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Pre-Export Working Capital Loan Program

Introduction

International trade continues to grow every year as nations expand their global sales and new nations join in. Today, over 225 nations are active in trade resulting in over $9 Trillion dollars in global business every year. Most nations recognize that the real growth in trade occurs with Small to Mid-sized Enterprises (SME). A key finance service required by this sector worldwide are short term working capital loans used to fulfill international sales orders.

A common complaint from American Exporters is that they receive minimal support from their banks for export trade transactions. After spending significant time and resources to develop export sales, American exporters often can not secure the funds they need to complete the orders. Current research indicates that only 5% percent of the 9600 banks in America offer effective pre-shipment financing. All too often, American banks simply will not extend any credit on export items such as inventory designated for export or export-related accounts receivable. These items are routinely excluded from the exporter’s collateral pool leading to cash-flow problems. Pre-shipment financing is considered by the U.S, government to be vital for the health and competitiveness of the U.S export community. The limited availability of pre-shipment financing poses a serious challenge for U.S. exporters already struggling to counter intense international competition.

True transaction based pre-shipment financing supported by export     letters of credit is rarely found in North America. Each deal requires a thorough understanding of the transaction and sufficient due diligence in order to mitigate the risk inherent in this type of trade financing. The skills, abilities and knowledge required to provide this type of financing is much more commonly found in the financial centers of traditional trading nations such as Hong Kong, London, Zurich. Only a few lenders in North America have the ability to structure this financing.

Example

DFO Enterprises in Watsonville, California represents a brand of natural juice beverages. The company began to develop a West African market. A four-country business trip arranged for DFO by the US Department of Commerce included meetings in Abidjan (Ivory Coast), Lome (Togo), Cotonou (Benin) and Dakar (Senegal).

Ternaga Imports in Dakar specializes in the supply of consumer products to foreign Embassies, cruise ships and military bases. As a result of the trip, Teranga Imports signed a distributorship agreement to represent DFO in Senegal.

To establish the working relationship, DFO and Ternaga decided on an initial shipment of one container of juice for $21,465. Teranga opened a Documentary Letter of Credit through their bank in Dakar for $21,465, with DFO as the beneficiary. The juice was to be shipped FOB Port of Los Angeles to Dakar, Senegal.

After conducting required due diligence, TEFO was able to provide a pre-shipment working capital loan for DFO Enterprises in the amount of $17,355. Of that amount $9,800 was wire transferred directly to the beverage Corporation and $7,555 was paid directly to a freight forwarder in Los Angeles for shipment.

The shipment was made. TEFO then worked with DFO to submit all the documents required by the Letter of Credit to the negotiating bank. TEFO was reimbursed for the loan and fees by the negotiating bank under an Assignment of Proceeds issued by DFO. DFO realized a profit of $4,100 on the transaction.

Features of the Working Capital Loan Program

• Requires that a Documentary Letter of Credit be opened by a foreign buyer. Provides pre-shipment working capital to the L/C beneficiary and designated suppliers.
• Finance amounts from $10,000 to $10,000,000.
• Loan repayment from funds generated through negotiated Letter of credit.
• Loan amount to cover cost to produce or purchase product for export.
• Collateral normally only the Assignment of Proceeds of L/C and promissory note.
• Financing ranges from a minimum time of 30 days to a maximum of 180 days.
• Funds disbursed to suppliers by wire transfer and/or Back to Back Letters of Credit.
• Streamlined online application process, fast decision turnaround.
• Support for single transactions or multiple sales under L/Cs.
• Preliminary commitment provided on export L/C deals that meet basic parameters.

Prerequisites

• For beneficiary of an Irrevocable Documentary Letter of Credit.
• Documentary Letter of Credit to be issued by accredited bank.
• For organizations with a track record of profitably producing and/or marketing goods.
• Exporter management must have a proven track record.
• Loan proceeds must be used to comply with terms of the Letter of Credit.

Advantages to Exporter

• Provides quick access to working capital to support export order.
• Enables extended payment terms (up to 180 days) to overseas buyers.
• Increases international sales capability and profitability.
• Increases cash flow and financial capacity to perform the export contract.
• Leads to strengthened balance sheet and enhanced borrowing potential.
• Accesses financing that do not impact existing bank credit lines.
• Provides supplemental financing beyond what current lender may be able or willing to provide.
• Funds business growth/expansion without selling equity or increasing bank credit line.

Disadvantages to Exporter

• Higher cost than standard bank financing.
• Requires enforced attention to details of letter of credit terms and conditions.
• Transaction normally secured with a non-collateral promissory note.
• Larger transactions may require A/R, inventory collateral, personal guarantees.  

Letter of Credit Terms and Conditions

• Freely negotiable irrevocable documentary Letter of credit from recognized bank.
• No “Applicant documents” that are outside the control of beneficiary.
• No split Bills of Lading.
• Third party documents allowed.
• Partial shipments allowed.
• Currency in US dollars or other major currencies.
• Tenor to be Sight Draft or usance Time Draft up to 180 days.
• Payment by Sight Draft Negotiation or discount of Bankers Acceptance

Procedure

• Exporter obtains guidance from lender during negotiations with overseas Buyer
• Negotiate letter of credit terms and conditions as part of sales contracts
• Exporter - beneficiary of the L/C - applies to the lender for pre-shipment financing.
• Lender reviews application, copy of L/C and conducts due diligence.
• After acceptance of the application, exporter signs loan contract with lender.
• Exporter assigns proceeds of L/C to the lender for the loan amount and mark-up.
• Lender disburses funds to Exporter and/or Exporters suppliers.
• Lender coordinates and manages the transaction documents on behalf of the Exporter.
• Exporter ships product and submits documents to Lender.
• Lender submits documents to negotiating bank.
• Negotiating bank negotiates Letter of Credit and disburses proceeds of L/C.
• The negotiating bank reimbursed the Lender for loan amount and service fee
• The negotiating bank remits remaining funds to L/C beneficiary/exporter

Application Process

• Written application.
• Export sales contract and if applicable domestic purchase contract.
• Full description of the underlying transaction.
• Original L/C or Preliminary Advice of L/C.
• Exporter applies directly to lender for a Preliminary Commitment.
• Exporter can apply to the Lender for a Final Commitment.
• Lender’s turnaround time for first deal is generally within 10 working days.

Costs

• $10K - $1M: 5.0% per month, minimum 30 days
• $1M - $10M: 0.17% per day, no minimum days
• Maximum term is 180 days.

TEFO is supported by:

The Bank of Alameda

California Independent Bankers Association

California Centers for International Trade Development

Tradeport

InternetLC

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