Seizing a Global Opportunity — Unlocking the International Demand for Credit
As U.S. companies continue expanding their offerings globally, asset-based lenders that successfully work with exporters, their customers and export credit insurers will open the door to tremendous growth opportunities.
Amid the business challenges we’re all facing this year, there are also opportunities for growth. The recession is not affecting every sector of the economy. Many companies are growing, often by expanding their international sales. While growth trends in exporting volume are lower than they were pre-2008, worldwide market demand for goods and services continues to engender a considerable amount of international trade — and even growth in some sectors.
The U.S. economy is projected to remain relatively flat throughout this year and into 2015 before beginning to recover more robustly, but with just 5% of the world’s population and less than one-quarter of global GDP, the U.S. is not the only market with purchasing power. And while all countries are linked to some degree by economic interdependence, cultural, political and market forces will lead Europe, Asia, Latin America and other regions on their own trajectory. But in order to grow their international sales, U.S. exporters need to offer competitive payment terms to their customers in other countries.
Global Demand for Credit
Cash in advance and letters of credit are no longer always acceptable terms to creditworthy overseas buyers, even in developed economies, let alone in emerging markets. In the U.S. we’ve got the national banks, regional banks, community banks, non-bank asset-based lenders, factors, leasing companies, other debt/equity players and a whole menagerie of specialty lenders. Companies in emerging markets don’t have anything like the depth and breadth of access to capital enjoyed by borrowers in the U.S.
Rising interest rates plague foreign companies, not only in troubled economies but also in some of the most attractive overseas markets, i.e., the ones that are heating up the fastest. Currency exchange controls — the lengthy processes for converting local currency to U.S. dollars and getting clearance to send U.S. dollars out of the country — also lead foreign customers to look to their U.S. suppliers for credit.
The eurozone, really the EU and Europe as a whole, while the world’s most sizeable economic bloc, is suffering a downturn in the availability of credit as banks pull borrowers’ longstanding credit lines. Latin American traders aren’t bringing in as much hard currency these days due to falling commodity process and slipping export demand. Facing non-performing loans, Asian lenders have begun to establish higher standards for creditworthiness. And other local, regional and international credit challenges abound for companies all around the world.
Progressive Payment Terms
Beyond reacting to this global demand for credit, U.S. exporters have their own proactive reasons for opening up more progressive payment terms on their international sales. As a competitive tactic versus other suppliers, credit can win U.S. companies new business and expand their market share. Overseas distributors may be prepared to place larger orders, and more importantly, to stock local inventory, if they’re granted larger amounts of credit and longer payment terms. Getting foreign distributors to stock up enables U.S. exporters to transfer inventory-carrying costs abroad. U.S. companies trying to get their brands established and recognized globally can use credit to fill local supply chains.
From a strategic perspective, credit opens doors in emerging markets that U.S. exporters want to penetrate. Growing internationally is not a short-term proposition. Companies need to be in for the long haul. That may involve being flexible with credit in good times, as well as in not such good times. However, when U.S. exporters give credit via open-account international terms, what happens if they don’t get paid?
Like in the U.S., foreign debtors can file bankruptcy, fall into receivership, become insolvent or just plain go out of business. And the courts in other countries’ legal systems may be difficult for U.S. creditors to navigate.
Overseas customers may face cash-flow problems, get themselves overly leveraged and have balance sheet issues or simply perpetuate financial fraud. Risks vary from country to country, but in emerging markets they often exceed the incidence of such scenarios domestically. General economic conditions in local markets can affect foreign companies’ ability to pay. And overseas buyers may be unable or unwilling to pay U.S. dollar invoices following unfavorable currency fluctuations, not to mention the more catastrophic risks of currency inconvertibility or prohibitions on transferring hard currency out of their country. Other political risks that can impact payment include expropriation, war and other political violence, trade sanctions, embargoes, loss of import or export licenses, and other events or foreign government actions.
