FINANCING EXPORT SALES

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Few would disagree that small businesses must look overseas for profit

opportunities in the 1990s.  However, to compete successfully, small firms

must offer financing arrangements that are competitive with exporters of

other nations.  This chapter will discuss three major influences on an

exporter's ability to arrange competitive financing:

     .    today's banking environment

     .    how to approach a lender

     .    methods of payment

UNDERSTANDING THE BANKING ENVIRONMENT

     In the United States, most small firms turn first to their local banks

for export finance assistance.  However, during the past decade many banks

have decided not to focus on export financing.

The banks' reasons for doing so have varied -- many cut their

international operations due to the huge losses they incurred on overseas

debt; others may have chosen to concentrate on more lucrative lines of

business, such as home equity loans or mergers and acquisitions.

     Consequently, during the 1980s export finance expertise in many U.S.

banks deteriorated.  Even today, most smaller banks do not retain any staff

with expertise in international trade.  This is not to say, however, that

such help is unavailable -- only that small businesses must be persistent

and tenacious in their efforts to find it.  For example, if a small

business loan officer is unwilling to work with his or her bank's

international staff (or the bank is unwilling to work with a

correspondent), exporters should consider establishing a second banking

relationship or, if necessary, moving all their accounts to a more

aggressive lender.  Don't be afraid to shop.

     Given the difficulty most small business exporters face when seeking

financing, it is imperative that financial arrangements be made in advance.

Finding a lender willing to consider such a request requires that the

borrower ensure that the purpose of the loan makes sense for the business,

and that the request is a reasonable amount.  Prospective borrowers also

should understand some key distinctions before beginning discussions with

a lender.

HOW TO APPROACH YOUR LENDER FOR EXPORT FINANCING

Venture Capitalists and Lenders

     Before approaching a bank for financial assistance, small exporters

should understand the distinction between venture capitalists and lenders.

Venture capitalists invest in a business with the expectation that as the

business grows, their equity in the business will grow exponentially.  On

the other hand, lenders are not in the venture capital business -- they

make their money on the difference between the rate at which they borrow

money and the rate at which they lend to their customers.

International Trade Services and Export Lending

     Small exporters should also understand the distinction between

international trade services and international trade lending.  Although

many banks offer international trade services, such as advising and

negotiating letters of credit, the banks' international divisions are not

authorized to lend money.  International lenders, on the other hand, have

the authority to make loans, as well as provide related services.

Exporters should verify that the bank officer with whom they are dealing

has the authority to lend for an export transaction.

Working Capital Financing and Trade Financing

     It is also important to note the difference between general working

capital financing and trade financing.  A small firm's ability to qualify

for general working capital financing depends on, among other things, the

strength of its balance sheet and its prospects for generating sufficient

earnings over the life of a loan to repay it.  Trade finance, on the other

hand, generally refers to financing individual transactions (or a series of

like transactions).  In addition, trade finance loans are often

self-liquidating -- that is, the lending bank stipulates that all sales

proceeds are to be collected by it, and then applies the proceeds to pay

down the loan.  The remainder is credited to the account of the borrower.

     The self-liquidating feature of trade finance is critical to many

small, undercapitalized businesses.  Lenders who may otherwise have reached

their lending limits for such businesses may nevertheless finance

individual export sales, if the lenders are assured that the loan proceeds

will be used solely for pre-export production; and any export sale proceeds

will first be collected by them before the balance is passed on to the

exporter.  Given the extent of control lenders can exercise over such

transactions and the existence of guaranteed payment mechanisms unique to

-- or established for -- international trade, trade finance can be less

risky for lenders than general working capital loans.

