Overseas sales and exports can really help business owners grow their companies. But, when the company gets its first international inquiry, an owner might say, “I always deal cash in advance. Send me a check. I’ll send you the product.”
That’s not how the world works, says Art Rice, vice president and manager of International Operations and Product Management at FirstMerit Bank.
“The world rarely operates on cash in advance anymore. So, it may be days, weeks or months between the actual sale of the merchandise or service and the resolution of the accounts receivable,” he says.
This extended sales cycle can strain your working capital, but the U.S. government has several programs to help, Rice says, including the Export-Import Bank of the United States (Eximbank) and the Small Business Administration (SBA).
And your banker can be very helpful as you get into international sales or expand into new markets, says Frank Pak, vice president, International Division, at FirstMerit.
“We can serve as a great referral source to other professionals involved in supporting exporters, and also referring them to government assistance centers like the U.S. Export Assistance Centers or the SBA, an international lawyer, a freight forwarder, export insurance broker, etc.,” he says.
Smart Business spoke with Rice and Pak about available export support programs.
What are some export support programs?
The Export Working Capital Programs of the Eximbank and the SBA provide an exporter with funds for things like materials and payroll while producing the product. Banks receive a 90 percent guarantee on the loan’s principal and interest, because the government wants to encourage U.S. job creation. Also, the work in process can be included in the advance funding calculations.
It’s better to work with a bank that has Delegated Lending Authority from the Eximbank or Preferred Lender designation from the SBA for this program as it can expedite the process and assures that you’re working with an experienced lender.
Credit Insurance on foreign receivables is when an exporter purchases protection against non-payment of its foreign receivables from Eximbank or a private insurance company. Normally, banks don’t allow the foreign accounts receivable to be included in a company’s borrowing base because of the perceived heightened risk when buyers are located in a foreign country.
With insurance, an exporter has the opportunity to offer longer repayment terms. For example, a company, that typically offers no more than 60-day terms to its customers, sees its competitors in foreign markets offering 120-day terms. With export credit insurance, the exporter is able to take the risk of longer terms that will enable it to be more competitive. Also, if it assigns the insurance policy to its bank, the bank can advance against those receivables, improving cash flow.
For larger export sales, buyers in higher interest rate countries often look for some form of extended payment terms. Typically referred to as buyer financing, the exporter can decline and lose the sale, offer unprotected terms or use a form of insurance to protect its medium term receivable. The U.S. government supports such sales with programs called Medium Term Loan Guarantees. A bank is willing to participate because repayment is guaranteed by the U.S. government. The exporter benefits because it satisfies what the buyer needs and receives payment from the bank almost immediately after shipping its product. While there are restrictions, successful exporters have used such programs for 70 years.
What’s important to know about using export programs like these?
You don’t have to go it alone. Your banker is an advocate who can help you find the right resources as you set up your export program and understand the advantages and disadvantages of available payment methods.
Contacting your banker early in the process, as you’re developing your business plan and researching markets, will shorten your learning curve and help you become successful sooner. Banks can also direct you to government resources, which have additional tools available to support exporters as they expand into new markets. Reach out to your bank now, even if you’re just thinking about exporting overseas, because your banker will be happy to share his or her expertise. ●
Art Rice is vice president and manager of International Operations and Product Management at FirstMerit Bank. Reach him at (330) 384-7178 or [email protected].
Frank Pak is vice president, International Division at FirstMerit Bank. Reach him at (216) 317-7399 or [email protected].
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