In today’s global marketplace, U.S. companies are doing business with more foreign customers who are reeling from the strength of their own currency relative to
the U.S. dollar. As businesses here capture
foreign demand for U.S. goods and services
— now more affordable for overseas companies than ever before — they may confront payment and financing issues.
There is inevitable risk associated with
overseas sales. Primarily, not getting paid, but
also, securing the financing to produce the
products to make the sale in the first place.
Trade financing addresses both concerns.
“Any company that exports overseas is a
candidate for trade financing,” says Joseph
Gerzina, senior vice president, regional manager for the Akron/Canton region commercial banking group of Huntington Bank.
Smart Business spoke with Gerzina about
trade financing and how it can help U.S. businesses prosper in a world economy.
What exactly is trade finance?
There are two parts to trade finance: credit
and structured payment. The credit helps
companies acquire and manufacture goods
to sell when domestic funding sources are
either insufficient or unavailable. A U.S. company can obtain trade finance credit to start
and complete a transaction. The structured
payment assures that the company gets paid
via documentary credits or collections that
are dispatched through secure global banking communication networks.
What businesses are prime candidates for
trade finance?
Any company engaged in buying and selling raw material, semifinished or finished
goods, both internationally and domestically,
can utilize trade finance. For instance, a U.S.
company receives a product order from a foreign customer, but it has never done business
with this customer before and, therefore, has
no proof that the customer will pay or pay on
time. In this case, the trade finance arrangement involves getting an Export Letter of
Credit or Standby Letter of Credit from the
foreign customer’s bank. An Export Letter of
Credit is a standardized conditional promise
to pay the seller when goods are delivered in compliance with the terms and conditions. A
Standby Letter of Credit is more along the
lines of a performance guarantee.
A business is also a candidate for trade
finance if a foreign customer places a large
order and the U.S. company does not have
the liquidity to produce the products to fulfill
that order and get paid. Trade finance
involves the lender securing short-term payment guarantees via Banker Acceptances
with an ‘Aval’ (guarantee) from the foreign
bank or Bankers Acceptances created under
an Export Letter of Credit or Credit
Insurance provided by the private insurance
market or insurance or credit guarantees
obtained from the Export-Import Bank of the
United States (Ex-Im Bank). Essentially, by
seeking outside payment guarantees, the
loan repayment risk is shifted to an investment grade foreign bank or insurance company or, as in the case of the Ex-Im Bank of
the United States, the federal government.
What are the terms of a trade finance
arrangement?
Trade finance loan structures are usually
six months or less and utilize the buyer’s or
the buyer’s bank’s promise to pay, credit insurance to cover foreign receivables or
credit guarantees from the Ex-Im Bank.
These are means of collateral or guarantee
that the loan used to fund the export transaction will be repaid. The Ex-Im bank provides
participating U.S. financial institutions with
different types of credit guarantees, helping
shift the risk of nonpayment away from the
foreign or domestic buyer to the U.S. government instead. Trade finance loans are short-term ‘bridges’ to help U.S. companies do
business overseas with minimal risk.
Why should an owner utilize trade finance
rather than commercial finance?
Commercial loan structures are used to
fund the day-to-day operations of a company
or to purchase equipment and property. They
are longer-term and require a lot of collateral.
The problem is, some companies that do
business overseas have significant foreign
accounts receivables, which are typically not
sufficient collateral for U.S. banks. Trade
finance utilizes a secure promise to pay from
a third party. In the case of credit guarantees
from the Ex-Im Bank, generous advance
rates against ‘WIP,’ Raw Materials, Finished
Goods or Foreign Accounts Receivable can
be obtained. If there is a default on payment,
which would lead to a default on the loan, the
Ex-Im bank will ‘make good’ on the loan.
What questions will a trade finance officer
ask an owner before facilitating the loan?
First, the bank will determine all risk factors that underlie potential payment default.
The bank will want to know what country
the buyer is in. The bank’s knowledge of legal
and banking systems in your buyer’s country
will help identify political or economic factors that contribute to the risk of nonpayment. Your bank will also figure out the financial capability of the buyer and its bank so
you can get paid and pay back the trade credit. Refusal by the buyer’s bank to guarantee
payment via Letter of Credit or otherwise is a
big red flag. You’ll also have to prove that
your company has requisite funding available
to sell the product.
JOSEPH GERZINA is the senior vice president and regional manager for the Akron/Canton region commercial banking group of
Huntington Bank. Reach him at (330) 438-1210 or [email protected].
