Financing International Trade
Export financing is often a key factor in a successful sale. Contract negotiation and closure are important, but at the end of the day, your company must get paid.
Exporters naturally want to get paid as quickly as possible, while importers usually prefer to delay payment until they have received or resold the goods. Because of the intense competition for export markets, being able to offer attractive payment terms in the trade is often necessary to make a sale. Exporters should be aware of the many financing options open to them so that they choose the most acceptable one to both the buyer and the seller. In many cases, government assistance in export financing for small and mid-sized businesses can increase a firm's options. The following factors are important to consider in making decisions about financing:
- The need for financing to make the sale
- The length of time the product is being financed
- The cost of different methods of financing
- The risks associated with financing the transaction
- The need for pre-shipment finance and for postshipment working capital
The Role of Commercial Banks
The same commercial bank facilities used to finance domestic activities, including revolving lines of credit for working capital, are often sought to finance export sales until payment is received. Banks do not regularly extend financing solely on the basis of an individual order as they prefer to establish an ongoing business relationship.
The exporter may wish to approach a commercial bank with an international department. Such a bank will be familiar with export business and also be in a position to provide international banking services related to documentary collections and letters of credit, including the discounting of drafts. An intermediate approach is to retain a relationship with the exporter's existing bank, but seek a referral to a correspondent bank that has an international department.
The exporter should visit the bank's international department to discuss export plans, available banking facilities, and applicable charges. The exporter may wish to inquire about such matters as: fees for amending or confirming a letter of credit, processing drafts and about the bank's experience in working with U.S. Government agencies that offer export financing assistance. Generally, the bank's representative handling the exporter's account will not be lodged in the international department. It is in the exporter's best interest to create and foster a close working relationship with the international department.
Government Assistance Programs
Several federal government agencies, as well as a number of state and local ones, offer programs to assist exporters with their financing needs. Some are guarantee programs that require the participation of an approved lender; others provide loans or grants to the exporter or the foreign government.
Government programs generally aim to improve exporters' access to credit rather than to subsidize the cost at below-market levels. With few exceptions, banks are allowed to charge market interest rates and fees, including fees paid to the government agencies to cover the agencies' administrative costs and default risks.
Government guarantee and insurance programs are used by commercial banks to reduce the risk associated with loans to exporters. Lenders concerned with an exporter's ability to be paid often use government programs to reduce the risks that would otherwise prevent them from providing financing. In other cases, lenders to a foreign buyer of U.S. goods and services are reluctant to provide the financing without the support from a U.S. Government agency.
Export-Import Bank of the United States(Ex-Im Bank)
The Ex-Im Bank is an independent federal government agency with the primary purpose of facilitating the export of U.S. goods and services. Ex-Im Bank meets this objective by providing loans, guarantees, and insurance programs on market-related credit terms. More information can be found at www.exim.gov
Small Business Administration(SBA)
The SBA also provides financial assistance to U.S. exporters. SBA targets its assistance to small companies and strives to assist those businesses that otherwise might not be able to obtain trade financing. Applicants must qualify as small businesses and meet other eligibility criteria. More information can be found at www.sba.gov
U.S. Department of Agriculture(USDA)
The Commodity Credit Corporation (CCC) of the USDA provides several programs to assist in the financing of U.S. agricultural goods exports. Two long-established programs guarantee intermediate-term irrevocable letters of credit opened by foreign banks and often confirmed by U.S. banks. More information can be found at www.usda.gov
Overseas Private Investment Corporation(OPIC)
The OPIC is a federal agency that facilitates the U.S. foreign direct investment in developing nations and emerging market economies. OPIC is an independent, financially owned agency, owned by the U.S. Government. More information can be found at www.opic.gov
The U.S. Trade Development Administration(TDA)
The TDA assists U.S. companies pursue overseas business opportunities. Through the funding of feasibility studies, orientation visits, specialized training grants, business workshops, and various forms of technical assistance, TDA helps businesses compete for infrastructure and industrial projects in emerging markets. More information can be found at www.tda.gov
The Agency for International Development (AID)
The AID administers most of the U.S. foreign economic assistance programs. These programs offer export opportunities for U.S. suppliers of professional technical assistance services and commodities. AID funds are available to finance developmentally sound projects in certain recipient countries involving U.S. capital goods and services. More information can be found at www.usaid.gov
Multilateral Development Banks(MDBs)
The MDBs are international financial institutions owned by member governments. Their individual and collective objective is to promote economic and social progress in their developing member countries. The MDBs achieve this objective by providing loans, technical cooperation, grants, capital investment, and other types of assistance to governments, government agencies, and other entities in their developing member countries. The practical expression of MDB support usually takes the form of a project or study.
The MDBs are:
World Bank Group: www.worldbank.org
African Development Bank: www.afdb.org
Asian Development Bank: www.adb.org
European Bank for Reconstruction and Development: www.ebrd.com
Inter-American Development Bank: www.iadb.org