Exporting can be a good opportunity for your small business to enter overseas markets and raise your company to a global level. Many times it is necessary to look for financing in order to take advantage of this possibility.
Why You Need Financing In Order to Export
There are different stages in the export process in which you may need financing to cover your costs. You may need financing in the initial stage, when you are investing time and resources in researching and evaluating potential overseas markets. When you are marketing your product for export you may incur expenses in attending international trade shows, or commercial missions to other countries; in translating your product brochures and catalogs; in doing advertising in overseas markets; in developing a website; and in making contacts and traveling to visit potential buyers, distributors, and agents abroad.
You may need financing to acquire the machinery, equipment, tools, materials and supplies necessary to fabricate your products for export, and working capital to finance your operating expenses during this production period.
If you make the export sale under open credit terms, which could be between 30 and 180 days, you may need working capital financing while you are waiting to be paid.
Many times, small exporters do not have sufficient cash flow to finance all the costs in the export process until payment is received from the customer abroad, so it is necessary to consider the financing options available.
Sources of Financing
One possible source of financing you have as a small exporter is the bank with whom you have established a relationship. If the bank does not have an international commerce department, it can be more difficult to obtain financing for exports. In this case, you may need to establish a relationship with a larger bank. But even in this case, it could be that the bank is not willing to assume the risk involved with this type of financing.
There are various U.S. government programs that can help with loan guarantees that enable a small exporter to request the financing it needs from commercial financial institutions, which rely on these guarantees.
Small Business Administration (SBA)
This agency can help small businesses obtain the capital they need to explore international markets, to establish themselves as exporters, and to expand their presence in overseas markets. This is done through programs to guarantee loans that small exporters request from commercial banks. The International Trade Office of the SBA has two programs to help small exporters obtain financing: the Export Working Capital Program, and the International Trade Loan Program.
Both are loan guarantee programs and therefore require the participation of an eligible commercial bank. Most major banks are familiar with the SBA programs and can offer information or help with the process of applying for these loan guarantees.
Export Working Capital Program
Through the Export Working Capital Program exporters can request guarantees of up to $1.5 million or 90% of the loan amount, whichever is less, in order to obtain short-term financing for a specific transaction or for multiple sales on a revolving basis. You can find more information on the website of the SBA at www.sba.gov.
To be eligible for this loan guarantee, the company must have been operating for at least 12 months, but does not necessarily had to have exported during that time.
You can use the proceeds from a loan under this program to finance working capital needs associated with a single transaction or multiple export transactions, including purchasing materials and paying for labor prior to the export, financing your operation during the period you wait to collect on the accounts receivable that result from the export sale, and for standby letters of credit used as bond to guarantee compliance. You cannot use the proceeds to finance consulting services or marketing for exports, business trips abroad, participation in trade shows, or to pay supporting personnel abroad, except to the extent these expenses are directly related to the transaction being financed. Nor can you use the proceeds of the loan to make payments to the owners, to pay withholding taxes, or to pay any already existing debt.
The term of the loan, in the case of a single transaction is the duration of the transaction cycle, up to a maximum of 18 months. If the loan is a revolving line of credit, it normally expires after 12 months and can be renewed for two additional annual periods.
International Trade Loan Program
This program can help small exporters finance the acquisition of machinery, equipment, and real property, and to improve their competitive position when they have been adversely affected by competition from imports.
To obtain this loan guarantee, the company must be able to demonstrate that: (a) the loan will help the company expand existing export markets or develop new export markets, or (b) the loan will help the company improve or modify its equipment in order to improve its competitive position, which has been negatively affected by competition from imports. In both cases, the company needs a business plan in order to request this loan.
The maximum amount of the loan is $2 million, with a guarantee from the SBA of up to $1.5 million. The guarantee can be up to $1.75 million when the company has a separate working capital loan according to loan program 7(a) (see below), provided that the SBA guarantee on the working capital loan was not more than $1.25 million. The SBA can guarantee up to 85% of loans up to $150,000 and 75% of loans for more than $150,000.
The loans guaranteed by the SBA offer competitive market interest rates and conditions. The terms of the loans cannot exceed 25 years for real property, 15 years for equipment, and 10 years for working capital.
Normal Business Loan Guarantee Program
Small companies that need money for fixed assets and working capital can also apply for financing through SBA’s 7(a) business loan guarantee program. The proceeds from these loans can be used to purchase real property; for construction, renovation, or leasehold improvements; to purchase machinery, equipment, furniture, and fixtures; to buy inventory; and for working capital.
To be eligible, the company must be operated for profit and must be within the parameters set by the SBA in terms of the size of the company. These parameters depend on the industry and are determined according to the number of employees, or the company’s annual revenue.
