April 2009 - The effect of the current credit crunch on global trade flows has been one of the least highlighted yet most significant and worrisome consequences of the current financial crisis. Limited financial capacity around the world threatens to severely inhibit global trade. Tucked within the U.S. government is an all-too-often overlooked financial solution: the U.S. Export-Import Bank. U.S. machine tool manufacturers and punching, slitting and cutting businesses have rarely tapped into the safe and flexible financing available through U.S. banks and the Ex-Im Bank. This overlooked resource can potentially make or break deals with international trading partners.
The credit crunch arrived and available capital vaporized for big-ticket purchases around the globe. No matter the emerging market--India, China, Brazil, Mexico, Russia or the Middle East--if you’re unable to provide your customer with a viable financing solution, the sale may not happen, or it may go to a competitor who brought a financing solution to the table.
Although these emerging markets are experiencing booming growth, they have illiquid or "shallow" financial infrastructures. Translation: The local banking systems are underdeveloped. If domestic banks do lend, they often impose onerously high interest rates with short terms and can be more than 100 percent collateralized. For instance, typical borrowing rates for a "good" company in Mexico may range between 9 percent and 18 percent, with a maximum term of six months. Further, a lien is typically required on all of the company’s assets, along with the owners’ personal guarantees.
Bottom line: If your customers are unable to get funding locally, you might assist them in securing financing to buy your products and services via the Ex-Im Bank.
The under-used opportunity
The Ex-Im Bank’s primary goal is to benefit American businesses and to create more U.S. jobs by encouraging the increased exportation of U.S. goods and services to international markets. With that said, it’s a valuable resource for U.S. manufacturers of all types of capital equipment.
The Ex-Im Bank is a unique and reliable source of financing support for both U.S. manufacturers and exporters, as well as foreign investors. It can insure or guarantee the financing provided by lending intermediaries in the United States, enabling large and small domestic companies to turn export opportunities into real sales that help maintain and create jobs and contribute to a stronger national economy. In turn, overseas importers and investors benefit from lower financing costs and more flexible financing structures than what may be available locally.
Its medium-term financing program supports authorized lending intermediaries (including U.S. and foreign commercial banks) in extending attractive credit to importers in emerging markets that are purchasing equipment and services from American suppliers.
With nearly 70 years of experience, the Ex-Im Bank has supported more than $400 billion in U.S. exports, primarily to developing markets worldwide. Its medium-term finance program is one of the least expensive ways for buyers in emerging markets to finance their purchases of U.S. goods and services. Medium-term refers to the amount of time to pay back debt: three to five years. Other details of the program include up to five-year financing with semiannual repayments, options of fixed or variable interest rates, no local bank credit or guarantees needed, and no liens on equipment needed.
Now, up to 30 percent of local costs (e.g., civil works, installation and local contractors) can also be financed.
The supplier or exporter gets cash on shipment, progress payments and a letter of credit from the intermediary lender--nonrecourse financing.
All types of new or used equipment, as well as services that are manufactured and sourced in the United States where the value of the U.S. content is at least 50 percent, are eligible to participate.
Because of the amount of paperwork that’s required to get Ex-Im Bank support, most intermediary lenders have a minimum amount they’ll consider financing. A typical minimum is $350,000, although smaller amounts are occasionally accommodated. Applications can be approved in as little as four weeks or as long as six months, depending on the completeness and quality of financial information provided by the prospective overseas buyer.
Ex-Im Bank financing should be considered for international customers that are purchasing equipment and related supplies from U.S.-based companies. The U.S. supplier can ship products overseas and be assured payment will be made in full and without recourse. The required paperwork and documentation can be a little overwhelming at first glance. However, commercial banks that have demonstrated experience with the medium-term financing program can help manufacturers and exporters navigate borrowers through the various requirements.
Across the border
In early 2007, a Texas-based manufacturer of metal-processing machinery knew it was in competition with Italian manufacturers for a $3.4 million slitting and coil straightener line for a well-established Mexican operation. With short-term local interest rates of above 14 percent and a positive cash flow beginning 18 months after equipment installation, a medium-term financing solution would be critical for winning the contract. Additionally, the small-business exporter would need working capital to support the manufacture of the equipment if it were to win the bid.
Following an introduction by the manufacturer to a U.S. commercial bank that specializes in structuring such credits, the lending bank determined that the Mexican buyer met Ex-Im Bank support criteria. The multilingual lending specialists issued a Spanish-language financing proposal that would accommodate progress payments to the manufacturer, as well as a five-year, Ex-Im Bank-supported term loan to the buyer at an interest rate that was one-third of what it would cost the Mexican company to borrow locally. Providing a user-friendly financing solution to the involved parties won the Texas company the contract. Shipment began six months later.
A Kansas-based, family-owned manufacturer had few experiences selling its high-end roll-forming equipment and automated systems internationally. In 2006, it received what appeared to be a legitimate inquiry from a fabricator of steel building studs in Turkey that wanted to increase not only its fabricating efficiencies but also its domestic market share in this rapidly growing economy. Closing the potential $2.7 million sale was critical for the continued well-being of this often cash-strapped firm.
The company’s business development manager turned to a U.S. commercial bank he knew specialized in working with the Ex-Im Bank to support such overseas buyers. The bank’s representative in Turkey made contact with the buyer and reviewed the benefits of Ex-Im-supported financing. The loan term, interest rate and uncollateralized structure of such a credit was significantly better than what could be obtained locally. Partnering with this experienced U.S. commercial bank in putting together a complete technical and financial package for the Turkish buyer quickly sealed the deal. Shortly after, the Kansas company established a sales and service office in Turkey to further develop this market.
The final word
Before a manufacturer or exporter or even a potential foreign investor dives in, it must select a bank with a multilingual staff. Language barriers can be eliminated by using a commercial bank with experienced bankers who are fluent in your customer’s language. The banker will make direct and immediate contact with the borrower to discuss an attractive financing package with the support of the Ex-Im Bank. In addition, the banker should keep the U.S. exporter informed about the progress in arranging financing so that the exporter is free to focus on closing the technical aspects of the sale, knowing the financing is in good hands.
Emerging markets’ growing economies should appeal to U.S. manufacturers. The uncertainties or costs of securing local financing shouldn’t hinder expansion. With an understanding of the medium-term financing available through the Ex-Im Bank, metal processing machinery manufacturers can introduce this low-cost financing as part of their discussions with potential international customers. Take advantage of the Ex-Im Bank to seal the deal. MM
This was prepared for general information purposes only and is not intended as specific advice or recommendation. Any reliance upon this information is solely and exclusively at your own risk.
Alan Andrews is a vice president and manager of the global trade and equipment finance at PNC, part of The PNC Financial Services Group Inc.