Look beyond the borders: Funding international growth

Many businesses turn to global trade for expansion. But for mid-size businesses (SMBs), the decision may not be an easy one. It’s not a lack of confidence in your products’ appeal that gives pause; it’s uncertainty about the world economic recovery, a lack of funding and the potential risks of export trade. While these concerns may be legitimate, the potential for growth outweighs the risks and financing solutions are readily available.

Trade volume is expected to rise in 2021.

The COVID-19 pandemic landed a hard blow to world merchandise trade volume, with the World Trade Organization (WTO) predicting an overall drop of more than nine percent in 2020. However, a recovery of slightly more than seven percent (7.2%) is forecasted for 2021.1 Leading the recovery will be North American exports, which are expected to jump 10.7%. That’s clearly a green light for businesses that have exported in the past.

What about new exporters? There are good reasons to consider the export market. Diversifying your revenue base is a prime reason for pursuing an international presence. In a recent survey, 40% of respondents said they hope to drive more sales by focusing on additional international markets.2 This was particularly true for companies suffering sales declines as a result of tariffs.

As of 2018, SMBs had been minor players in the export market. Only about one percent of U.S. small businesses exported their products and half of those exported to a single country.3 Yet, the reasons to export products are compelling.

• You’ll extend the product life cycle when selling to markets less developed than the domestic market.

• The cyclical or seasonal nature of some products can be minimized.

• Fixed costs can be spread over a greater volume of goods sold, while establishing new sources of revenue.

SMBs can benefit from exporting just as much as larger counterparts.

International exporting requires solid financing.

Deferring payments on purchased goods and services is essential for international trade. Eighty percent of world trade is dependent on trade finance.4 In early 2020, the pandemic slowed international trade and threatened to impact the cost and availability of funds for exporting. In response to the threat, governments instructed their export credit agencies to fill the financing need as best they could.5

As an SMB, it is possible to access working capital prior to the time of export. The U.S. government has a well-established program, the Export Working Capital Program (EWCP), to meet the capital needs of small businesses trying to fulfill new export orders. The EWCP is offered through the Export-Import Bank of the United States (EXIM) and the Small Business Administration. The program provides lenders with a 90% guarantee for working capital financing that supports export orders.6

Through the EWCP, businesses engaged in exporting have access to capital throughout the manufacturing process and product sales. The program allows a bank to offer advances against loan collateral they wouldn’t normally be able to finance. For example, the program provides a 100% advance rate for raw materials inventory; 75% for work in process and finished goods inventories; and 90% for foreign accounts receivable.

The key to accessing such funding is to have real export customers with real orders. Once these are established, you can work with a banking partner to understand how much funding is available.

Participation in the EWCP carries strict criteria.

The requirements for EWCP eligibility are straightforward and non-negotiable.

• Each product must be shipped from the U.S. to a foreign buyer.

• Each product must have more than 50% U.S content based on all direct and indirect costs, including but not limited to labor, materials, direct overhead, research/development and administrative costs, exclusive of profit.

• If the product doesn’t meet the above criteria, the aggregate content of all products of all invoices within a transaction must be more than 50% U.S. based on all direct and indirect costs, including but not limited to labor, materials, direct overhead, research/development, and administrative costs, exclusive of profit.

• If the U.S. content of any product or aggregate U.S. content of all products of all invoices within a transaction is 50% or less, only the U.S. content is eligible.

It’s important to work with a banking partner that understands the ins and outs of international trade finance.

Now is a good time to get into exporting.

The economic recovery from COVID-19 is expected to be strong, and there are real financial benefits to becoming an exporter. An experienced banking partner can not only offer financing, but also help mitigate potential trade risks.

If becoming an exporter intrigues you and seems to make sense for your business, talk to your Relationship Manager to see what’s possible.