Export Financing - What is It?

This page is about export financing and it is designed to introduce you to a well known
financial facility that helps meet the ever increasing international trade finance demands
of international traders by freeing-up their funds involved in international trade
transactions.

Export financing provides exporters who have orders from customers abroad with the
necessary financial backing to provide their overseas customers with the most favorable
and competitive international trade finance credit terms.

Borrowers have a variety of international trade finance funding options through the wide
range of funding programs offered that can provide them with the flexibility they need to
increase their profits and decrease transaction costs.
What Are The Advantages Of International Trade Finance?

Allows your company to expand its market share with limited risk.

Minimal paperwork.

Quick turnaround time.

No importer underwriting.

Allows you to provide flexible credit terms to international buyers that can increase your
export sales.

Provides a source of funding for companies that may not qualify for traditional financial
backing of its foreign receivables.

Export Financing can be arranged for up to 65% with a promissory note from the
Importer - or 98% with a Letter of Credit. This can provide you with sufficient financial
strength to sell larger orders than you might otherwise be able to on your own financial
strength.

Exporting may be on an OPEN ACCOUNT (with 65% coverage) with your foreign
customers - allowing your buyers to increase their purchasing power and requiring only a
promissory note.
What Size Transactions Can Be Financed And How Are They Handled?

Any size of transaction, small or large, can qualify for international trade finance funding.
The exporter will apply for a USDA guarantee for a particular sale.

What Are The Costs For International Trade Finance?

 Costs usually involve an application fee and a monthly rate for the outstanding duration
of the loan.

What Type Of Company Benefits Most?

Companies seeking to grow market share by exporting their goods into international
markets, but that are unwilling to assume the economic and/or political risks of non-
payment. The typical user may not wish to grant open credit to its foreign buyers or, if it
does, may not qualify for traditional international trade finance funding of its foreign
accounts receivable.

What Type Of Loans Are Available?

The most popular programs involve either: (1) loan terms of up to 180 days, covering
65% of the risk of importer default and requiring only a promissory note from the
importer; or, (2) loan terms of up to 10 years, covering 98% of the risk of importer
default and requiring a foreign bank letter of credit from the importer.
How to Get Immediate Export Financing for Export Credit Sales

For the last 20 years, the USDA has provided US exporters with international trade
finance guarantees for their export credit sales to help domestic companies compete with
foreign suppliers and allow them to increase sales into countries where it might not be
possible without the added security of the guarantees.

While the original programs offered long-term coverage and used foreign banks letters
of credit as security, changes in the international trade finance market mandated a new
type of guarantee based on shorter credit terms and cheaper payment mechanisms.

Included among these changes in the market was a significant increase in the sale of
high-value and consumer oriented products, which are generally shipped in smaller
quantities and more frequently than bulk products, which had declined in sales in the
same period of time. Also, there was a large shift in foreign import markets from state
trading monopolies to smaller, private sector buyers with a wide range of funding needs.

The USDA met these new market demands with the Supplier Credit Guarantee Program
which provides guarantees to suppliers of US commodities being exported to developing
countries on credit terms less than 180 days. By offering the exporter a 65% guarantee of
his export credit sales price through international trade finance and requiring only a
promissory note from the importer, the program allows US suppliers to accommodate the
needs of their smaller buyers to whom more and more sales are going.

At the same time, the 35% risk maintained by the exporter allows the USDA to approve
guarantee applications quickly and without any importer underwriting as they entrust
exporters to do all the necessary due diligence. However, many exporters, while desiring
to provide the most beneficial export credit terms to their buyers, still cannot afford the
delay in payment for their sales for the entire duration of the credit term. Others simply
want additional liquidity more rapidly.

The business that gave us the content for this article provides funding for exactly this
eventuality. By assigning the USDA guarantee to this business, exporters can now
receive immediate funding secured by the USDA guarantee, rather than waiting until the
end of the credit period to receive cash.

Products and Services

The selection of trade finance products and services has important consequences. The
right financing arrangement and the right terms can mean the difference between profit
and loss on each transaction. TEFO's mission is to provide the widest range of trade
finance services and to assist in the selection of the optimal financial solution.