Pre-export, Accounts Receivable and Market Development Financing

     Exporters should understand the distinctions between the various types

of trade finance.  Most small businesses need pre-export financing to help

with the expense of gearing up for a particular export sale.  Loan proceeds

are commonly used to pay for labor and materials or to acquire inventory

for export sales.  Others may be interested in foreign accounts receivable

financing.  In that case, exporters can borrow from their banks an amount

based on the volume and quality of such accounts receivable.  Although

banks rarely lend 100 percent of the value of the accounts receivable, many

will advance up to 80 percent of the value of qualified accounts.  Foreign

credit insurance (such as Eximbank's Export Credit Insurance Program) is

often used to enhance the quality of such accounts.

     Financing for foreign market development activities, such as

participation in overseas trade missions or trade shows, is often difficult

for small businesses to arrange.  Most banks are reluctant to finance such

activities because, for many small firms, their ability to repay such loans

depends on their success in consummating sales while on a mission --

prospects that in many cases are speculative.  Although difficult for many

small firms to do, the recommended source for financing such activities is

through the working capital of the firm or, in certain cases, through the

use of personal credit cards.

     Finally, take time to make sure your banker understands your business

and products.  Have a detailed export plan ready and, most important, be

able to clearly show how and when a loan will be repaid.

METHODS USED TO FINANCE EXPORTS

     A small business exporter's principal concern should be to ensure that

he or she will be paid in full and on time.  Foreign buyers may have

concerns as well, including uncertainty that the goods ordered will meet

the necessary specifications and arrive in a timely manner.  As a result,

it is imperative that the terms of payment be agreed upon in advance and in

a manner satisfactory to both parties.

     The payment method exporters use can significantly affect the

financial risk of a particular export sale.  In general, the more generous

the sales terms are to a foreign buyer, the greater the risk to the

exporter.  The primary methods of payment for international transactions,

ranked in order of most secure to the exporter to least secure, include:

     .    payment in advance

     .    letters of credit

     .    documentary collections (drafts)

     .    consignment

     .    open account

Payment in advance

     Paying in advance is often too expensive and risky for foreign buyers.

Yet, this method of payment is not uncommon.  Requiring full payment in

advance may cause lost sales to a foreign (or even another domestic)

competitor who is able to offer more attractive payment terms.  In some

cases, however, where the manufacturing process is specialized, lengthy or

capital-intensive, it may be reasonable to insist upon partial payment in

advance, or on progress payments.

Letters of Credit (LC)

     A letter of credit is an internationally recognized instrument issued

by a bank on behalf of its client, the purchaser.  The LC actually

represents the bank's guarantee to pay the seller, provided the conditions

specified on it are fulfilled.  Of course, the purchaser pays its bank a

fee to render this service.

     The rationale behind the use of an LC is reliance by the seller on the

credit worthiness of the bank, which is normally more reliable than that of

the purchaser.  It is also easier to verify by the seller's bank.

Moreover, this vehicle can be structured to protect the purchaser because

no payment obligation arises until the goods have been satisfactorily

delivered as promised.

     The conditions of the LC are spelled out on the LC itself.  When the

conditions of delivery have been satisfied (usually by the documented,

satisfactory and timely delivery of the goods), the purchaser's bank makes

the required payment directly to the seller's bank in accordance with the

terms of payment (in 15, 30, 60 or 90 days, whichever is specified).

     The greatest degree of protection is afforded to the seller when the

LC has been issued by the buyer's bank and confirmed by the seller's bank.

LCs may be utilized for one-time transactions, or they can cover

multi-shipments, depending upon what is agreed between the parties.  Also,

make sure you can deliver within the terms of the LC.  It is suggested that

you review the details of such documentation with a bank that has LC

experience.

LETTER OF CREDIT

                        BUYER      SELLER

     .  Agrees to buy product      .  Agrees to ship goods if LC

                                      is opened

 .  Requests bank to issue LC      .  LC assures payment

                                      if proper documents are presented

                                   .  Ships goods and submits

                                      shipping documents to bank

                                      for payment

    .  Verifies documents for

       compliance

      .  Payment is made when      .  Payment received

documents received or accepted        immediately or upon

                                      maturity of accepted draft

Documentary Collection (Drafts)

     Documentary collections involve the use of a draft, drawn by the

seller on the buyer, requiring the buyer to pay the face amount either on

sight (sight draft) or on a specified date in the future (time draft).  The

draft is an unconditional order to make such payment in accordance with its

terms, which specify the documents needed before title to the goods will be

passed.

