Export Credit and Finance Essentials For Successful Exporters

International Trade Leadership Certificate Series Export Credit and Finance Essentials For Successful Exporters July 17, 2015 1

Alabama Small Business Development Center Network An affiliate of America s SBDC NETWORK: A partnership organization fostering small business success in America 2

Trade Finance and Access to Capital A Brief Overview by Bill Cummins Alabama International Trade Center Alabama Small Business Development Center Network 3

A Brief Overview of Trade Finance and Access to Capital What is Trade Finance & the Current Landscape Exporting and the Need for External Debt Capital Key Government Programs in Trade Finance: 1) Ex-Im Bank 2) SBA 3) State of Alabama (SSBCI) 4

The Basics of Trade Finance What is TRADE FINANCE? Why a specialty field within commercial finance? 5

Trade Finance Landscape Trade Finance is a Concentrated Business in the USA: About 7,000 banks in USA Less than 200 large scale participants in Trade Finance (144 Members of BAFT) Mostly Money Centers and foreign subs of major multinationals In Alabama, about 140 banks (8 are BAFT members) 6

Trade Finance Landscape Trade Finance is a Concentrated Business in the USA: Approx. 10% of U. S. Exports are supported by LCs and Documentary Collections 18 Banks account for over 90% of the dollar volume of all export LCs and DCs Avg Export LC: $716,000 Avg DC: $139,000 SOURCE: NEW YORK FED & SWIFT 7

Int l Trade as a Line of Business in Banking Trade SERVICES: High Volume, Low Margin Line of Business Pluses: -- Generates Fee Income -- Boosts ROE and ROE (Favorable Capital Adequacy Treatment) Minuses: -- Labor Intensive (Skilled/Technical) -- Compliance Risk (KYC, etc) 8

Trade FINANCE as a Line of Business Trade Credit: Secured, transactional loans & lines are typical Pluses: -- Very self liquidating -- Spins off lots of fee income -- Variety of gov t gty programs to lower risk -- Usually very sticky relationships Minuses: -- Export A/R and Credit Policy (High maintenance loan portfolios re: compliance and loan admin.) -- Limited client base (but growing) -- Varying step child approaches by banks (where does trade finance belong? E. G., ABL, Commercial Lending Dept, Small Business, Gov t Gty Lending, Int l Dept?) 9

Alabama Market for Trade Finance Sizable export sector, and growing - $20 billion / yr Traditional ag exports (poultry, lumber, grain) - $1 bil/yr Manufactured and High Tech (Automotive $8 bil/yr) About 4,000 exporters (over 90% small business) Roughly 6% of Alabama businesses actively export 10

Alabama and Sources for Trade Regions SunTrust Finance Wells Fargo JP Morgan Chase PNC BBVA Compass BB & T Synovus Hancock/Whitney Others? 11

The Need for Export Start-up Expenses Financing Building and Equipment Working Capital/Inventory & Receivables Financing (Purchase of Raw Materials, Labor, Finished Goods, Packaging, Storage, Carrying of Accounts Receivable, etc.) International Bonding (Bid, Performance, Advance Payment, Warranty... ) 12

Financing Export Working Capital Common Sources of External DEBT Financing Trade Credit (Suppliers) Cash In Advance (Customer deposits, combined with very short credit terms) Discounting Time LCs; Factoring Domestic Bank Loans and Lines of Credit Trade Finance Credit Facilities -- Banks 13

Government Guaranteed Lending & Export Finance Primary Sources: 1) Export-Import Bank of the United States (Ex-Im Bank) 2) Small Business Administration (SBA) Secondary Sources: USDA OPIC TDA SSBCI 14

International Trade Leadership Series 17 JULY 2015 CITY/STATE PARTNER: Export-Import Bank of the United States

Executive Summary

What is Ex-Im Bank?

Ex-Im Bank bridges a gap with transactional finance

Ex-Im Bank Financing Covers the Spectrum Pre-Export Financing Post-Export Financing Working Capital Guarantee Insurance Guarantees Direct Loans

Working Capital Guarantee

Working Capital Guarantee (cont.)

