Working capital lines of credit for exporters

Small business exporters experience difficulty obtaining financing from bank lenders due to the control and collectability problems that might arise from financing foreign accounts receivable. Lenders are hesitant to lend on foreign trade assets, and most lenders would either consider those accounts ineligible or will discourage their use as collateral as a matter of policy.

As I discussed earlier, one way to mitigate this risk of exporting is to obtain export insurance. This type of insurance has direct benefit to the small business, and is also used as an enticement for lenders to extend credit by assigning the insurance policy to the lender. Export insurance provides a direct benefit to the small business exporter by paying out in cases of nonpayment. However, insurance alone might not be enough to convince a lender to provide financing. In fact, export insurance by its nature only covers accounts receivable, which means that any inventory that is needed to support the export sales might still not get financed.

What a small business exporter needs is a comprehensive solution that provides working capital financing.

What is Working Capital?

The basic definition of Working capital is the amount by which current assets exceed current liabilities. But looking at working capital that way is not as useful as determining the actual working capital needs of the business. A better way to look at it is as the amount of cash needed to plug the hole in the cash conversion cycle (accounts receivable days + inventory days – accounts payable). In fact, growing businesses with growing accounts receivable and inventory are the ones that need the most financing.

What kind of working capital loan is available to Small Business Exporters?

There is a great program available that several clients of my employer take advantage of. The Working Capital Guarantee program from the SBA / Ex-Im Bank provides a 90% loan backing guarantee, which decreases the risk of the lender and encourages trade financing. With this guarantee, the business can leverage all of its assets and enjoy higher advance rates than even a regular domestic Asset Based Lending facility would allow.

Who manages the program?

For Loan Facility requests up to and including $1,666,666 applications are handled by the SBA.

For Loan Facility requests greater than $1,666,666 applications are handled by the Ex-Im Bank.

How does a business qualify for the guarantee?

The following were the qualifications for the program as of the date of the writing of this article:

  •  The business must be located in the United States.
  • At least one year of operating history with positive net worth.
  • The business must have U.S.-based employees.
  • The business’ products must be shipped from the U.S. to a foreign buyer.
  • Product content must be at least 50% US content. Based on all direct and indirect costs.
  • There are some categories of goods that are not eligible such as military goods.

Can you explain the comment about higher advance rates?

A typical Asset Based Lending line of credit will advance a certain percentage on accounts receivable {normally no more than 80%}, and a certain percentage on inventory {normally around 50%}. As a result, a company with $1,000 in eligible receivables, and $1,000 in eligible inventory could potentially borrow up to $800+$500=$1,300.

The working capital guarantee provides up to 90% guarantee on receivables, and 75% guarantee on export related inventory. Consequently, lenders can provide advance rates that match those guarantees.  A company with $1,000 in eligible receivables, and $1,000 in eligible inventory could potentially borrow up to  $900+$750=$1,650.

How costly is the guarantee?

The guarantee is not cheap. The government requires a 1.75% fee based on the amount of the loan, and on top of that the lender has its own fees and costs. I would expect total fees to be around 3.5% to 5% depending on several factors.

Anything else a small business exporter should know?

It is important to note that while the export insurance protects both the exporter and the lender, the working capital guarantee only protects the lender. The working capital guarantee does not cover customer nonpayment, it protects the lender from the borrower’s default.

You can read and learn more about exporting and business loans by purchasing the following books from Amazon Basic Guide to Exporting: The Official Government Resource for Small and Medium-Sized Businesses
Export/Import Procedures and Documentation

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