Many people would be surprised to know that the U.S. economy exceeded growth estimates for the first quarter of 2008, with GDP up 0.9 percent compared to advance estimates of 0.6 percent. A surge in the exports of goods and services was the primary reason for this increase. With the U.S. dollar at record lows against the euro and the yen, businesses that may not have considered exporting in the past are now seeing it as an enticing way to increase sales. Despite the appeal, there are still some U.S. companies wary of exporting because of the financial risks.
Smart Business sat down with Alan Andrews, vice president and manager of PNC’s global trade and equipment finance group, to talk about some of the issues facing exporters and the resources that are available to help them.
What do companies need to know before they start exporting?
First, you will want to identify the most attractive markets for your goods. Gathering and analyzing information about the markets you are considering current business climate, trends, demographics, cultural issues may influence your decision to sell in a certain region. The U.S. Commercial Service, the government’s primary trade promotion agency, can help you with this due diligence and provide you with assistance throughout the entire export process.
The U.S. Commercial Service gathers market research and information about legal and compliance issues specific to each country and makes this information available to companies through the U.S. Government’s export portal, export.gov. Additionally, it pre-qualifies buyers and distributors and improves exporters’ access to working capital loans and facilities development financing through the U.S. Export-Import Bank (Ex-Im Bank).
What are some of the financial concerns surrounding exporting?
Many exporters spend time developing leads, but do not think about maintaining enough working capital to support sales. Approaching your bank about obtaining credit may be a logical first step. However, many U.S. banks will not lend against export sales, including those backed by letters of credit, unless the loan is guaranteed by the Ex-Im Bank. As the official export credit agency of the United States, the Ex-Im Bank guarantees the loans commercial banks issue to support exports.
Finding a U.S. financial institution that already has a relationship with the Ex-Im Bank can be beneficial to exporters, especially if the bank is ‘Fast Track’ certified. Experienced lenders that qualify for the Ex-Im Bank’s ‘Fast Track’ program help U.S. exporters obtain larger working capital loans in less time.
Banks with international trade expertise usually have foreign exchange consultants who actively trade in emerging market currencies. They will work with your company’s hedging policy to help minimize currency risk associated with variable international conditions.
What are some of the other risks associated with selling goods abroad and how can they be minimized?
Once you have established a financing plan, you will need to put the tools in place to mitigate your payment risks. Letters of credit and documentary collections can mitigate payment risks by obligating the issuing bank to pay the seller when merchandise has been shipped in accordance with agreed-upon terms and conditions. They provide payment security when you are unsure of buyers’ credit history or you are trading with them for the first time.
Be sure to ask your bank about any other risk mitigation techniques they may have to assess your transactions with a specific foreign buyer.
This article was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice or recommendations to buy or sell currencies or to engage in any specific transactions, and does not purport to be comprehensive. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other adviser regarding your specific situation. Relevant information was from sources deemed reliable. Such information is not guaranteed as to its accuracy. Any views expressed herein are subject to change without notice due to market conditions and other factors. © 2008 The PNC Financial Services Group, Inc. All rights reserved.
ALAN ANDREWS is a vice president and manager of PNC’s Global Trade and Equipment Finance Group, part of The PNC Financial Services Group, Inc. Reach him at (412) 768-7662 or firstname.lastname@example.org. To learn more about export financing and other aspects of international trade, check out PNC's Middle Market Advisory Series at pnc.com/joinus.