Q&A;: Export Financing

Financing can be one of the trickiest parts of putting together an export transaction. Most U.S. banks generally are reluctant lenders to exporters in general. New and small exporters face particular problems. L. Fargo Wells, director of the California Export Finance Office, and Karin B. Dulat, have written a comprehensive export primer called “Exporting From Start to Finance.”

Following is excerpts from Wells’ answers to basic questions on financing:

Question: What is trade financing and what form does it take?

Answer: You won’t find total agreement on usage among everybody. When you’re talking about trade finance, you mean two different terms. One is export finance. Now this is the broader term. Export finance refers to any financing to support exports. It can provide financing for pre-shipment of exports, where you need to buy labor and materials to get the export shipment ready. It can be helping a business borrow against their export receivables. All these things could be called export financing.

Now partly as a subhead and partly as standing by itself comes trade finance. It is the supporting of a transaction by largely documentary evidence and signed notes where there is a clear implication of foreign risk. Export finance is simply supporting the export transaction. It does not necessarily involve foreign risk at all.

Q: When is meant by documentary transaction?

A: Some document to give real evidence that the goods have been exchanged, like the receipt of a promissory note signed by the buyer, like a negotiable bill of lading or an invoice that could prove goods have been shipped. In other words, it’s dealing with the transaction after it has basically occurred.

Q: What is a letter of credit?

A: A letter of credit is a bank document or financial institution document . . . that basically substitutes the issuing bank’s credit for the credit of the buyer. The issuing bank says, ‘If you ship the buyer’s order . . . on time and on the boat that he says to ship them on, we’ll pay you no matter what else he does. You collect from us.’ They usually send it (the letter of credit) to an advising bank in the country of the seller. And the advising bank takes the papers and sees that they’re in order . . . and sends them back to the issuing bank who pays it. If they send it to a confirming bank, which costs a little bit more, the confirming bank in turn substitutes its credit for that of the issuing bank. Now you’ve really got two banks guaranteeing it.

Q: So if I’m a U.S. exporter, I should make sure that I have a letter of credit from my buyer?

A: If you want the safest possible terms, yes. . . . And in some cases a letter of credit isn’t safe if it’s issued by a flaky bank in a country that doesn’t have any U.S. dollars. So in that case, it’s not a safe term unless you get it confirmed here by a bank.

Q: You mentioned in your book that many banks have pulled out of trade financing. Is that changing?

A: Well, they’ve really pulled out of trade financing because, as I told you, trade finance kind of implies a higher level of foreign country risk than just general domestic export finance. They got burned so badly with the foreign risk . . . that they decided, to heck with it, this isn’t profitable, we don’t want it. And they let go a lot of their international bankers. Now the reason for getting out of the more generalized export finance is that these same officers who conducted a lot of the trade finance business were also the officers who understood international terms of trade and international trade and who were doing the pre-shipment type of financing too, because they could read the letter of credit, see how good the letter of credit was, which made it easier to extend more credit to the seller.

Steps to Success

L. Fargo Wells, director of the California Export Finance Office, has identified seven key steps for a business to follow in a successful export sale:

* Identify your market.

* Determine a strategy.

* Overcome possible obstacles, such as import restrictions or export licenses.

* Make the sale.

* Finance the transaction.

* Oversee the performance of the contract and follow-up to the sale.

* Get paid.