Country Coverage Availability (Cover Policy) Ex-Im Mission support is available in over 175 countries. Ex-Im products support exporters in the short, medium, long term through a variety of trade finance products. Country Limitation Schedule (CLS) describes Ex-Im product coverage availability for sovereign, nonsovereign public, and private foreign buyers. http://www.exim.gov/tools/countrylimitationschedule/

Ex-Im Bank Lending Stats Export Working Capital Program in FY2014: $2.4 Billion 541 Facilities (Loans & Credit Lines) Avg Deal: $4.5 million Short-Term Credit Insurance (Export A/R): $3.25 Billion Approx. 2500 policyholders (about 65 in Alabama) 23

AUTHORITY HAS LAPSED! Due to a lapse in EXIM Bank s authority, as of July 1, 2015, the Bank is unable to process applications or engage in new business or other prohibited activities. Reducing Risk. Unleashing Opportunity.

U.S. SMALL BUSINESS ADMINISTRATION A BRIEF OVERVIEW OF THE EXPORT FINANCE PROGRAMS OF THE SBA Mobile Area Chamber of Commerce July 17, 2014 25

SBA Export Programs Export Working Capital (EWCP) Export Express International Trade Loan (ITL) 26

Loan Volumes NUMBER OF LOANS GROWTH SBA Loan Type 2012 2013 2014 FY12-14 Export Working Capital 159 188 185 16.4% Export Express 185 160 124-33% Intl. Trade 61 152 193 216% Core Loans (In part used for export) All SBA Loans to Exporters 405 500 502 23.9% 1,469 1586 1644 11.7% 27

Loan Amounts LOAN $ VALUE GROWTH SBA Loan Type 2012 2013 2014 FY12-14 Export Working Capital $219.6 million Export Express $35.1 million Intl. Trade $95.8 million Core Loans (In part used to support export) All SBA Loans to Exporters $350.5 million $923 million $295.7 million $30.9 million $251.1 million $577.7 million $1.19 billion $307.4 million $23.5 million $285.4 million $616.3 million $1.34 billion 40% -33% 198% 75.8% 45.2% 28

Total SBA financing to U.S. Number of Lenders exporters Number of Loans Total Value of Loans ($ Millions) 1416 1538 1469 1586 1644 $1,190 $1,340 $918 $923 463 430 497 483 513 $611 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 29

Export Working Capital SBA financing to U.S. exporters FY2010 to FY2014 156% increase in available capital and 36% increase in number of loans $266 $296 $307 $220 188 185 171 159 136 $120 84 90 82 85 76 No. of Loans No. of Lenders Total Value (Millions) 2010 2011 2012 2013 2014 30

SBA Export Lender Volume Lender participation by SBA export loan program 90 84 139 133 60 48 45 185 186 172 87 81 80 73 76 71 66 58 Total 4 16 2010 2011 2012 2013 2014 ITL ExportExpress EWCP 31

Key Elements of the EWCP Export Working Capital program Max Loan Amount Guaranty % Use of Proceeds Maturity Max Interest Rates Who Qualifies Benefits to Borrowers $5 million 90% guaranty up to $4.5 million max guaranty Short-term, working-capital loans for exporters. May be transaction based or assetbased. Can also support standby letters of credit 1 year or less generally May go up to 3 years No SBA maximum interest rate cap (but SBA monitors for reasonableness) Must be a for-profit business & meet SBA size standards; show good character, credit, management, and ability to repay. Must be an eligible type of business. Plus, need short-term working capital for exporting. Provides financing to support export orders or the export transaction cycle, from purchase order to final payment. 32

EWCP Borrower Eligibilty Export Working Capital: Eligibility SBA s 7(a) size and ownership standards apply based on NAICs-- Manufacturing: under 500 employees (exceptions up to 1500) Wholesaling: under 100 employees Services: $7.5 to $38.5 million Or, Tangible Net Worth under $15 million and Net Income over last 2 years averages less than $5 million Product shipped from U.S.A. or services provided and invoiced by U.S. entity 12 months of operating history or proven expertise Transaction- or asset-based loans Guarantee fee: ¼ of 1% on guaranteed amount, 12 months or less 33

