Tapping into International Trade Financing Options

With the vast majority of customers beyond U.S. borders, it makes sense to focus on exporting goods abroad. Yet, the number of companies that could export products remains small. The U.S. Department of Commerce’s International Trade Administration (ITA) reports that less than one percent of 30 million American companies export. And, of the U.S. companies that do, 58 percent sell goods and services to only one country.

Given economic predictions for 2012 and beyond, the emphasis will certainly need to shift. The International Monetary Fund forecasts that 87 percent of world economic growth during the next five years is plotted to occur outside of the United States. Tapping into this vast and increasing market abroad requires a strong understanding of international trade finance, and this can sometimes be where middle market companies falter.

The ITA reports that small and medium-sized companies did account for 97.6 percent of U.S. exporters, but that figure represented less than one-third of the known export value of U.S. goods.  For 2009, there were approximately 275,843 identified U.S. exporters, and 269,269 of these companies were classified as small or medium-sized companies. Interestingly, the number of small-and medium-sized exporters did more than double between 1992 and 2007.

Unlike large companies with the know how and clout to garner international financing, middle market companies need to establish strong relationships with commercial lenders, factors, and government sources to become familiar with the trade financing products available. It’s an education process to figure out how to select from the many trade-financing options in place to suit a company’s payment timing needs, risk tolerance, and price range. And, of course, that balancing act has to consider the buyers’ needs, as well, in order for any seller to stay competitive.

Whether it’s open accounts, cash in advance, or documentary collections, the universe of trade finance is wide. Commercial lenders often provide working capital loans to middle market companies, and many of these loans are guaranteed by the Export-Import Bank of the United States, the export credit agency of the U.S. government. And, while the Ex-Im Bank of the United States also provides direct financing, the support is only meant to come into play when commercial lenders are not in the picture. But government initiatives, like this one, remain essential to middle market companies seeking to tap into new markets. While their larger competitors might have subsidiaries and business partners abroad, medium-sized companies are charting new territory and responding to customs, political, tax and regulatory issues.

Export credit insurance, offered by governmental export credit agencies and private insurance companies, can also offer some protection for the financial and many other risks inherent in selling abroad. Factoring companies, on the other hand, provide accounts receivable financing, and this is not to be confused with invoice discounting. Middle market companies might also opt for forfaiting, a form of supply chain financing that is a less recognized and available form of trade finance in the U.S. Buyer credit facilities can also provide a solution for financing trade abroad.

According to Jim Hirsch, president of Air Tractor, an Olney, Texas-based agricultural aircraft manufacturer, it was a keen understanding of trade financing options that helped to bolster the middle market company’s exports to more than half of its sales. He notes, “International sales have been a part of our company since the beginning, but to become as big a part as it is now took a level of sophistication in the way we did business and in the way we took advantage of the financing programs available.” As of 2010, Air Tractor’s international sales accounted for 56 percent of the business, and when final figures are in for 2011, it will likely top that figure.

David Ickert, the company’s vice president of finance, notes that the transition in sales was a “learning process”, and one that required a hand-in-hand relationship with traditional lenders and Ex-Im Bank. The company does utilize cash in advance and letters of credit to finance international trade. But Ickert does note that the support of Ex-Im Bank greatly “increased the company’s ability to access foreign markets”. He says, “Medium term credit insurance has been the most viable for us.” The challenges along the way haven’t discouraged Air Tractor’s efforts to expand sales internationally. Ickert acknowledges, “It’s been an evolution, and we learn and continue to learn each day. We were lucky to find a patient bank—one that was willing to educate us about trade finance.”

Whether it’s a larger bank or a sizeable regional one, most financial institutions are set up to respond to their customer’s international financing needs. Robert Mayer, head of PNC's trade finance group, agrees that businesses need to have a strong relationship with the bank handling their trade financing. “You have to have an interactive conversation with your lender,” says Mayer. “Middle market companies are often focused on the domestic market,” he admits. “They might export a small part of business, so they don’t spend much time thinking about it.”

Mayer does note that the financing demands of middle market companies are often much different than the needs of larger businesses. “The working capital guarantee program is built for asset based borrowers and for middle market companies. Ex-Im can offer support, but larger companies usually don’t need this.” PNC’s Trade Finance is just one of a number of commercial lenders who are working with Ex-Im. Mayer says that the agency’s loan authorizations are growing and that Ex-Im has certainly helped to fill a gap in credit from private lenders across the country. While the financial crisis put a temporary damper on financing options, the Ex-Im Bank was able to help out with the contraction of liquidity in trade-finance activities. 