Loan guarantees for the acquisition of fixed assets have a term of up to 25 years, and general working capital loans up to 7 years. The SBA can guarantee up to 85% of loans up to $150,000 and 75% of loans greater than that amount, up to a maximum guarantee of $1.5 million for a loan of $2 million. The financial institution can charge a maximum interest rate of 2.75% above the prime rate, or 2.25% above prime when the maturity is less than 7 years.
This SBA program helps small companies that want to start exporting and those that are already exporting and want to expand their markets abroad. The proceeds from loans under this program can be used for marketing activities, for the purchase of real property and equipment to be used in the production of goods and services for export, and to finance the export transaction itself.
In this program, more rapid review and approval procedures are used to process guaranteed loans. Typically the SBA can give a response to the financial institution within 36 hours. The SBA’s guarantee is 85% of loans up to $150,000 and 75% of loans from $150,000 to $250,000, which is the maximum amount of a loan that can be guaranteed under this program.
Interest rates are negotiated between the small company and the financial institution. These rates can be fixed or variable and are set according to the prime rate. The lender can charge up to 6.5% over prime for loans up to $50,000 and 4.5% over prime for loans for more than $50,000. The terms of the loans are normally 5 to 10 years for working capital loans, 10 to 15 years for loans to purchase machinery and equipment, and up to 25 years for purchases of real property.
For more information you can see the website www.sba.gov/oit/exportexpress.html.
Export-Import Bank (Ex-Im Bank)
The Export-Import Bank (www.exim.gov) is an independent agency of the U.S. government that supports U.S. exporters through guaranteed working capital loans to exporters, loans and loan guarantees for international buyers of U.S. goods and services abroad, and credit insurance to protect U.S. exporters when buyers abroad do not pay for political or commercial reasons.
The Export-Import Bank’s Working Capital Program (www.exim.gov/products/work_cap) offers guarantees so that exporters can obtain financing from commercial financial institutions. Exporters can use these guaranteed loans to purchase finished goods for export; purchase raw materials, equipment and supplies and pay for labor and overhead to produce the goods or provide the services for export; cover guaranty bonds required in bidding processes for a contract with a buyer abroad; and finance accounts receivable from customers abroad.
The guarantees for working capital loans generally cover 90% of the principal and interest on commercial loans for small and mid-sized companies, and in certain cases cover 100%. Exporters can request a letter from the Export-Import Bank that serves as a preliminary commitment, pointing out the guarantee conditions the Bank can offer. With this letter the exporter can apply for a loan at a financial institution. The exporter can also request a definitive authorization of the loan guarantee. These guarantees can cover an individual transaction or a revolving line of credit. Generally, guaranteed loans have a term of 12 months and are renewable.
The Export-Import Bank’s insurance policies protect U.S. exporters from the risk that buyers abroad will not pay, and thereby enable exporters to grant credit to these buyers. Insurance policies can be obtained for one-time sales or multiple sales abroad of raw materials, agricultural products, capital goods, and consumer goods. The insurance covers 100% of the principal against political risk, and 90 to 95% against commercial risks, with terms of from 180 to 360 days, and capital goods can be insured for up to five years.
The Export-Import Bank can also help U.S, exporters by granting direct loans, or loan guarantees to qualified international buyers, in the public or private sector. Normally these loans are to finance the purchase of capital goods from the U.S., or services for large-scale projects.
The Export-Import Bank works with small companies at the local level through five regional offices and a network of partners in the cities and states. It has also delegated authority to certain financial institutions so they can commit the Bank to working capital loan guarantees. Insurance brokers can help with applications for the insurance coverage offered by the Export-Import Bank on credit granted to clients abroad.
Overseas Private Investment Corporation – OPIC
This corporation is a federal government agency that offers political risk insurance, guarantees against all risks, and direct loans. The Small Business Center of OPIC (www.opic.gov/smallbusiness) offers direct loans of from $100,000 to $10 million, with terms of from 3 to 15 years, to small companies with annual revenues of less than $35 million.
Interest rates on loans are fixed and are based on the cost of the funds to OPIC plus a reasonable margin to cover the risk. There could be a one-time charge of 2% of the loan amount and a maintenance charge of not more than 1% of the remaining loan balance. Companies that receive these loans are eligible for political risk insurance coverage.
Department of Agriculture
The Commodity Credit Corporation, CCC (www.fas.usda.gov/excredits) of the U.S. Department of Agriculture administers credit guarantee programs to help with the financing of exports of agricultural products.
The GSM-102 program guarantees credit granted by private U.S. banks to approved banks abroad using irrevocable letters of credit to pay for agricultural products sold to buyers in other countries.
For more information on the financing programs offered by the CCC, you can see the website http://www.fas.usda.gov.
State and City Governments
In addition to the U.S. federal government programs, many of the states and cities in the U.S. have programs for direct loans, loan guarantees, insurance, and other assistance for small exporters. On the website of the National Association of State Development Agencies at www.nasda.com you can find links to the state agencies.