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Priority Lender Program

Under the Priority Lender Program, a qualified bank is assured faster turnaround for loans of up to $5 million. Qualification for this status requires completion of Ex-Im Bank training programs, completion of at least two working capital loans, and submission of a report every year. This Ex-Im Bank program guarantees its priority lenders that it will make a decision on a pending loan within 10 business days for standard transactions. Ex-Im Bank offers short-term insurance to cover risks incurred during the pre-shipment (during the assembly or manufacturing) period for export transactions. This period is normally limited to 180 days but can be extended depending on certain factors. This type of insurance covers the exporter against the possibility of a buyer canceling his/her purchase agreement or a foreign government canceling the buyer ;s import license.

Small Business Administration (SBA) of the US

The SBA has some services specifically designed to help the small business get started in exporting. SBA provides financial assistance programs for US exporters. Applicants must qualify under the SBA's size standards and meet other eligibility criteria. The SBA has two main programs to assist US exporters-- the Export Working Capital Program and the International Trade Loan (ITL) program. It is important to note that the SBA does not provide loans but rather loan guarantees. The SBA programs provide a small business owner with financing aids that will enable the business to obtain the capital needed to get into exporting. This program is designed to help small business exporters obtain financing by reducing risks to lenders. The SBA will guarantee up to 90% of a loan from a private bank. The proceeds from the loan can be used for pre-shipment working capital, post-shipment exposure coverage, or a combination of both. Credit managers should understand the basic credit attributes that are part of the SBA package that is funded through a bank and be able to determine if a company can qualify for SBA ;s financial assistance. The company must understand basic credit factors that apply to all loan requests. Every application needs positive credit merits to be approved. These are the same credit factors a lender will review and analyze before deciding whether to internally approve a loan application, seek a guaranty from SBA to support their loan, or decline the application all together.

Equity Investment

Business loan applicants must have a reasonable amount invested in their business to ensure that, when combined with borrowed funds, the business can operate on a sound basis. There will be a careful examination of the debt-to-worth ratio of the applicant to understand how much money the lender is being asked to lend (debt) in relation to how much the owner(s) have invested (worth). Owners invest either assets that are applicable to the operation of the business and/or cash which can be used to acquire such assets. The value of invested assets should be substantiated by invoices or appraisals for startup businesses or current financial statements for existing businesses.

Earnings Requirements

Financial obligations are paid with cash, not profits. When cash outflow exceeds cash inflow for an extended period of time, a business cannot continue to operate. As a result, cash management is extremely important. A company must be able to meet all its debt payments, not just its loan payments as they come due. Applicants are generally required to provide a report on when their income will become cash and when their expenses must be paid. This report is usually in the form of a cash flow projection, broken down on a monthly basis, covering the first annual period after the loan is received.

Working Capital

Working capital is defined as the excess of current assets over current liabilities. Current assets are the most liquid and most easily convertible to cash of all assets. Current liabilities are obligations due within one year; therefore, working capital measures what is available to pay a company ;s current debts. It also represents the cushion or margin of protection a company can give their short-term creditors. Working capital is essential for a company to meet its continuous operational needs. Its adequacy influences the firm ;s ability to meet its trade and short-term debt obligations as well as to remain financially viable.

Collateral

To the extent that worthwhile assets are available, adequate collateral is required as security on all bank loans; however, banks will generally not decline a loan where inadequacy of collateral is the only unfavorable factor. Collateral can consist of both assets which are usable in the business and personal assets which remain outside the business. Borrowers can assume that all assets financed with borrowed funds will collateralize the loan. Depending upon how much equity was contributed towards the acquisition of these assets, the lender also is likely to require other business assets as collateral. Although banks may require all, SBA loans definitely require personal guarantees by the owner or other individuals who hold key management positions.

Resource Management

The ability of company officers to manage the resources of the business, sometimes referred to as character, is a prime consideration when determining whether or not a loan will be made. Managerial capacity is an important factor involving education, experience and motivation. A proven positive ability to manage resources is also a large consideration. Primary Difference Between Ex-Im Bank and the SBA The Ex-Im Bank program offers exporters more flexibility and a desire to see that businesses in the US create jobs and increase exports. They also offer short, medium, and long-term guarantee insurance and direct loan programs. The SBA generally works with small businesses, while Ex-Im Bank involves itself with Fortune 500 companies and larger. The SBA defines a small business as one that is independently-owned and operated and not dominant in its field. A small business must also meet the employment or sales standards developed by the Small Business Administration based on the North American Industry Classification System (NAICS).

Factoring

Accounts receivable are the basis for factoring. Factoring is the discounting to the holders of accounts receivables by providing financing in the form of cash to them by a factor. Factors are organizations that specialize in the financing of specific industries that are known to them. They thus have collecting clout against buyers who are responsible for paying the account receivable(s). Factoring occurs in two forms-with recourse and without recourse. The difference lies in who takes responsibility if the buyer (debtor) does not pay. When a with recourse option is exercised, issuer of the invoice is forced to pay the factor if the debtor who is responsible for paying the account receivable (invoice) but does not pay the factor. Foreign credit insurance is often used as added protection for the issuer of the invoice. Without recourse means that the factor buys the account receivable (invoice) outright and takes full responsibility for its collection without being able to go back to the issuer of the invoice for reimbursement. Factoring is mainly used for small transactions that are available for short- term financing on a continuous basis.

Forfaiting

Forfaiting is defined as the discounting of medium-term promissory notes or drafts issued by a foreign buyer. Banks forfait larger transactions over a longer period of time. These transactions are backed by the maturing promissory notes. Banks also prefer that the drafts or promissory notes be avalized by the issuing bank, thus providing a guarantee from the avalizing bank. The benefit to the importer is the receipt of a discounted cash payment for the sale with the bank assuming responsibility for the collection of the promissory notes or drafts. Forfaiting is mainly used to finance equipment and relates to specific transactions.

Summary

A variety of short-term financing tools are available to exporters and importers. These tools range in simplicity, cost, requirements and risk. The need for financing will depend on the parties involved in the transaction, the countries involved, the products/services being traded, the amount of the transaction, and regulations that surround the transaction. Selecting and qualifying for appropriate financing tools can make or break the transaction and the profitability achieved by the importer and exporter significantly. Do your homework as programs change; identify your options; and select the appropriate tools.

Resources

www.fas.usda.gov/agx/exporter_assistance.asp
www.sba.gov (click on "Support Your Business with a Team of Experts")
www.exim.gov (click on "U.S. Exporters")
http://tefo.com

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