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Small Business | Financing and Insurance

Ex-Im Bank Can Aid Overseas Trade

July 01, 1998|JUAN HOVEY

No matter the turmoil in Asian financial markets, business owners in Southern California want to sell their goods overseas--and quail at the hazards inherent in foreign trade.

Of the hazards, two in particular make business owners toss and turn at night:

* The risk that your foreign customers won't pay for your goods.

* The reluctance of U.S. banks to finance foreign business with loans against receivables and inventory.

As discussed in this space in recent weeks, you can hedge the risk that your overseas customer won't pay by securing your trade with letters of credit, with a financing technique called documentary collections, and with credit insurance, among other options.

Thanks to the U.S. Export-Import Bank, an agency of the federal government, you can also persuade your banker to finance your overseas trade with loans against receivables and inventory.

In essence, the Ex-Im Bank, like the Small Business Administration, fosters economic growth by making it possible for commercial banks to lend money to businesses they might otherwise avoid. The SBA does this by guaranteeing commercial bank loans for start-up, working and expansion capital to small businesses. The Ex-Im Bank does it by guaranteeing loans against inventory or receivables involving foreign trade.

And like SBA loans, Ex-Im Bank money doesn't come cheap. You borrow against inventory or foreign receivables at interest rates reflecting your credit risk, but you also pay an upfront annual fee usually equal to 1.5% of your line of credit, no matter how much or how little of the line you use.

On the other hand, unlike the SBA, the Ex-Im Bank makes it possible to get a loan without burrowing through a mountain of paperwork--and without waiting weeks and weeks for approval.

How do Ex-Im loans work?

The trick is to seek the funding through a bank with what the Ex-Im Bank calls "delegated authority"--that is, authority to approve your loan without review by the Ex-Im Bank. Because such banks can act on their own, they process Ex-Im Bank loans as rapidly as they process any business loan, cutting the time it takes to get funds into the business owner's hands to as little as one week, sometimes less.

Bank of America, Wells Fargo, Imperial Bank and Silicon Valley Bank hold such authority, along with 19 other California lenders. Silicon Valley Bank is the No. 1 underwriter of Ex-Im Bank loans in the country.

The paperwork is the same as that for conventional loans against receivables or inventory, by and large. You supply your bank with financial statements and tax returns when applying for your loan, and periodically--usually monthly, sometimes quarterly--you give the bank an analysis of your accounts receivable and inventory known as an aging report.

Like most loans against inventory or receivables, an Ex-Im Bank loan is a revolving line of credit, usually with a term of one year.

The benefit of an Ex-Im Bank guarantee is that it puts the exporter on the same footing as the company doing domestic business by allowing the exporter to leverage the value of accounts receivable and inventory. Put another way, an Ex-Im Bank guarantee shortens the time it takes to turn exported goods into cash, just as ordinary loans against accounts receivable and inventory do for any company doing domestic business.

"The Ex-Im guarantee allows banks to lend against as much as 90% of your accounts receivable from foreign customers, and against as much as 75% of your inventory destined for shipment overseas," says Barry Cohn, a regional vice president of Imperial Bank, with offices in Sherman Oaks.

"Normally, banks lend nothing at all against foreign receivables unless you carry credit insurance--and even if you have credit insurance, banks ordinarily lend only 70% or 80% against accounts receivable and nothing against inventory," Cohn adds.

"What this means is that the Ex-Im guarantee increases your borrowing power so that you can manufacture more goods and get them ready for shipment."

California businesses make far more use of Ex-Im Bank guarantees than do businesses in other states, according to Donald Schmoll, business development director for the Ex-Im Bank's Long Beach office.

In fiscal 1997, the Ex-Im Bank guaranteed loans totaling about $154 million to nearly 90 exporters in California, most of them small businesses, Schmoll says. Nationwide, exporters borrowed $443 million against inventory and receivables using Ex-Im Bank guarantees in 1997.

And because such loans multiply turnover, the Ex-Im Bank supported at least $2.3 billion, and very probably much more, in exports nationwide, of which roughly one-third went overseas from California, Schmoll says.

The Ex-Im Bank also guarantees loans made by U.S. banks to foreign buyers of U.S. goods, and lends directly to foreign buyers of U.S. goods. In addition, it sells credit insurance protecting U.S. exporters against the risk that foreign buyers will default in paying for goods shipped overseas.

"It takes some paperwork to get a line of credit with an Ex-Im guarantee," says Cohn, "but it's no worse than for any bank loan."

Once you get together your financial statements and aging reports, it usually takes less than a week to get approval from a bank with delegated authority, Cohn says.

"For the fast-growing company, this provides the credit you need to ramp up sales."

*

Freelance writer Juan Hovey can be reached at (805) 492-7909 or via e-mail at jhovey@gte.net.

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