TEFO is focused on the customized and personalized service needs of the SME. TEFO's
network includes independent banks and trade finance service providers that serve the
SME trade community. Through our network, TEFO offers a broad range of solutions,
including many service that are unavailable from the major international banks.

Import Trade Financing Services

Export Trade Financing Services

Import Trade Financing Services

Pre-Import Working Capital Program can be used for the purchase of materials, services,
and labor to fulfill an import sales contract.
Accounts Receivable Factoring provides immediate cash for importers in return for
domestic accounts receivable.
Asset Based Line of Credit provides an effective tool to finance imports by advancing
funds based on a percentage of the importers qualified receivables, inventory and other
assets.
Inventory Financing provides specialized financing of inventory for importers in a variety
of industries yielding the highest advance rate in the inventory finance industry.
Purchase Order Financing is a short-term solution for importers to finance the purchase
or manufacture of goods that have been pre-sold to a creditworthy customer.
Equipment Leasing provides specialized leasing program for importation of capital
equipment.
Import Letters of Credit Financing Program provides an importer a payment system as
well as a financing mechanism through structured Letter of Credit terms of Deferred
Payment and Acceptance credits.

Export Trade Financing Services

Pre-Export Working Capital Loan Program can be used for the purchase of materials,
services, and labor to fulfill an export sales contract.
Accounts Receivable Factoring provides exporters immediate cash against the value of a
company's foreign accounts receivable.
Purchase Order Financing for Exporters is a short-term solution to finance the purchase
or manufacture of goods that have been presold to a creditworthy customer.
Forfait Financing is an effective, non-recourse finance solution for medium and longer-
term export sales.
Term Finance for Foreign Buyers provides medium-term loans directly to foreign buyers
of U.S-sourced goods. Supplier Credit Financing provides non-recourse, medium-term
financing for exporters of U.S. sourced goods and services.

Trade finance is related to international trade.

While a seller (the exporter) can require the purchaser (an importer) to prepay for goods
shipped, the purchaser (importer) may wish to reduce risk by requiring the seller to
document the goods that have been shipped. Banks may assist by providing various forms
of support. For example, the importer's bank may provide a letter of credit to the exporter
(or the exporter's bank) providing for payment upon presentation of certain documents,
such as a bill of lading. The exporter's bank may make a loan (by advancing funds) to the
exporter on the basis of the export contract.

Other forms of trade finance can include Documentary collection, trade credit insurance,
export factoring, forfaiting and others. In many countries, trade finance is often supported
by quasi-government entities known as export credit agencies that work with commercial
banks and other financial institutions.

Trade finance refers to financing international trading transactions. In this financing

arrangement, the bank or other institution of the importer provides for paying for goods
imported on behalf of the importer.

Documentary collection

A documentary collection is a process, in which the seller instructs his bank to forward
documents related to the export of goods to the buyer's bank with a request to present
these documents to the buyer for payment, indicating when and on what conditions these
documents can be released to the buyer.

The buyer may obtain possession of goods and clear them through customs, if the buyer
has the shipping documents (original bill of lading, certificate of origin, etc.). The
documents, however, are only released to the buyer after payment has been made
("Documents against Payment") or payment undertaking has been given - the buyer has
accepted a bill of exchange issued by the seller and payable at a certain date in the future
(maturity date) ("Documents against Acceptance").

Documentary Collections facilitate import/export operations. However, they do not

provide the same level of security as Letters of Credit, but, as a result, the costs are lower.
Unlike the Letters of Credit, for a Documentary Collection the bank acts as a channel for
the documents but does not issue any payment covenants (does not guarantee payment).
The bank that has received a documentary collection may debit the buyer's account and
make payment only if authorised by the buyer.