Today, Ex-Im Bank and the ITA have stepped up to emphasize middle market businesses, reaffirming the mission with the National Export Initiative. Phil Cogan, a spokesman for the Export-Import Bank of the U.S., notes that Ex-Im Bank has “tripled loan authorizations in the past last three years during the financial crisis.” Ex-Im Bank approved $32.7 billion in total loan authorizations in their fiscal year 2011, representing an all-time Ex-Im record. “Banks simply cut back on credit,” says Cogan. Ex-Im Bank has reaped the rewards. As traditional lenders contracted, Ex-Im was able to acquire a bumper crop of more creditworthy customers.

But as companies search for new opportunities and trade in emerging markets grows, trade finance from private lenders is also projecting to rebound. According to the Bureau of Economic Analysis of the U.S. Commerce Department, exports of goods and services in 2011 totaled $2.089 trillion, which is 32.64 percent above the level of exports in 2009. Comparing 2009 to 2011, exports grew at an annualized rate of 15.9 percent. The figures are encouraging, and middle market companies are in a great position to benefit from market demand abroad and the increasing support of the financing community.

Kurt Schneiber, CEO of Syncada, a provider of supply chain financing solutions, notes, “Exporting is key to transitioning from a small to a midsized company, but the transition can be hard.” Syncada is a joint venture between Visa and US Bank. Supply chain financing through private sources is also providing a critical lifeline in the export process. Ex-Im Bank may guarantee supply chain financing, depending on the lender. According to Schneiber, any sort of trade financing requires a special touch to time financing right ahead of anticipated growth. “You need to have strong credit quality and often multiple providers involved,” he says.

Middle market companies also need to do some homework, gathering information on their trade financing partners. Larger companies generally have the financing relationships already in place and the level of knowledge to ferret through the process. So, just what should middle market leaders ask of their trade financing providers? Says Schneiber, “Working capital management needs should drive them to ask questions, and your bank should be in a never ending effort to provide a value added service. Ask tons of questions and be aggressive when it comes to recourse rates, for instance. You may need to ask a variety of sources.”

Schneiber adds that more regional banks are now looking for ways to service middle market clients and their trade financing needs. The relationship has to be about “global connections”, and that might require an understanding of the lender’s experience in a particular part of the world. And, when a regional player can’t service the clients’ needs, they can often refer them to another source, he says. “The larger banks certainly service midsized companies, and factors are becoming more competitive,” he adds.

The middle market is a particularly attractive customer for factors, says Jon Lucas, chief sales officer of CIT’s Commercial Service. He describes the middle market as CIT’s “sweet spot”. He also describes factoring as “a complete financial package that combines customer credit protection, accounts receivable bookkeeping, and working capital financing as needed.” And, for certain types of middle market companies, it can make sense. Lucas notes that factoring is most commonly used by consumer product companies that sell to retailers. He adds, “Factoring may not be suitable for certain types of companies, so the traditional lending market is where they turn for trade finance solutions.”

Lucas does see a particular place for factoring in international trade finance. “Factoring is a common working capital and outsourcing solution for companies that sell their products domestically,” he says. “Since selling internationally is more complex than selling domestically, it absolutely makes sense for companies that export to use factoring, as it relieves the exporter of the stress and burdens of collecting foreign receivables.”

And, just like any other financing product, company leaders need to be prepared to ask questions when it comes to their factor. Lucas notes, “I would ask whether or not the factor is experienced in your industry and whether the factor has the ability to obtain payment in the countries into which you are selling your goods.” Many factoring companies rely on a correspondent network of factors through Factors Chain International, a global network for independent factoring companies. It’s through this network that most factors will probably have the ability to obtain payment from retailers in a broad range of countries. He adds, “Lastly, ask whether the factor will lend against the value of your export receivables.”

For middle market companies looking to amp up their trade finance knowledge, a good place to start, in addition to Ex-Im Bank, their lender and factor, is the U.S. Commercial Service, the trade promotion arm of the U.S. Department of Commerce’s International Trade Administration. The office maintains a network of trade professionals in more than 100 U.S. cities and in more than 75 countries to help U.S. companies get started in exporting or increase sales to new global markets. In many key markets, the U.S. Export Assistance Centers include representatives from the Small Business Administration and Export-Import Bank of the U.S. to help with trade finance needs.

Ken Hyatt, deputy assistant secretary for services in the manufacturing and services division of the U.S. Department of Commerce’s International Trade Administration, says President Obama’s latest effort, the National Export Initiative, is specifically designed to “increase access to credit, especially for small and medium-sized businesses”. Hyatt does note that U.S. government agencies offer a range of financing tools to help U.S. exporters succeed in overseas markets. And, many of these financing options are specifically geared to small and medium-sized businesses, such as working capital guarantees and export credit insurance.