     Because title to the goods does not pass until the draft is paid or

accepted, both the buyer and seller are protected.  However, if the buyer

defaults on payment of the draft, the seller may have to pursue collection

through the courts (or possibly, by arbitration, if such had been agreed

upon between the parties).  The use of drafts involves a certain level of

risk; but they are less expensive for the purchaser than letters of credit.

DOCUMENTARY COLLECTIONS

                        BUYER      SELLER

    .  Agrees to buy products      .  Agrees to be paid via

                                      documentary collection

                                   .  Ships goods and submits

                                      shipping documents to bank

                                      for collection or

                                      acceptance

.  Documents released to buyer     .  Seller receives payment at

   against payment or acceptance      sight or upon acceptance

Consignment

     When goods are sold subject to consignment, no money is received by

the exporter until after the goods have been sold by the purchaser.  Title

to the goods remains with the exporter until such time as all the purchase

conditions are satisfied.  As a practical matter, consignment is very

risky.  There is generally no way to predict how long it might take to sell

the goods; moreover, if they are never sold, the exporter would have to pay

the costs of recovering them from the foreign consignee.

Open account

     An open account transaction means that the goods are manufactured and

delivered before payment is required (for example, payment could be due 14,

30, or 60 days following shipment or delivery).  In the United States,

sales are likely to be made on an open-account basis if the manufacturer

has been dealing with the buyer over a long period of time and has

established a secure working relationship.  In international business

transactions, this method of payment cannot be used safely unless the buyer

is credit worthy and the country of destination is politically and

economically stable.  However, in certain instances it might be possible to

discount open accounts receivable with a factoring company or other

financial institution, referred to above.

     The following diagram assesses the relative strengths and weaknesses

of each method of payment:

METHOD     USUAL TIME     GOODS AVAILABLE     RISK TO     RISK TO

                            OF PAYMENT        TO BUYER    EXPORTER

                                                          IMPORTER

Cash in    Before         After payment       None        Dependent

Advance    shipment                                       upon exporter

                                                          shipping goods

Letter     After ship-    After payment      Very little

of         ment, when                        or none      Relies on

Credit     documents                         depending    exporter to

           complying                         on LC        ship goods

           with LC are                       terms

           presented

Document-  On presenta-   After payment      If draft un- Relies on

ary Col-   tion of draft                     paid, must   exporter to

lection    to buyer                          dispose of   ship goods

Sight                                        goods

Draft

Document-  On maturity    Before payment     Relies on    Almost none

ary Col-   of draft                          buyer to pay

lection                                      draft; no

Time Draft                                   control of goods

Consign-   After sale     Before payment     High         Low

ment

Open       After ship-    Before payment     Relies on    None

Account    ment, as                          buyer to pay

           agreed                            his account

PRIVATE SECTOR EXPORT FINANCING RESOURCES

Commercial Banks

     International trade transactions traditionally have been financed by

commercial banks.  Commercial banks can make loans for pre-export

activities.  They can also help process letters of credit, drafts and other

methods of payment discussed in this chapter.  Banks have also become

increasingly involved in making export loans backed by United States

government export loan guarantees.

     Many larger banks have international departments which can help with

your company's particular export finance needs.  If your bank does not have

an international department, it probably has a correspondent relationship

with a larger bank that can assist you.

Private Trade Finance Companies

     Private trade finance companies are becoming increasingly more

commonplace. They utilize a variety of financing techniques in return for

fees, commissions, participation in the transactions or combinations

thereof.  International trade associations, such as a District Export

Council, can assist you in locating a private trade finance company in your

area.

