Don't Let Financing Stand In Your Way

By: Dennis Chrisbaum Issue: Global Trade Section: Collaborator Profile

Grow Your Export Business with Help from SBA

ICOSA Magazines

In February, the U.S. had a trade deficit of only $26 billion, the lowest in nine years, as imports plunged while exports stabilized — even growing slightly. This was in stark contrast to 2008, which saw an average monthly trade deficit of $57 billion. As imports continue to plummet, primarily due to the drop-off in U.S. retail sales and the decline in oil prices, the U.S. trade deficit with the rest of the world has finally begun to narrow. Clearly, we are in new territory, both for our struggling domestic economy and for emerging global trade patterns.

In fact, the World Trade Organization expects the volume of world trade to decline by 9% this year, the largest decline since World War II, while the International Monetary Fund now projects that world GDP [Gross Domestic Product] will decline for the first time in 60 years. These forecasts break with past decades when global economies experienced steady growth and world trade increased even more rapidly, typically at double the world’s growth rate in GDP.

Nevertheless, just as the U.S. economy will recover in the coming months, so too will the economies of our trading partners around the world. And, in the short term, the stimulus programs adopted by various governments also will create new opportunities for U.S. products and services. Consequently, 2009 is an excellent time for companies to review its business plan, to evaluate opportunities in other markets, and possibly to diversifying away from a position that might have been too heavily dependent on the U.S. economy alone.

Entering New Markets

For help in beginning that process, a U.S. Export Assistance Center (USEAC) is a great place to start. Located in major cities through the country, USEACs are staffed by U.S. Department of Commerce trade specialists and, in some locations, trade financing specialists from the U.S. Small Business Administration (SBA) and the Export-Import Bank (Ex-Im Bank), who can provide the market research, training, and technical support needed to enter and successfully sell in overseas markets. (To find the USEAC near you, visit: http://www.buyusa.gov/home/export.html). Most companies are amazed at the amount of market research and technical support that is available from these U.S. Export Assistance Centers--much of it free of charge. For a detailed description of the programs and services available to U.S. companies to help with their export expansion plans, please visit the U.S. Department of Commerce’s export portal at http://www.export.gov, or download a free publication, Breaking Into the Trade Game: A Small Business Guide to Exporting, at: http://www.sba.gov/international.

Upon making the decision to pursue global opportunities and develop an international business plan, the U.S. Small Business Administration (SBA) is a logical next stop for discussing payment and financing options. The SBA staff, assigned to 19 U.S. Export Assistance Centers across the country, can assist in sorting through international payment conventions and explain working capital options to support export expansion plans and international sales.

Financing Market Expansion

Major changes to SBA’s loan programs have been put in place for this year in order to help jumpstart the economy and to encourage banks to make more small business loans, including loans to small business exporters.

The American Recovery and Reinvestment Act of 2009, signed into law on February 17, 2009, created some short-term relief and incentives by providing $375 million to temporarily waive the guaranty fees on SBA-backed loans, while also raising the SBA’s guarantee percentage on most loans to 90 percent. In addition, the SBA temporarily is allowing the use of alternative size standards, matching those used for the Certified Development Program, which will make more small businesses eligible for SBA support. This alternative size standard will be in effect until September 30, 2010, and will allow companies (and any affiliates) with a net worth of $8.5 million or less and an average net income, after federal income taxes for the preceding two fiscal years, of no more than $3 million to qualify. For a complete listing of historic size standards by industry classification, please see: http://www.sba.gov/sizestandards.

Since 97% of all U.S. exporters are small businesses by SBA’s size standards (and account for one-third of all U.S. exports, or more than $500 billion annually), the vast majority of U.S. exporters should qualify for one of SBA’s several financing programs, ranging from working capital loans to loans for export expansion to loans for equipment and buildings. While any of SBA’s loans programs can be used by small business exporters, three programs are specifically targeted for use by the exporting community.

1. The SBA Export Express Program provides guarantees on loans up to $250,000. Typically, these loans are for 5-7 years, but they can extend to 25 years based on the use of proceeds. Under this lender-expedited program, SBA currently provides a loan guarantee of 90% and, if the term of the loan exceeds 12 months, the guaranty fee currently is being waived. Proceeds can be used for equipment, other fixed assets, transaction costs, foreign trade show participation, translation services or other working capital needs. SBA typically approves these loans in 2-3 days after receiving them electronically from a bank. However, in order to qualify for this program, the applicant must have been in business for a least one year and must demonstrate that the loan will help the firm enter a new export market or expand in an existing export market.

