Many businesses are interested in doing business internationally, but may not know where to begin. Ianni Palandjoglou, senior vice president, international, at Cadence Bank, says that regional banks can guide you through the process and mitigate risk while opening the door to global markets.
“Ultimately, engaging in international trade requires an accessible, informed and educated adviser capable of helping you navigate the embedded risks,” he says.
Smart Business spoke with Palandjoglou about how regional banks can help small to mid-sized businesses navigate the challenges of doing business on a global scale.
What is international banking?
From a regional bank’s perspective, international banking provides support to small and mid-sized businesses engaging in business globally in three primary segments: trade finance, trade services and foreign exchange.
Trade finance focuses on finding solutions for the needs of the exporter and the importer, with more emphasis on exports. Trade services facilitate various payment methods used in international trade, such as export/import letters of credit, documentary collections, standby letters of credit and open account shipment. Foreign exchange provides support in currency management risk using such tools as spots, forwards and swaps.
International banking differs from domestic banking in that it addresses the unique factors that can impact doing business abroad. These include political and economic risks, foreign legal systems and business practices, cultural and language barriers, infrastructure for distribution and other issues that could potentially hinder transactions. With more than three-fourths of total U.S. exports coming from small businesses, they can look to regional banks as an adviser that can address these needs and help improve operations.
What value does a bank bring to companies interested in engaging in international business?
Regional banks help their customers by serving as a counselor of sorts to understand their business while mitigating currency, country and payment risks. Also, by working through the Export-Import Bank of the U.S. (Ex-Im), regional banks can guide an exporter in obtaining insurance on foreign receivables or help it acquire working capital for pre-export on purchase orders with much higher advance levels on raw materials and inventory. What makes regional banks with an international department unique is they work with governmental agencies such as Ex-Im Bank and the Small Business Administration to provide different types of financing solutions to customers, which, in general, domestic institutions would not otherwise be able to offer.
What advice would you offer a company that is looking to import or export for the first time?
From an exporter viewpoint, the appeal to go global is attractive. It offers the potential to increase and diversify sales, spread risk by expanding into a variety of markets, extend your product life cycle, and ensure your global competitiveness and adaptability. However, there are things you need to address when working internationally, such as getting to know your buyer well, structuring your sales to protect your money and your assets, learning the various methods of payment in international trade, buying insurance on your receivables or selling only under a letter of credit, and getting to know the Department of Commerce.
The government, including the DOC and 19 other agencies, has undertaken a very strong initiative to increase exports. These agencies are working to promote U.S. exports and can provide information and grants that allow you to attend conventions and seminars held outside of the country that can facilitate meetings with potential buyers and partners.
What role do the Ex-Im and the SBA play for U.S. businesses looking to trade internationally?
They are critical. Without these agencies, regional banks in the U.S. would not be able to provide financing for domestic borrowers because banks would not be able to mitigate the risks involved. These agencies provide guarantees to U.S. banks so they can lend on export-related purchase orders under the working capital guarantee programs, which cover 90 percent of the export risk for performance and disputes, as well as political and commercial risk.
Some regional banks, like Cadence Bank, have delegated lender status with the SBA and Ex-Im, meaning they can approve export capital working loans up to a predetermined limit without prior approval from the agencies.
How can banks help mitigate risk in transactions involving foreign currencies?
There is an embedded currency risk in any transaction involving a foreign entity. Although paying or receiving U.S. dollars for your international transactions may seem like a prudent way to mitigate your foreign exchange risk, the opposite is true. In fact, when you conduct international trade in U.S. dollars rather than in the functional currency, you are exposed to the foreign exchange market.
If you have an international payable and the U.S. dollar weakens, your vendor could ask for additional funds to cover the shortage. Conversely, if you’re exporting and your customer’s currency weakens against the dollar, then it’s harder for your customer to pay you and it may default. Accordingly, the most conservative manner in which to conduct your international transactions is by dealing in the foreign currency to better manage the risk.
Say you’re exporting from the U.S. to Mexico, which has seen its currency depreciate 23 percent during the past year. As an exporter, the strengthening U.S. dollar against the peso makes you less competitive and potentially exposes you to nonpayment.
This risk can be offset and hedged using forward transactions with your bank’s foreign exchange team, locking in today’s exchange rate for future delivery. By doing so, you remove market volatility and exchange uncertainty, while minimizing your costs and maintaining your profit margins.
Ianni Palandjoglou is senior vice president, international, with Cadence Bank. Reach him at (713) 871-3908 or [email protected]
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