The world may be 'flat,' but who will finance global sales?
We often discuss the global economy here on these pages, and how information technology is bringing businesses and consumers from every continent (save Antarctica) together into a seamless global commerce network. Great talk for the conference circuit. However, doing business with customers on the other side of the globe can be risky. If you're in North America, and a customer in Asia doesn't come through with the payment for that $200,000 in equipment you shipped over, how do you recover the funds?
No matter how globalized or "flat" we get, there's risk associated with overseas transactions, and this risk is reflected in the cost of exporting. Banks are often reluctant to finance these riskier transactions. Commercial loan providers may finance such transactions, but at a premium. Many businesses do not know how to handle or mitigate these costs.
About a decade ago, I spearheaded a research effort for the US Small Business Administration, in which we attempted to calculate the true costs for small businesses to sell their good overseas. (A brief summary of our research can be found at the SBA site.) We spoke to banks and finance companies, as well as about 60 small businesses, which ranged from catfish farms to machine-parts manufacturers.
We found very few companies were knowledgeable about resources available for exporting. Access to capital to fulfill overseas orders (whether or not secured by letters of credit) was a major issue, but most small companies simply did not bother to try to finance their overseas sales. They simply drew on whatever working capital they had on hand, or demanded payment up front from the overseas customer. This ad-hoc financing approach may work for incidental sales, but if a company wants to expand with a cohesive exporting strategy, it needs a solid source of financing it can turn to as the business grows.
At the time I did the study, export finance assistance was divided between two government entities -- the SBA helped with smaller loans, while the Export-Import Bank of the United States (Ex-Im Bank) was the place to go for larger loans.
Now, it appears Ex-Im Bank is taking a more proactive role in encouraging entrepreneurial exports as well. The Wall Street Journal reports that businesses with annual export credit sales of $7.5 million or less are now eligible for coverage under an Ex-Im Bank program that even protects small-business owners in the event of buyer default. "Generally, this insurance covers 95% of an invoice, at a cost of roughly 55 cents per $100 of shipment for 60-day repayment terms. (The previous ceiling for this benefit was $5 million.)"
The Wall Street Journal also reports that Ex-Im Bank also recently opened its working capital guarantee program to indirect exporters, meaning US companies that sell products or services to other US companies that subsequently export those goods.
One of the challenges we identified in the SBA study was a lack of awareness of public-sector assistance programs for exporters. This was confirmed in the article as well -- for example, the founder of a food-service equipment supplier that has been shipping commercial refrigerators, ice makers and dishwashers to countries within Asia since the late 1980s wasn't even aware of Ex-Im Bank during his first decade of business.
Because we operate in such a global economy, and will keep increasing global business, companies need to develop export strategies that are supported by export-specific financing. Some resources are available from the public sector, many from the private sector, and still many others are bootstrapped as the result of entrepreneurial ingenuity. As you build your strategy to do business across the globe, it's smart business to be aware and incorporate the resources available.
This post was originally published on Smartplanet.com