Before I became the chief financial officer/treasurer of DS-Concept Factoring, I was the CFO for a New York City-based international importer/distributor of fashion and consumer goods. I come from “being in the trenches” with respect to wiring up banking, lending, factoring, asset-based lending and trade finance. It has only been about 35 years since the United States economy has become globalized and now The World is Flat, according to the book by Thomas Friedman, noted editorialist, journalist and author. Our nation has grown very dependent on imports in almost all sectors, whether it is consumer household goods, raw materials or industrial equipment (and components).
Many small business owners and entrepreneurs have built their business models around importing and exporting, as they understand the important opportunities, revenues and income streams which have developed this way. A major challenge for a small business owner dependent on import/export transactions is its ability to access financing. Generally, many American lenders will not finance a business that in large measure is tied to collecting receivables in a foreign country.
The impact of importing/exporting on small businesses has become more influential on the conduct of American business. In the past, banks, factors and asset-based lenders tended to overlook or tolerate many of these enterprises where credit scores were probably consistent and where import/export income only represented a portion of their operation. However, as small business entities have become increasingly reliant on import/export traffic, the banks, factors and asset-based lenders have been limiting their exposure by trimming back or filtering out these particular enterprises. In cases where businesses are totally import/export driven, many banks, factors and asset-based lenders have become severely restrictive on any financing.
This paralysis has become even more pronounced since the Great Recession in America, widely acknowledged to have started in 2008. As bank/lender relationships and credit standards continue a process of realignment, a paradox has become more evident over the past five years — the import/export sector has seen vast expansion. And trends point the way to continued increases here. However, the traditional financing tools available to small businesses in this arena continue to shrink and dry up. These financial services organizations thus leave behind a marketplace opportunity with enormous potential.
(Objectively, the credit decisions during this time frame by banks have been somewhat driven by government regulatory policies. Especially during the past four years, these agencies have discouraged banks from liberal activity in this sector. The restrictions and penalties often imposed on financial institutions have caused many credit officers to seek business development elsewhere.)
This import/export watershed has summoned a new, different class of companies to service and fulfill the needs of the small business owners and entrepreneurs in this space. Import/export trade credit firms are in a sense picking up the pieces being left behind by the traditional financial service firms, banks and lenders. Because they have pulled out — in large measure concluding that this sector poses too much risk, antagonizes government regulators and does not hold enough profit — the emerging import/export trade credit firms have been able to customize a business model that meets the needs of lesser-equipped businesses.
Given the nature of these small enterprises that are typically manufacturers, distributors, jobbers, vendors or suppliers with precarious, limited financial capabilities, the import/export trade credit firm has the potential to provide financing to all of the entities in the supply chain process. Let’s say there is an order for automobile transmissions being manufactured in America and shipped to a large specialty auto parts distributor in Pakistan. The international trade finance and factoring firm has the opportunity to provide financing, so the transmission manufacturer can procure the parts and components it needs for production. That same firm can factor the receivables generated by the Pakastani auto parts distributor. Many times, provided there is an acceptable credit risk tied to the original order, the same firm can even finance the distributor’s transaction that could be an order for procurement by a reputable credit-worthy Indian retailer.
The key to accomplishing much of this lies in the vetting and documentation throughout the process. (In contrast, many conventional banks are not staffed or equipped to handle the due diligence process that goes with these transactions, especially on an international scale.) The nature of international transactions requires knowledge about letters of credit and certification of the sales involved. For example, one of the first and foremost questions is knowledge of how the inventory is manufactured and shipped through the supply chain, along with the credit worthiness of the purchasers and the strength of the purchase orders. Does this become a good credit risk to finance?
Using business intelligence to qualify a customer and the players in the process, understanding the customer’s management and its products becomes critical. Does the product made by the customer hold value throughout the entire supply chain when it gets shipped to the final seller, fulfilling an order from the retailer/distributor? Customers need to understand how they are paying their exporters or debtors and the required documentation to support the complete transaction.
Unfortunately, while many small business owners and entrepreneurs have excellent products for manufacture or distribution, they are deficient with their capability to engage export. Because they are missing out, the growth opportunities for their business are reduced. They preclude their business from relationships with more worthy clients, because they cannot finance all of the expansion and volume they would hope to see. Many of these business owners have written off this economic vista to stay within their safety zone.
These businesses wind up paying cash up front or immediately upon delivery for anything they import. They demand cash up front or upon delivery for any shipment they export. While “cash is king” and these deals reflect quality — this practice is often an impediment to sales and opportunities where credit is preferred.
The nature of small business sales today is that no one in the process wants to be left holding inventory. Often with little planning, small businesses must be ready to clinch a sales order where some form of working capital or funding to process it must be quickly accessed.
Letters of credit can be issued through import/export trade finance firms with speed and efficiency.
Banks, especially the second tier or community institutions, have limitations on their letters of credit. They are often reluctant to entertain international issues in which their money is at risk. Recently, a small New York bank touted in its display advertising that it had $50 million available to lend to small business owners. A lighting manufacturer/distributor with a business plan to expand selling to international entities approached this bank. The bank’s response to the owner was, “Do you have enough personal equity or assets to collateralize the credit line you are seeking?” Obviously, this became a deal-breaker between the small bank and its prospect.
As an import/export trade finance and factoring company, the difference is that our credit decision would be based not only on personal savings, but also on both personal and corporate assets. As previously described, we would consider the viability of the transactions, the reputation and credit worthiness of the players in the supply chain, along with the valuation and quality of the product being produced and shipped.
An imperative would be our ability to obtain credit insurance on this customer and the deal. Unlike a bank that often reaches a decision spreading it among several departments, our evaluation is conducted and executed by one team.
At the same time, banks, factors and asset-based lenders should recognize that the import/export trade credit process is not a competitive threat to them. Rather it complements their services. Import/export trade credit can help to maintain a bank or factor relationship by assisting internationally in an auxiliary position, where the bank, factor or ABL is unable to move.
Import/export trade credit today is giving the small business owner and entrepreneurs the ability to take advantage of shipping efficiency in globalized sales transactions and enables them to handle risk for exporting overseas.
Richard Tretler is chief financial officer/treasurer of DS-Concept Factoring, Inc. (New York), a 13-year-old German-based import/export trade credit firm handling about $1.5 billion in annual deal flow. For more information, visit www.ds-concept.net.