2. For companies that would like to expand their business because of growing export sales, or for those businesses that have been adversely affected by imports and need to re-tool to be competitive, the SBA’s International Trade Loan can help, by providing (currently, under the American Recovery and Reinvestment Act of 2009) up to a 90% guaranty to the lender on commercial loans of up to $2.0 million. The SBA guaranty can go as high as $1.75 million per borrower, unlike other SBA loans which generally are capped at $1.5 million. Terms can go out as long as 25 years, while loan proceeds can be used for both fixed assets and working capital. Refinancing is possible under this loan program.

3. The Export Working Capital Program (EWCP) provides a 90% guaranty to the lender and can be set-up to finance a single export transaction--one that might be larger than the firm’s normal order--or set-up on a revolving, line-of-credit basis to finance multiple transactions. For loans of 12 months or less, the guaranty fee is only 1/4 of 1%; for loans over 12 months, the guaranty fee has been temporarily waived under the American Recovery and Reinvestment Act of 2009. The collateral required for these loans is what is in the transaction: inventory, accounts receivable, work-in-process, and an assignment of proceeds for letters of credit and/or an assignment of proceeds under a credit insurance policy. Loans can go as high as $2 million, under a co-guaranty agreement between the U.S. Small Business Administration and the Export-Import Bank (Ex-Im Bank). Applicants must have at least one year of business operating history to qualify. Unlike the Ex-Im Bank, the SBA does not have a U.S.-content requirement (the Ex-Im Bank will only finance exports with at least 51% U.S. content), nor does it have a prohibition against financing sales to foreign military establishments in friendly countries.

Insuring Global Transactions

Given the recent global financial crisis, foreign buyers might be struggling with having enough working capital, so it would not be uncommon for them to ask for open account terms.

Given the recent global financial crisis, foreign buyers might be struggling with having enough working capital, so it would not be uncommon for them to ask for open account terms. To mitigate that risk, many SBA borrowers work with the Ex-Im Bank to obtain export credit insurance on their open account sales, insuring those overseas accounts receivable against commercial and political risk. Such policies may pay up to 95% of the invoiced amount on claims for default. The same credit insurance policies also can be written to cover unconfirmed letters of credit and documentary collection sales.

Especially priced for small business exporters (as defined by the SBA), the Ex-Im Bank’s small business, multi-buyer credit insurance policy will insure a company’s worldwide open account sales against political and commercial risk. To qualify, the company’s open account, annual export sales must have been less than $5 million on average over the past three years. The cost for this insurance coverage is only 55 cents per $100 invoiced amount, after a 15% discount that is being offered this year. As an added incentive, any small business exporter with an SBA EWCP loan would qualify for an additional 25% discount which would lower the premium to approximately 42 cents per $100 invoiced amount, in most cases. And, having credit insurance offers one other benefit when it comes to financing: a higher borrowing limit. Since a U.S. government agency is insuring the accounts receivable against commercial and political risk, banks typically will add them back into the borrowing base, making them “bankable.” Under the SBA’s export working capital program, advance rates against insured accounts receivable of 85-90% are commonly allowed.

It is less well known that exporters can use a combination of federal loan guarantees to make a deal feasible. For example, an SBA pre-export working capital loan [EWCP], supporting the U.S. exporter, could be paired with an overseas buyer using the Ex-Im Bank’s medium-term, buyer financing program. Under this program, the Ex-Im Bank will provide 5-7 year financing to foreign buyers of U.S. products or services. The importer has to come up with a 15% down payment and the Ex-Im Bank will provide a 100% guaranty on a loan covering 85% of the transaction amount. Under this scenario, the SBA’s Export Working Capital loan program would provide the necessary working capital for the exporter to produce the order, which would then be fully repaid upon shipment by the importer’s medium-term loan guaranteed by the Ex-Im Bank.

For more information on all of the Export-Import Bank programs, please visit: http://www.exim.gov.

To learn more about how these export finance programs might be structured to meet your needs, please contact one of the SBA trade finance specialists in any of the 19 U.S. Export Assistance Centers around the country. First established in 1994, the U.S. Export Assistance Center network combines the international marketing expertise of the U.S. Department of Commerce’s Commercial Service staff and the international trade finance expertise of the SBA staff, knowledgeable about both international methods of payments and export financing options under SBA and the Ex-Im Bank programs. These centers create an easy access point for exporters to all federal government export programs. To locate an SBA international trade finance specialist near you, or to learn more about the SBA’s loans for exporters, go to: http://www.sba.gov/international.

Don’t let financing needs stand in your way of international business success. Contact SBA and your local U.S. Export Assistance Center today!

Dennis R. Chrisbaum has worked in international trade for almost 30 years. He currently serves as the Regional Manager of International Trade Programs for the U.S. Small Business Administration, in the U.S. Export Assistance Center in Denver. In that capacity, he covers the states of Arizona, Colorado, New Mexico, Utah and Wyoming for the SBA’s Export Working Capital program. He can be reached at 303.844.6623 x 218 or at dennis.chrisbaum@sba.gov .