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SMALL BUSINESS | FINANCING AND INSURANCE

Need Funds? Bank Must Understand Your Deal

September 30, 1998|JUAN HOVEY

Have you lost export business to the turmoil in Asia and Latin America? Do you struggle to find safer, preferably domestic, markets in which to sell your goods?

Take heart. People do business in good times and in bad, in overseas as well as in domestic markets, and if the troubles in Asia and Latin America make it hard to trade there now, they can't make it impossible.

They just make you work harder.

Indeed, the people who bought your goods last year still want them--and you can still sell to them if you understand that:

* The rules of the foreign-trade game have changed.

* You can learn the new rules just as you learned the old.

What's more, you can even get help in playing the game, from your friendly local banker.

How? To be sure, like everybody else, U.S. banks see a great deal of risk in financing trade to Asia and Latin America, but they also have plenty of capital to lend, and if you understand how they analyze risk, you can probably salvage at least part of the business lost to the turmoil in the Pacific Rim.

But your banker needs to find comfort in your deal, and you must analyze the trade you have in mind to make it understandable, according to Alexander Kramer, who leads the trade finance group for American Honda Motor Co., which exports autos to 65 foreign countries.

Your analysis, Kramer says, should ask four key questions:

* Could you find other customers for your goods if your original buyers flake out?

* How much time do your buyers need to pay you for your goods?

* What risks, strictly financial and otherwise, threaten your deal?

* What kind of credit do you need?

"The first question is important because your banker wants to know whether you'll find yourself stuck with a container full of goods nobody wants except your original buyer," Kramer says.

"In other words, your banker wants to know whether you plan to ship standard goods like socks, or a one-off product like specialized scientific equipment. You can get export financing for any product, but the product plays a big role in the package you put together for your banker analyzing the transaction."

If, for example, you plan to ship a load of scientific equipment, your banker may want you to obtain an inspection certificate, Kramer says. If your deal calls for you to install the equipment and get it running, he adds, you must detail these things for your banker too.

To answer the second question, Kramer says, you must understand not only your own cash flow but that of your buyer. It takes time for you to manufacture, inspect and ship your goods; it also takes time for your buyer to clear customs, ship your goods via local freight, prepare your goods for use or sale and perhaps tap local sources of credit.

Kramer calls these steps the "commercialization time," and it can eat up weeks, sometimes months. But if you plot these steps carefully, you can tell your banker how soon you can repay your loan.

You also give your banker comfort that you understand the ins and outs of what you plan to do.

"You want to match your credit terms to your commercialization time," Kramer says, "but you also want to understand the steps your buyers must take before they can send you cash--so you can look for logjams and maybe knock them aside."

The second question also highlights one of the new rules of foreign trade, Kramer says: You must understand the impact of the financial troubles in Asia and Latin America on your buyer, and this takes probing.

"If you think your commercialization time should be three months and your buyers ask you for six, something doesn't make sense," Kramer says.

"So you need to ask: Are your buyers having cash flow problems? Can you help? Or are the buyers telling you that they can get terms of six months from one of your competitors?"

The third question may turn up some hidden risks--for example, the risk of shipping frozen fish in poorly insulated containers, or of shipping cosmetics without air conditioning of any kind.

You can prevent disaster if you anticipate these risks, Kramer notes, and in the process you give your banker comfort that you can avoid them.

The answers to the first three questions, Kramer says, position you to ask your banker for the right kind of credit--for example, working capital to manufacture your goods, or a loan against receivables to finance your buyers.

"Export financing is transaction-based," Kramer says, "and for small exporters who need financing, it's crucial to document every aspect of the deal so that the bank understands the risks from beginning to end.

"If you give your banker a good plan documenting everything you have in mind--shipping, your cash flow analysis, the background of both your own exporting expertise and your buyers'--you stand a good chance of getting the financing you need."

If you need help in documenting your plan, you can get it free from the nonprofit Export Managers Assn. of California at (310) 606-0161. The association, for which Kramer serves as a board member, provides free consulting services to small and mid-market California exporters.

"Over recent years, local banks have gained a lot of confidence in dealing with exporters," Kramer says. "They understand export transactions, and they know how to make use of state and federal government resources such as loan guarantees.

"They are very eager to work with small and middle-market exporters--because this is really a moneymaker for the banks."

How to get financing will be one of the topics addressed at The Times' Small Business Strategies Conference Oct. 17-18 at the Los Angeles Convention Center. Columnist Juan Hovey will be featured. He can be reached at (805) 492-7909 or via e-mail at jhovey@gte.net.

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