The news couldn’t have come at a better time. After a bit of a lull in exporting during the downturn in 2009, the latest figures for U.S. export business are very encouraging. According to the U.S. Department of Commerce, after a drop of 14.6 percent in 2009, exports in 2010 were 16.7 percent above their 2009 levels. According to Hyatt, between 2001 and 2010, U.S. exports of goods and services have increased by 79 percent. Goods exports do dominate U.S. overall exports, making up about 70 percent of exports in 2010. U.S. merchandise exports have jumped by $549 billion during this period, an impressive increase of 75 percent.

This boost in exports was driven by increased exports of mineral fuel, vehicles, machinery, precious stones and metals, and aircraft. Of the top exported commodities, exports of mineral fuel, precious stones and metals, pharmaceutical products, organic chemicals, and plastic products have all shown rapid growth, with each more than doubling since 2001. And, with the variety of companies on the lookout for trade finance, Hyatt notes that the process is not a one size fits all approach. The market entered, the type of goods exported, the seller’s risk appetite, the buyer’s needs, and the availability of financing often dictates the nature of the transaction. And, not surprisingly, the financing often follows the upswing in economic trends in a given country.

One thing that hangs in the air is President Obama’s recent proposal to roll the six major federal departments or agencies focused on business or trade—the U.S. Department of Commerce’s core business and trade functions, the Small Business Administration, the Office of the U.S. Trade Representative, the Export-Import Bank of the United States, the Overseas Private Investment Corporation, and the U.S. Trade and Development Agency—into a single department. What that means for the various financing programs currently in place is hard to say, but the general consensus is that the majority of government financing guarantees and loans will remain available. The proposal has met with considerable opposition from business groups, and predictions are that given the opposition and the current election year that a change isn’t forthcoming.

For now, most businesses, including middle market firms, will need to stay focused on dealing with the impact of the U.S. consumer sitting on the sidelines and the political and economic instability in the U.S. and the EU. That certainly means exploring the many trade financing options available in economically stable and growing markets abroad. According to the U.S. Department of Commerce, as of 2009, the top markets by total export value were Canada, Mexico, China, Japan, and the United Kingdom. In 2010, Canada continued to be the largest market by far for U.S. exports at $249 billion and Mexico was the runner-up with $163 billion in exports. China was the third largest export market at $92 billion, followed by Japan with $60 billion and the United Kingdom with $48 billion.

But the emerging markets may just present the greatest room for growth for exports. According to the ITA, during the past five years, goods exports to China, Brazil, and India have grown significantly, each increasing by more than 70 percent from 2006 to 2010. The Bureau of Economic Analysis of the U.S. Commerce Department also reports that in comparing 2009 to 2011, among the major export markets, the countries with the largest annualized increase in U.S. goods purchases was Turkey (45.4 percent), Panama (40.6 percent), Honduras (37.0 percent), Argentina (33.4 percent), Hong Kong (32.9 percent), Peru (30.7 percent), Chile (29.2 percent), Brazil (29.1 percent), South Africa (28.7 percent), and Thailand (27.7 percent).

Air Tractor’s Hirsch says his business and others like it have to be ready for the inevitable shifts in the market. “This is a global economy, and there are changes not just in the U.S., but across the world. International sales have helped to propel our business when things have lagged domestically, as they have recently. Having a global perspective smoothes out the business.” Having a mix of countries to export to can also help to balance out the changes in the economic, political, customs, and regulatory environment abroad.

For Air Tractor, the universe of customers turned out to be much bigger than they originally thought. According to Ickert, as the U.S. market took a turn for the worse, it was fortuitous that the company pursued the international market in such an aggressive fashion.  He says, “The key to our growth was export sales, and much of that wouldn’t have happened had it not been for export financing. We were able to capitalize on the shifts, and trade finance was critical.” As Air Tractor’s footprint continues to grow globally, the company’s seen a pickup in activity in Brazil, Argentina and various parts of Central America.

Ickert notes, “There are still a lot of countries we can move into as we broaden our base.” The expansion will continue for Air Tractor, and he says that much of the change will occur due to shifts in business, economic and political changes here and abroad. But as Air Tractor benefits from the increase in export sales, Ickert recognizes a two-fold benefit. Certainly, the growing coffers can’t be overlooked. He concludes, “Small to medium-sized businesses have a real potential to export more, and in our case and in a lot of cases, that means additional jobs in the U.S.”