Export Trading and Management Companies

     Both EMCs and ETCs provide varying ranges of export services,

including international market research and overseas marketing, insurance,

legal assistance, product design, transportation, foreign order processing,

warehousing, overseas distribution, foreign exchange and even taking title

to a supplier's goods.  All of these services can leverage the limited

resources of small businesses.

Factoring Houses

     Factoring houses, also called factors, purchase export receivables on

a discounted basis.  Using factors can enable the exporter to receive

immediate payment for goods while at the same time alleviating the hassles

associated with overseas collections.

     Factors purchase export receivables for a percentage fee at 2-7

percent below invoice value, depending on the market and type of buyer.

The percentage rate will depend on whether the factor purchases the

receivables on a recourse or non-recourse basis.  In the case of a

non-recourse purchase, the exporter is not bound to repay the factoring

house if the foreign buyer defaults or other collection problems arise.

Therefore, the percentage charge will be greater with non-recourse

purchases.

Forfaiting Houses

     Similar to factoring, exporters relinquish their rights to future

payment in return for immediate cash.  Where a debt obligation exists

between the parties, it is sold to a third party on a non-recourse basis,

but is guaranteed by an intermediary bank.

     One U.S. exporter which used forfaiting found the benefits

substantial:

     Ed Lamb, President of Custom Die and Insert of Lafayette, Louisiana,

was able to sell a 180-day letter of credit through a forfaiting house and

got paid 178 days sooner.  Forfaiting enabled Custom Die and Insert to

consummate a $2.3 million-dollar export order to the Middle East.

GOVERNMENT EXPORT FINANCING RESOURCES

     Because private sector financing providers will only assume limited

risk regarding foreign transactions, the U.S. government has become

increasingly involved in providing export financing assistance.

     U.S. government export financing assistance comes in the form of

guarantees made to U.S. commercial banks which in turn make the loans to

exporters.  Federal agencies, as well as certain state governments, have

their own particular programs as noted below:

U.S. Small Business Administration (SBA)

     SBA provides financial and business development assistance to help

small businesses develop export markets.  The SBA assists businesses in

obtaining the capital needed to explore, establish or expand international

markets.  SBA's export loans are available under SBA's guarantee program.

As a prospective applicant, you should request that your lender seek SBA

participation, if the lender is unable or unwilling to make a direct loan.

     The financing staff of each SBA district and branch office administers

the financial assistance programs.  You can contact the finance division of

your nearest SBA office for a list of participating lenders.  The business

development staff of each SBA district and branch office can provide

counseling on how to request export financial assistance from a lender.

     Borrowers can use different SBA loan programs and types of loan

guarantees simultaneously, as long as the total SBA-guaranteed portion does

not exceed the agency's $750,000 statutory loan guarantee limit to any one

borrower.  The lender may charge a maximum interest rate of 2.75 percentage

points above the New York prime interest rate, or 2.25 percentage points

above New York prime if the maturity is less than seven years.

Regular Business Loan Program

     The SBA can guarantee up to 90 percent of a bank loan up to $155,000.

For larger loans, the maximum guaranty is 85 percent up to $750,000.

     Small businesses that need money for fixed assets and for working

capital may be eligible for the SBA's regular 7(a) business loan guarantee

program.  Loan guarantees for fixed-asset acquisition have a maximum

maturity of 25 years.  Guarantees for general purpose working capital loans

have a maximum maturity of seven years.  Export trading companies (ETCs)

and export management companies (EMCs) also may qualify for the SBA's

business loan guarantee program.

     To be eligible, the applicant's business generally must be operated

for profit and fall within size standards set by SBA. Loans cannot be made

to businesses involved in creation or distribution of ideas or opinions,

such as newspapers, magazines and academic schools.  Other types of

ineligible borrowers include businesses engaged in speculation or

investment in rental real estate.

Export Revolving Line of Credit Program

     The Export Revolving Line of Credit (ERLC) Program offers a credit

line up to 36 months.  Any number of withdrawals and repayments can be made

as long as they do not exceed the dollar limit of the credit line, and the

disbursements are made within the stated maturity period.  Loan maturities

are generally for 12 months, with options to renew.

