Financing Opportunities within the Global Trade Cycle - Part I
Pre-Export Financing
by Lisa Sasaki

Part I of this series identifies needs and solutions during the pre-export portion of the global trade cycle which includes the acquisition of inventory (cash to inventory), and financing of production (inventory to finished goods).

Working Capital is King
A recent study conducted by the Aberdeen Group offers the following about the working capital cycle: “For CFOs, working capital cycles are king. As more business is tied up in global trade, working capital cycles become longer and harder to manage. More working capital is tied up in inventory to combat longer and more uncertain international lead times, proactive use of accounts payables balances degrades, accounts receivables become slower and cash movement becomes more complex.”

After Negotiating a Sale
One of the first things a company must do, after negotiating a sale, is purchase raw material (RM), semi-finished, or finished goods depending on your industry. Two means for payment are to pay cash or receive supplier credit. A company may be able to use internal resources (cash), however, if you have an influx of orders, you may not have the cash or be able to obtain a sufficient supplier credit limit to support the purchase of RM. In some cases, no supplier credit may be approved. This is where pre-export financing must be considered. Pre-export financing is nothing more than securing funds to start production of your orders. There are several options available to finance the purchase of inventory.

One option is to obtain a working capital line of credit. There are two types of working capital lines available, a traditional line of credit or government supported export working capital line of credit supported by the Export Import Bank of the United States (Exim Bank, a government agency whose sole mission is to support jobs in the US through the growth of exports) or the Small Business Administration (SBA).

Mitigate Risk
Traditional lines of credit typically will not support inventory that is being sourced or maintained offshore. Banks tend to shy away from collateral outside the US because the perfection of security liens outside the US jurisdiction is less than perfect. However, you may be able to obtain insurance on the inventory to support traditional bank financing and mitigate the inherent risks.

Exim Bank and SBA both will provide credit support to banks for export working capital purposes. Exim’s export working capital line of credit will allow companies to advance on export related inventory and foreign receivables, something that traditional lines of credit will not support. Basic eligibility criteria 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. The SBA’s export line of credit is identical in purpose to the Exim Bank line. However, there are a couple of differences: Maximum loan guarantee is $1.5MM, no US content requirement, no limitation on sales of military/defense products and no country limitations for sales.

Another option is Bankers’ Acceptance (BA) Financing, a form of short-term financing. In this case, the inventory supplier presents a draft to the purchaser’s bank demanding payment. The purchaser signs (endorses) the draft and returns it to their bank. The bank then “accepts” the draft and it becomes an unconditional liability of that bank. The supplier may request for the bank to discount the BA to accelerate their cash flow. Upon maturity of the draft, the bank will collect the amount of the draft from the purchaser. The benefit of BA discounting is the supplier will get paid now and enable the purchaser to pay later.

Because each company’s global trade cycle varies, the solutions for solving the cash crunch are not be “one size fits all.” To construct the best solutions, it is important for companies to align themselves with a knowledgeable Trade Finance banker, your local Department of Commerce Trade Specialist, and various other government agencies supporting international trade like Exim Bank (www.exim.gov) and the SBA (www.sba.gov). These business professionals can assist you in evaluating your global trade cycle and identifying the best opportunities for financing in order to make your business successful.

The author, Lisa Sasaki, CTP is vice president in the International Trade Finance Department at Comerica Bank. She is responsible for marketing International Trade Products/Services to U.S. - based companies that import, export or have foreign operations. Her territory includes Southeast Michigan, the New England States, and New York.

For more than 20 years, Sasaki has held assignments in Treasury Management, International Trade Services, and Retail Operations/Banking. Lisa holds a B.A. in Economics and Music from the University of Michigan, Ann Arbor and is a Certified Treasury Professional (CTP).