Research, specialized financing needed before doing business overseas

Middle-market companies that can capture a segment of business in a foreign market have a tremendous opportunity to increase their revenues and outpace competitors in the same industry. Exporting products overseas, however, requires fastidious research upfront.

“Research is needed to determine if the company’s product has enough of a price and/or quality advantage in the target market,” says Jim Altman, middle market Pennsylvania regional executive at Huntington Bank. “The other critical element is getting the funds needed from a lender that is qualified to finance international transactions.”

Smart Business spoke with Altman to learn more about what it takes to export into foreign markets.

Where should companies start that have never done business internationally?

A good first step is to call the local U.S. Export Assistance Center, which is part of the Department of Commerce. The professionals there will conduct market research in the target country to determine if the product would be competitive in that market. They will research and advise with regards to market potential as well as any potential regulatory compliance requirements for the product being sold. In addition, they can set up meetings with potential foreign buyers, and vet those companies and their owners.

How do companies finance a deal that takes place between two countries?

Many companies don’t realize that only banks with a capable trade finance unit can provide the types of loans needed for such transactions.

A trade finance unit can work with The Export-Import Bank of the United States to secure special types of credit guarantees that mitigate inherent collateral risk associated with credit lines used to support export sales. Additionally, trade finance departments can help companies mitigate payment default risk posed by a foreign buyer. This is done by constructing letters of credit or providing credit insurance.

The reason that exporters should consult with a trade finance specialist is that export-related collateral — export related inventory and foreign accounts receivable — are not eligible for borrowing against in a standard revolving line of credit.

In addition, many single sale contracts where a company is selling a more complex, specialized product will require work in process finance. This is a feature traditional loan products typically cannot accommodate or if they do, the advance rate is marginal at best, somewhere in the 20 percent range.

With respect to foreign accounts receivable, domestic banks don’t have the internal resources to understand lien rights in multiple jurisdictions, so in most instances, placing a lien against foreign accounts receivable is a non-starter with your commercial bank. Trade finance departments have experience in managing and understanding various risks associated with selling abroad. Additionally, they are well versed in structuring credit lines that can be fully utilized to support export transactions.

At what point should companies reach out to get financing in place for foreign deals?

Once a rough outline of a contract with a foreign partner is in hand that indicates which party is paying for cost of freight and cargo insurance, it’s time to contact your bank’s trade finance specialist and your freight forwarder. There are fees for the risk-mitigating government guarantees that need to be priced in along with the logistics fees to fully understand the true margins on that sale before moving forward with a deal. And it’s always prudent to factor at least ½ of 1 percent extra in to your project cost to account for unforeseen expenses that are not related to actual production.

Breaking into a foreign market for the first time isn’t as much of a mystery as many companies assume it to be. There are ample resources available in the U.S. to help companies understand their target market and how to finance the deal.

Start by having an informal conversation with a bank’s trade finance unit. The people who work in these departments often have connections to logistics providers, lawyers and the like who understand international business and can facilitate a strong entrance into a foreign market.

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