     Loans can be used to finance labor and materials for manufacturing or

wholesaling for export, to develop foreign markets or to finance foreign

accounts receivable.  Foreign business travel and participation in trade

shows are also among the eligible uses, but a regular 7(a) business loan

may be more appropriate for these purposes.

     Applicants must satisfy eligibility criteria established for all SBA

loans.  Also, the applicant must have been in business -- not necessarily

exporting -- for at least 12 months' continuous operation before filing an

application.  The 12-month requirement may be waived by the SBA regional

office, if the firm's management has sufficient export experience or enough

management ability to warrant an exception.

The International Trade Loan Program

     The International Trade Loan Program provides long-term financing to

help small businesses compete more effectively and to expand or develop

export markets.

     Loan maturities cannot exceed 25 years, excluding the working capital

portion of the financing. The SBA's guarantee cannot exceed 85 percent of

the loan amount.  The agency's maximum share for facilities or equipment

loans is $1 million, plus $250,000 for working capital.

     Proceeds may be used to purchase or upgrade facilities or equipment,

and to make other improvements that will be used within the U.S. to produce

goods or services.

     No debt payment is allowed.  Proceeds can be used to buy land and

buildings; build new facilities; renovate, improve or expand existing

facilities; and purchase or recondition machinery, equipment and fixtures.

The working capital portion of the borrowing could be in the form of either

an ERLC or a portion of the term loan.

     Applicants must establish either of the following to meet eligibility

requirements:

     .    Loan proceeds will significantly expand existing export markets

or develop new ones.

     .    The applicant's business is adversely affected by import

competition.

Small Business Investment Company (SBIC) Financing

     A Small Business Investment Company (SBIC), approved and licensed by

the SBA, may also provide equity or working capital exceeding the agency's

$750,000 statutory maximum.  SBICs can invest in export trading companies

in which banks have equity participation as long as other SBIC requirements

are met.

Export-Import Bank of the United States (Eximbank)

     Eximbank is an independent federal government agency responsible for

assisting the export financing of U.S. goods and services through a variety

of information service and insurance, loan and guarantee programs.

Eximbank has undertaken a major effort to reach more small business

exporters with better financing facilities and services, to increase the

value of these facilities and services to the exporting community, and to

increase the dollar amount of Eximbank's authorizations supporting small

business exports.

     Eximbank's export financing hotline provides information on the

availability and use of export credit insurance, guarantees, direct and

intermediary loans extended to finance the sale of U.S. goods and service

abroad.

     Briefing programs are offered by Eximbank to the small business

community.  The program includes regular seminars, group briefings and

individual discussions held both within the Bank and around the country.

     Export credit insurance programs reduce an exporter's risk and can be

obtained through an insurance broker or from Eximbank's Insurance Division.

A wide range of policies is available to accommodate many different export

credit insurance needs.  Insurance coverage:

     .    protects the exporter against the failure of foreign buyers to

pay their credit obligations for commercial or political reasons;

     .    encourages exporters to offer foreign buyers competitive terms of

payment;

     .    supports an exporter's prudent penetration of higher risk foreign

markets; and

     .    gives exporters and their banks greater financial flexibility in

handling overseas accounts receivable.

     During the first two years, the new-to-export insurance policy offers

a short-term (up to 180 days) insurance policy geared to meet the

particular credit requirements of smaller, less experienced exporters.

Under the policy, Eximbank assumes 95 percent of the commercial and 100

percent of the political risk involved in extending credit to the

exporter's overseas customers.  This policy frees the smaller exporter from

"first loss" commercial risk deductible provisions that are usually found

in regular insurance policies.  The special coverage is available to

companies which are just beginning to export, or have an average annual

export credit sales volume of less than $2,000,000 for the past two years,

and meet the SBA definitions of small business.

