Financing Opportunities within the Global Trade Cycle
The Post Export Process- Sales of Finished Goods
by Lisa Sasaki

The first part of this series identified needs and solutions during the pre-export portion of the global trade cycle that includes the acquisition of inventory, and financing of production. (Read Part I of the series)

The focus of Part II will review the needs and solutions present in the post-export phase of the global trade cycle, managing your accounts receivables.

Sales of Finished Goods to Cash

The goal is to collect receivables as quickly as possible. How quickly you get paid will depend in part on the payment terms for the sale. Typical choices for payment terms are:

• Cash in advance – payment via wire transfer in advance of the shipment of goods
  
• Letter of Credit (LC)
  A LC is an instrument issued by a bank on behalf of the buyer through which the bank substitutes its own credit standing for that of the buyer. The bank unconditionally agrees to pay for goods, at sight or a future date, as long as the seller is in compliance with the terms and conditions stated in the letter of credit.
  
• Documentary Collection
  A service where banks act as agents for the handling of documents received from the seller, against acceptance or payment, for delivery to the buyer. The seller’s credit risk is the buyer.
  
• Open Account –Payment typically by wire transfer (i.e. net 30 days)

Which Payment Method is Best

Receiving cash in advance is the quickest method of getting paid; however, it is not the preferred competitive payment method. The benefit of cash in advance is there is no post-export financing need because you are collecting the receivable prior to shipment. On the other end of the spectrum, you may choose to extend open credit terms to your foreign buyers, if you are comfortable with their financial standing. This may be determined by evaluating company provided financial statements or by obtaining foreign credit reports.

In certain instances, where you have some positive credit experience with a buyer, you may wish to sell using documentary collections. While this is still open credit to the buyer, there are more controls because the banks are acting as agents between the buyer and seller to move documents and facilitate payment from the buyer to the seller.

If you are unable to determine the financial wherewithal of the buyer, you may request that they go to their bank and have a letter of credit issued in your favor (seller) as payment for the goods. In this case, the issuing bank’s (or confirming bank’s) credit standing is replacing the credit standing of the buyer.

Financing the Foreign Receivable

Whether the payment terms are open account, documentary collection, or letter of credit your company may need to finance foreign receivables to create working capital. There are two types of working capital lines available, a traditional line of credit or government supported working capital lines of credit supported by the Export Import Bank of the United States (Exim Bank) or the Small Business Administration (SBA).

Traditional lines of credit will allow you to advance a percentage of domestic receivables. Typically, banks may advance against foreign receivables backed by a LC, but won’t lend against foreign receivables, unless they are insured because it is difficult to perfect and enforce liens on those assets. Both Exim Bank and the private insurance market offer foreign receivable insurance. Dealing with an experienced trade credit and political risk insurer to obtain a policy, will go a long way in helping your company get the maximum coverage for the minimum cost.

Exim Bank and SBA provide credit support to banks for export working capital purposes. Both programs allow advances against foreign receivables but are not necessarily insured. The basic eligibility criteria for Exim Bank includes one year of operating history, positive tangible net worth, 51% US content of product, product must not be military/defense related, and buyers must be located in a supported country. There are a couple of differences with the SBA program. The maximum loan guarantee is $1.5MM, there is no US content requirement, and no country limitations for sales.

Another financing method for exporters (sellers) involves discounting drafts presented under a letter of credit or advancing funds against documents due for payment at a future date.

As an example, a seller has a $500,000 USD LC, payable 180 days from sight. Once the documents are presented to the seller’s bank and accepted, the seller has two options. They can either wait to get paid 180 days from sight of the documents or ask the bank to discount the draft and get paid now. If you ask the bank to discount the LC, you will get paid today, $500,000 less the discount (180 day cost of funds + spread). This will accelerate the payment of your receivable while allowing the buyer to stretch their payable.

The solutions for optimizing working capital and minimizing risks are going to fluctuate due to many variables like product production times, payment terms, and country of the buyer. As mentioned previously, the solutions for solving the cash crunch will not be “one size fits all.” Surrounding your company with a knowledgeable Trade Finance banker, a Department of Commerce Trade Specialist, and various other government agencies that support international trade will help you evaluate your global trade cycle so you may optimize working capital while minimizing risk.