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August 17, 2015 Q&A

Ex-Im Bank closure means exporters face financing hurdles

Contributed Photo Chris Buchholz, senior vice president and commercial bank manager, Santander Bank

Q&A talks about international trade financing with Chris Buchholz, senior vice president and commercial banking manager at Santander Bank in Hartford.

Q: What is the impact of the shutdown of the Export-Import Bank (Ex-Im) of the United States?

A: The shutdown of the Ex-Im Bank will impact the ability of many companies, especially small businesses, to grow their international sales. The Ex-Im Bank is an independent federal agency whose mission is to bolster U.S. job growth by providing trade financing. The agency provides several programs to help exporters including export credit insurance, either directly or through brokers, which insures foreign accounts receivable against a buyer's payment default. Another is through its working-capital, loan-guarantee program, which makes it easier for banks to lend against foreign accounts receivable and issue standby letters of credit for bid and performance bonds. Without these credit enhancements, some companies may not qualify for financing.

Q: What can private lenders do to help exporters in light of Ex-Im Bank's shutdown?

A: Private lenders are doing a lot to help exporters by providing letters of credit, working-capital financing, foreign exchange services and documentary collections. Large international banks also have international trade portals with useful country specific information, an international desk and trade teams that help companies understand customs and trade barriers, make overseas connections and navigate programs like the Small Business Administration Export Express.

Q: What are the biggest challenges faced by exporters?

A: According to the U.S. Department of Commerce, more than 70 percent of global purchasing power is located outside America, and 95 percent of all global consumers reside in foreign countries. This tells us that perhaps the best opportunity for economic growth in Connecticut is selling into foreign markets. A key advantage of international trade is that it opens up new and broader markets for U.S. companies and allows them to grow their businesses.

There are many challenges facing companies that are either currently exporting or interested in exporting. In a recent international trade survey of Connecticut companies by the Connecticut Business & Industry Association, concerns included trade and regulatory barriers, insufficient knowledge of foreign markets, connecting with customers, managing foreign currency risk, difficulty managing payment risk, and linguistic and cultural barriers.

Q: What types of financing do companies that want to export need to consider?

A: Companies need a broad range of financial services, including letters of credit, documentary collections, foreign currency exchange and working-capital financing. A company selling on open account terms is at risk of payment default by the foreign importer. Requiring a letter of credit issued by the foreign importer's bank to the exporter's bank mitigates the payment risk. Documentary collection services performed by banks facilitate the sale, shipment and transfer of title to the goods. Standby letters of credit are issued to support performance and bid bonds. Companies will need to convert foreign currency into U.S. dollars during the payment process — a service offered by commercial banks. Finally, a working-capital line of credit may be needed to finance the buildup of inventory and accounts receivable.

Q: How does international financing differ from domestic financing?

A: While payment default risk exists any time a company sells on open account, lenders will include domestic accounts receivable as collateral in its borrowing base for working capital lines of credit. Typically, a domestic bank will not include foreign accounts receivable in the borrowing base, and an exporter may need a credit enhancement such as export credit insurance and government-loan programs, including the Export-Import Bank's working capital loan program and the Small Business Administration Export Express program, which targets small and midsized companies. These loan products free up cash, which enables a company to grow more quickly and export more products into new markets.

With domestic trade, the mobility of goods is easier across the U.S. in comparison to exporting overseas where there are international trade barriers, tariffs and customs procedures. In domestic trade, a single currency is used (the U.S. dollar) whereas, in international trade, there may be foreign exchange exposure and risks associated with fluctuations in a foreign currency. 

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