to pick back up again, month to month.
Despite the positive trajectory, the U.S. goods deficit was the highest on record in August; while trade continues to pick up around the world, there are still many fluctuations and unknowns. Those uncertainties can make it particularly difficult for smaller exporters to stay afloat. Nevertheless, expanding into foreign markets is still a good business decision despite the higher risks, and export financing can be the bridge that connects cash flow to business opportunities, believes John C. Lee, first vice president and portfolio manager at East West Bank.
“The U.S. population is 330 million; the world population is 7.8 billion,” says Lee. “That means over 95% of people live outside of the U.S., which has tons of opportunity. The U.S. has the highest income and buying power, but the non-U.S. population is growing faster and the rewards may be high.”
Here’s how export financing can help with a business’s working capital and cash flow needs, and help you grow your business.
When it comes to international trade, most businesses, small or large, can’t afford to have their cash tied up in the middle of their trade cycle—which is where export financing comes in. According to the World Trade Organization, 80-90% of world trade relies on some form of financing. Intermediary financial institutions provide financing between the buyer and seller, which can be in the form of loans, letters of credit, or export credit and financing.
“Every business, if you want to grow, then they need to ask a bank for financing,” says Lee. “That’s where the Small Business Administration (SBA) and U.S. Export-Import Bank (EXIM) come in.”
Generally, Lee says that businesses should look into their export financing options “as early as possible in the trade cycle.” However, the inherent risks associated with foreign trade make it difficult for businesses to receive financing from traditional lenders. Luckily, both the SBA and the EXIM Bank partner with certain financial institutions such as East West Bank to make it easier for exporters to receive financing. The SBA and EXIM Bank will guarantee up to 90% of a loan through their export programs, to limit the risk taken on by the lender. Although there are other lenders outside of the SBA and EXIM Bank networks that provide export financing, Lee says they often charge high interest rates that could eat into a business’s bottom line.
The EXIM Bank favors high-tech areas like artificial intelligence, quantum computing, biotechnology and wireless communications, as well as exports related to renewable energy and emerging financial technologies.
The SBA offers two types of export services: the Export Express program and the Export Working Capital Program.
Even if a business hasn’t started exporting yet, they are eligible for a loan as long as they have been in operation for at least 12 months. They just need to demonstrate that the loan will be used to support export activity. So, if you’re a business that is just getting into exports, this would be a good way to finance that expansion.
Key things to note are:
The Export Working Capital Loan program is designed more for businesses that have already begun exporting and need capital to support those export sales.
Key terms to note are:
The EXIM Bank offers the Working Capital Loan Guarantee program, which allows exporters to borrow more funds with the same amount of collateral. However, the bank doesn’t provide the loans itself but rather works with qualified lenders to guarantee up to 90% of the loan.
“The Working Capital Guarantee provides an excellent opportunity for exporters to maximize their borrowing capacity against their export accounts receivable and their inventory destined for export,” says Michael Dwiggins, lender account manager at EXIM Bank.BREX
For example, Dwiggins says that inventory typically would be financed at 50% of its value, but under the Working Capital Guarantee program, it can be financed for up to 75% of the value, which includes raw materials and work-in-process goods. Dwiggins adds that foreign accounts receivables that don’t have credit insurance are “usually completely excluded by banks,” but under the program, banks can finance uninsured accounts receivables for up to 90% of its value.
However, since the program aims to support U.S. businesses and jobs through export, there are some eligibility requirements and restrictions a business must meet:
Thanks to the import and export restrictions that have been put in place over the past few years, Lee says some industries are more likely to be approved by the EXIM Bank for export financing. Typically, he says the EXIM Bank favors high-tech areas like artificial intelligence, quantum computing, biotechnology and wireless communications, as well as exports related to renewable energy and emerging financial technologies.
Although the EXIM Bank does not require an exporter to insure its receivables in order to get a loan, businesses should still look into export credit insurance to protect themselves from risk, especially if they don’t plan to go through one of the SBA or EXIM Bank programs.
The EXIM Bank offers a number of export credit insurance products, depending on a business’s needs. However, all the insurance products must have their claims filed 3 to 8 months after the due date, cover a 12-month period and offer report shipments monthly.
This was designed for experienced U.S. exporters to protect against non-payment by foreign buyers. “It protects the exporter from commercial risk of insolvency or protracted default of the foreign buyer just not paying,” Dwiggins says. “And also against political risks, such as currency and convertibility, expropriation, naturalization, war, cancellation of import/export licenses—anything that has a political orientation.”
This is designed for businesses that meet the SBA’s small business definition and whose three-year annual average of export credit sales are $10 million or less.
Express insurance is made for small businesses that are new to exporting, with $10 million or less in export credit sales, 10 or fewer buyers, and no more than five years of export credit experience.
Single-buyer insurance can be purchased by any exporter looking to insure just one buyer.
Both the SBA and EXIM Bank’s export programs work with other lenders to provide these loans, so the application will vary lender to lender.
However, Lee says that banks like East West Bank will want a business to have a solid business plan in place before they apply. “You need to show that you can export, that you have knowledge about exporting,” explains Lee. “You will need to know the [export] rules of not just the U.S., but foreign rules, and you need to show that you are a profitable operation. And, of course, we ask you what kind of collateral you can provide us.”
Although it sounds daunting, especially in the midst of a pandemic, Lee reminds businesses to keep the opportunities in mind. There are risks, but there is also the reward of having access to a much larger and diversified market.
“I encourage our audiences, if you start to export, to first equip yourself with the necessary knowledge, and maybe try to sell one or two orders—just [take] a baby step,” says Lee. “Once you get one or two items, then your income will be 24/7.”