Invoice Payment Terms
Beyond the risks of not getting paid at all, another challenge faced by U.S. exporters is the length of time it can take to get paid. First of all, international payment terms tend to run longer than in the U.S. It’s going to take 30 or more days just for the goods to get there, and the above-mentioned local pressures can lead to selling on 60, 90, 120 days or even longer invoice payment terms.
In addition, there are inflationary pressures introduced by the market. Perhaps a U.S. supplier offers 60-day terms, to which an Asian competitor responds with 90-day terms, which the U.S. supplier now needs to meet or beat with even longer terms. If the goods are going to turn quickly in the destination country, one might look at the extended terms not as trade credit but rather unsecured working capital for the buyer. But when this kind of scenario emerges, exporters need to decide what they’re willing to do to compete.
And then the foreign customers, even steady long-term customers who pay consistently, may pay slowly — by 30, 60, even 90 days — owing to different payment morality, capricious or arbitrary manipulation, local in-country pressures, inability to readily access hard currency, etc. None of this is to suggest that either protracted credit or slow payments are, or should be, considered normal, acceptable or inevitable. U.S. exporters owe it to their companies, shareholders, suppliers, et al, to rein in credit terms extended abroad and their foreign customers’ payment performance. Arguably such temperance would also benefit the U.S. and global economy at large.
At the same time, U.S. exporters need to win orders, out-compete other suppliers, penetrate new markets, grow market share and not only sell internationally, but negotiate optimal profit into those export sales. When the reality of market demand for credit intrudes on higher principles of financial management, sometimes something’s got to give. But the combination of longer payment terms and slower remittances can wreak havoc with a U.S. exporter’s DSO and, unless the company has a pretty deep war chest, necessitates the availability of trade finance on their foreign receivables.
Export Credit Insurance & ABL
For growing numbers of U.S. exporters, the trade finance solution involves a combination of export credit insurance and asset-based lending.
Export credit insurance protects foreign receivables against non-payment. All of an exporter’s or lender’s insurable foreign receivables can be covered under one export credit insurance policy. A specific credit limit gets approved for each foreign customer, or the policy will ensure the credit decisions the exporter or lender makes, based on experience. Alternatively, a credit insurance policy can cover just an exporter’s largest foreign customers. Or the coverage can be even more selective, as long as the insured sales represent a reasonable spread of risk. Policies covering just a single customer are less common, but may be feasible in some cases for a very creditworthy foreign debtor.
Lenders that extend credit directly to foreign debtors, factor/discount foreign receivables without recourse or otherwise remain irrevocably at risk can obtain their own export credit insurance policies. Lenders that extend revolving lines/loans against exporters’ foreign receivables, factor/discount with recourse, etc., can be designated as assignee or loss payee on the exporter’s policy.
However, mitigating foreign buyer credit risk with export credit insurance represents only one element of a lender’s challenge, the balance of which is represented by the suitability of the exporter as a borrower. As such, it’s encouraging that a widening range of asset-based lenders have continued entering the foreign receivables financing market: established national and regional financial institutions for bankable exporters that are eligible for conventional facilities; non-bank, asset-based lenders for exporters whose wants and needs call for greater flexibility; and factoring companies that can take on more challenging scenarios.
U.S. companies will continue to expand their international sales, which represents a tremendous growth opportunity for asset-based lenders that know, or are prepared to learn, how to work with exporters, their foreign customers and export credit insurance.
Gary Mendell is president of Meridian Finance Group, a company providing credit, insurance and trade finance tools that exporters can use to expand their international sales. Mendell has more than 35 years of experience in domestic and international sales, distribution and finance. Prior to Meridian Finance Group, he held positions managing international business development for companies in the pharmaceutical, aerospace and plastics industries. He received the President’s “E” Award and other recognition from the U.S. Department of Commerce, the Export-Import Bank of the U.S. and the Foreign Credit Insurance Association for Meridian’s contributions to international trade. Mendell can be reached at gmendell [at] meridianfinance [dot] com or www.meridianfinance.com.