INDIRECT EXPORTS ARE ELIGIBLE! 34 Indirect Exports Applicants who produce products or services that enter into the export channel, but do not directly export their products: Manufacturers using an Export Trading Company Suppliers to other domestic manufacturers that export directly: supply chain financing solution Requires certification from domestic customer that goods are, in fact, being exported. Can now be supported by all three of SBA s core export loan programs: EWCP, Export Express, ITL (and Ex-Im too)

Key Elements of the SBA Export Export Express Express Max Loan Amount Guaranty % $500k 75% guaranty for loans > $350,000 90% guaranty for loans $350,000 Use of Proceeds May be used for revolving lines of credit (up to 7 year maturity) or for a term loan [same as 7(a)]. Plus standby letters of credit Maturity Up to 7 years for Revolving Lines of Credit including term out period. Otherwise, same as 7(a). Max Interest Rates Loans $50,000 or less; prime+ 6.5% Loans over $50,000; prime + 4.5% Who Qualifies Business must have been in operation for at least 12 months (though not necessarily in exporting). Note: Can be waived by lender if borrower demonstrates export expertise and lender does conventional underwriting, not relying on credit scoring) Borrower entering a new foreign market or expand in an existing export market. Benefits to Borrowers Provides working capital and/or fixed asset financing for companies that will begin or expand exporting. 35

SBA International Trade Loan International Trade Loan Max Loan Amount Guaranty % Use of Proceeds Maturity Max Interest Rates Who Qualifies Benefits to Borrowers $5 million 90% guaranty up to $4.5 million max guaranty up to $4.0 million max guaranty for all working capital Term loan for permanent working capital, equipment, facilities, land and buildings and debt refinancing Up to 10 years for Working Capital and Equipment; up to 25 years for Real Estate Less than 7 years: $0 - $25,000 Prime + 4.25% $25,001 - $50,000 P + 3.25% Over $50,000 Prime + 2.25% Loans 7 years or longer: 0 - $25,000 Prime + 4.75% $25,001 - $50,000 P + 3.75% Over $50,000 Prime + 2.75% Must be a for-profit business & meet SBA size standards; show good character, credit, management, and ability to repay. Must be an eligible type of business. Plus, engaged or preparing to engage in international trade or adversely affected by competition from imports. Provides long-term financing to support companies that are expanding because of growing export sales or have been adversely impacted by imports and need to modernize to meet foreign competition. 36

State Small Business Credit Initiative (SSBCI) Administered by ADECA, Howard Wills, Program Coordinator (tel: 334-242-5100) Provides a 50% guaranty to loans and lines of credit for working capital, building & equipment Terms up to Five Years; Upfront fee of 1.00 percent on the amount of the guaranty Amounts up to $5.0 million Available since 2013, over $100 million in loans in partnership with 41 participating community banks in Alabama to over 300 small businesses. Available for Trade Finance! 37

DON T FORGET THE EXPORT TAX INCENTIVE! Interest-Charge Domestic International Sales Corp (IC-DISC) Favorable Federal Tax Treatment of Export Earnings Min. 50% U. S. Content Tangible Goods (not services, except eng/architectural) Includes Indirect Exports Usually a viable option when export sales exceed $1.0 mil/yr Works well with S Corp and Reducing Owner Comp Tax Rates 38

Thank You! For more information, Call 205/348-7621 Alabama SBDC Network ASBDC.org Alabama International Trade Center AITC.ua.edu 39

Contact Information William Cummins Alabama SBDC Network bill.cummins@ua.edu ASBDC.org BirminghamSBDC.org AITC.ua.edu Tel: 877-825-7232

Ex-Im Lenders or Insurance Brokers Please consult: Delegated Authority Lenders: http://www.exim.gov/tools/applicationsandforms/upload/ebd-w-13.pdf List of Ex-Im Insurance Brokers: http://www.exim.gov/about/whoweare/partners/insurance-brokers.cfm http://aitc.ua.edu/export-finance/export-credit-insurance/