     The umbrella policy also covers short-term receivables of companies

with only limited experience in export trade. These policies are available

to commercial lenders, state agencies, finance companies, export trading

and management companies, insurance brokers and similar agencies to insure

their clients' receivables.  Exporters are eligible if they have average

annual export credit sales of less than $2,000,000 for the past two years

and meet the SBA definitions of small business.

Loan Programs

     The Working Capital Loan Guarantee Program assists small businesses in

obtaining crucial working capital to fund their export activities.  The

program guarantees 100 percent of the principal and interest on working

capital loans extended by commercial lenders to eligible U.S. exporters.

The loan may be used for pre-export activities such as the purchase of

inventory, raw materials, the manufacture of a product or for marketing.

Eximbank requires the working capital loan to be secured with inventory of

exportable goods, accounts receivable or by other appropriate collateral.

Direct and Intermediary Loans

     Eximbank provide two types of loans, direct loans to foreign buyers of

U.S. exports and intermediary loans to fund responsible parties that extend

loans to foreign buyers of U.S. capital and quasi-capital goods and related

services.  Both the loan and guarantee programs cover up to 85 percent of

the U.S. export value, with repayment terms of one year or more.

     Direct loans of any size and long-term loans to intermediaries are

offered at the lowest interest rate permitted under the Organization for

Economic Cooperation and Development (OECD) arrangement for the market and

term.

     Medium-term intermediary loans are structured as "standby" loan

commitments.  Under this arrangement, the intermediary may borrow against

the remaining undisbursed loan at any time during the term of the

underlying debt obligation.  There is a prepayment fee if it is triggered

by prepayment of the foreign borrower.

Guarantee Programs

     Guarantees of the Eximbank provide repayment protection for private

sector loans to credit worthy buyers of U.S. capital equipment and related

services.  The guarantee is available alone or may be combined with an

intermediary loan.

     Most guarantees provide comprehensive coverage of both political and

commercial risks but political risks only coverage is also available.  The

guarantee covers 100 percent of principal and interest.  In the event of a

default, the guaranteed lender must file a claim no less than 30 and no

more than 150 days after the default.  The claim will be paid within five

business days after receipt.

     Customary repayment terms for capital goods in international trade

are:

     Contract Value           Maximum Term

     Less than $75,000        2 years

     $75,000 - $150,000       3 years

     $150,000 - $300,000      4 years

     $300,000 or more         5-10 years, depending on the natureof the

sale and the OECDclassification of the buyers'country.

     Loans for projects and large product acquisitions, such as aircraft

and capital-intensive machinery, are eligible for longer terms while lower

unit value items such as automobiles and appliances receive shorter terms.

Commodity Credit Corporation (CCC)

     The United States Department of Agriculture's Commodity Credit

Corporation (CCC) operates Export Credit Guarantee Programs to provide

United States agricultural exporters or financial institutions a guarantee

that they will be repaid for short- and intermediate-term commercial export

financing to foreign buyers.  These programs protect against commercial or

noncommercial risk if the importer's bank fails to make payment.  Under one

program, the CCC will guarantee credit terms of up to 3 years and under

another, credit terms from 3 to 10 years are guaranteed.  (For more

details, see Part II, The Exporter's Directory.)

State Export Financing Programs

     A number of state-sponsored export financing and loan guarantee

programs are available.  Many cities and states have established

cooperative programs with the Eximbank and can provide specialized export

finance counseling.  Details of these programs are available through each

state department of commerce or trade office.

     Arkansas, California, Delaware, Georgia, Indiana, Louisiana, Maine,

Maryland, Massachusetts, Michigan, Minnesota, New Jersey, New York, Nevada,

North Carolina, Oklahoma, Pennsylvania, South Carolina, Texas, Utah,

Virginia, Washington, and Wisconsin all provide direct or indirect export

financing assistance.

     Once an exporter determines the kind of export financing assistance to

be used and which payment method, the next step is to arrange for delivery

of the goods to the buyer's destination.  It is important to assess the

various transportation options available, the subject of Chapter 6,

"Transporting Goods Internationally."

import  ,export , manufacturers