Tracking Trade

Most companies are accustomed to wondering if their international sales are going to materialize in troubled times, but they are not used to worrying about whether their bankers are going to survive.  Here are some simple ideas to help you deal with lender issues (and keep your cash flowing):

LENDER ASSISTANCE

1. Check the fine print on your loan agreement for clauses covering market disruption.   Market disruption can include lack of lender liquidity.  This can result in having to switch out of low rate libor or commerical paper into prime rate.  A change in bank ownership may mean that your lender now has the right to sell your loan or declare a “material adverse change” in your loan agreement.  Any changes (and the implied costs of covenant tightening) are passed directly to commercial borrowers whenever a change occurs.
2. Find out if your lender is eligible for U.S. government lending programs.  This is important for three reasons:  (i) less risk capital is required for your bank to hold a government guaranteed loan; (ii) the guarantee covers 50-80% of the loan value against default which should reduce the risk premium on your loan, and (iii) the Federal Reserve’s Discount Window can be used to fund your loan allowing the lender hold your loan to maturity.  Even if your company is not making money or has negative equity for a wide variety of reasons, these government agencies may still be willing to guarantee loans if you have been in business for a number of years.  Current bad times will not necessarily preclude their support.  SBA (Small Business Administration) is the most recognized agency, but did you know that they have an export finance program that will cover some, if no all, of your international receivables, pre-export working capital, bid and performance bond requirements and even military sales?  Best of all they can set up a facility that can last for more than one year – up to 5 years in some cases.  You may still only get short term “funding” from your lender, but setting up a longer-term facility can help funding with longer-term contracts and projects. If your lender is not SBA eligible, find one that is.  Most regional and community banks are, they are just not as familiar with the export financing part of the program – which can be be in addition to, not in place of, other SBA facilities.
3. If your need is greater than SBA can provide – over $2 million, there is another export finance program with the Export-Import Bank of the United States (Ex-Im Bank).  Program limits are larger, but facilities are usually no more than 1-3 years at a time.  They are easier to renew than SBA, but the big drawback is that they only cover product that is 51% US Content.  Technology, hardware and software designers and integrators as well as service industries are eligible so investigate this opportunity. It is not just for tangible goods!
4. OPIC (Overseas Private Investment Company) is a third US government agency that will help small business owners work with overseas partnerships in all sorts of longer term funding faciliies perhaps up to 10 years.  Think of this as a solution for difficult countries with no capital markets and the ability to handle even micro-loans of $250,000 to $10 million.

FACILITY MANAGEMENT

1. Make sure that any vendor’s contract, PO or order that is paid for via a letter of credit (LC) includes a cash discount for prompt payment.  LCs are a cash-in-advance system for most overseas vendors so take advantage of it. Remember an LC is a separate contract from a PO or vendor contract so make sure payment terms are clearly spelled out.  Also make sure the Incoterms 2000 match in all agreements.
2. If your bank funds your business on a monthly borrowing base certificate rather than individual invoices, look at how to pre-pay a part of the loan from any cash you do not need.  This is especially important if bank balances are not insured beyond $250,000.  Keeping high bank balances may not be the best solution for you in these trying economic times. Most lenders do not have pre-payment penalties on receivables funding facilities.  So when you get cash, repay your receivables even when it is in the middle of the month rather than a normal monthly or bi-monthly borrowing cycle.
3. Ask your vendors if you can pay them on terms that are longer than your normal net 10-30 days from shipment date (usually B/L date). Even an extra 5-10 days may put that payment into another monthly borrowing cycle.   It might be only a one-time benefit but it can help when going into a selling cycle like Christmas.
4. If you buy from a vendor every month like clockwork and want to eliminate commercial letters of credit, think about using stand-by LCs to guarantee payment.  It may provide the pre-export support your vendor needs at much less cost.  Structuring a stand-by LC payment mechanism will take education and financial set-up/management but the overall savings can be well worth the effort.

ALTERNATIVE LENDING OPTIONS

As a small business, you may have business operations overseas.  There may be a small-business financing program in the local market that your supplier can tap.  Remember your payable is their receivable!  Here are three possiblities:

1. Export financing programs funded or backed by local government agencies (even China has one now) – Ask your overseas vendors if they can tap into a local program for their receivables which are your payables.
2. Local trade credit insurance providers may also discount the receivables that they insure.  Any country with a robust insurance industry probably has local funding programs, or
3. International factoring companies that really do think the world is flat and will finance sales “from anywhere to anywhere.”

However, if you use any of these alternative lending options, make sure your US-based lender knows you are selling an asset or borrowing from abroad.  In either case, this may require a special waiver from your U.S.-based lender and/or their trade credit insurance policy provider.  You do not want to unintentionally violate a loan debt covenant with your US-based lender or the trade credit insurance provider.

As you can see there are all sorts of ways to obtain financing and work with lenders in these difficult times.   The important thing to remember is that lenders want to work with their clients and they want to be fair.   They may not have a choice as to pricing due to current risk spreads, but they want to help even if it costs more than it did a year ago. 

If you (or your lender) wants to learn more about the best ways to tap into import and export financing alternatives, contact Christine Topoulos at 404-307-2091 or ctopoulos@tradepros.net.