Possibilities and advantages:

Make international trade operations more flexible, Use Documentary Collection in cases
when the seller does not want to deliver goods to the buyer on "open account" basis, but
due to a long-term stable business relationship between the parties there is no need for
security provided by a Letter of Credit or payment guarantee, Documentary collection is
suitable to the seller: if the seller has no doubts about the buyer's ability to meet its
payment obligations, if the political and economical situation in the buyer's country is
stable, if there are no foreign exchange restrictions in the seller's country; Documentary
collection is convenient for the buyer because: there is no need for an advance payment;
payment for goods can be made when shipping documents have been received, in cases
of documents released against acceptance the buyer has the possibility to sell the goods
first and afterwards make payment to the seller. Documentary Collection assures the
seller that the shipping documents will be released to the buyer only upon payment or
acceptance of a Bill of Exchange.

Trade credit insurance

Trade credit insurance, business credit insurance, export credit insurance, or credit
insurance is an insurance policy and a risk management product offered by private
insurance companies and governmental export credit agencies to business entities
wishing to protect their balance sheet asset, accounts receivable, from loss due to credit
risks such as protracted default, insolvency, bankruptcy, etc. This insurance product,
commonly referred to as credit insurance, is a type of property & casualty insurance and
should not be confused with such products as credit life or credit disability insurance,
which the insured obtains to protect against the risk of loss of income needed to pay
debts. Trade Credit Insurance can include a component of political risk insurance which
is offered by the same insurers to insure the risk of non-payment by foreign buyers due to
currency issues, political unrest, expropriation, etc.

This points to the major role trade credit insurance plays in facilitating international trade.
Trade credit is offered by vendors to their customers as an alternative to prepayment or
cash on delivery terms, providing time for the customer to generate income from sales to
pay for the product or service. This requires the vendor to assume non-payment risk. In a
local or domestic situation as well as in an export transaction, the risk increases when
laws, customs communications and customer's reputation are not fully understood. In
addition to increased risk of non-payment, international trade presents the problem of the
time between product shipment and its availability for sale. The account receivable is like
a loan and represents capital invested, and often borrowed, by the vendor. But this is not
a secure asset until it is paid. If the customer's debt is credit insured the large, risky asset
becomes more secure, like an insured building. This asset may then be viewed as
collateral by lending institutions and a loan based upon it used to defray the expenses of
the transaction and to produce more product. Trade credit insurance is, therefore, a trade
finance tool.

History

Trade credit insurance was born at the end of nineteenth century, but it was mostly
developed in Western Europe between the first and Second World Wars. Several
companies were founded in every country, some of them also managed the political risk
to export on behalf of their state.

Over the '90s, a concentration of the trade credit insurance market took place and three
groups now account for over 85% of the global credit insurance market. These main
players focused on Western Europe, but rapidly expanded towards Eastern Europe, Asia
and the Americas.:
Euler Hermes, merger of the two credit insurance companies of the Allianz Group. Euler
Hermes is the world's number one credit insurance provider.[1]
Atradius. A merger between NCM and Gerling Kreditversicherung. Later renamed
Atradius after it was demerged from the Gerling insurance group.
Coface. Formerly a French government sponsored institution established in 1946, this
company is now part of the Natixis group.

Many variations of trade credit insurance have evolved ranging from coverage that can be
canceled or reduced at an insurers discretion, to coverage that cannot be canceled or
reduced by the insurer during the policy period. Other programs may allow the policy
holder to act as the underwriter.

While trade credit insurance is often mostly known for protecting foreign or export
accounts receivable, there has always been a large segment of the market that uses Trade
Credit Insurance for domestic accounts receivable protection as well. Domestic trade
credit insurance provides companies with the protection they need as their customer base
consolidates creating larger receivables to fewer customers. This further creates a larger
exposure and greater risk if a customer does not pay their accounts. The addition of new
insurers in this area have increased the availability of domestic cover for companies.

Many businesses found that their insurers withdrew trade credit insurance during the
financial crisis of 2007–2010, forseeing large losses if they continued to underwrite sales
to failing businesses. This led to accusations that the insurers were deepening and
prolonging the recession, as businesses could not afford the risk of making sales without
the insurance, and therefore contracted in size or had to close. Insurers countered these
criticisms by claiming that they were not the cause of the crisis, but were responding to
economic reality and ringing the alarm bells.[2]

In the UK, the Government set up a £5 billion emergency fund for trade credit top-up.
However, this was considered a failure as the take-up was very low.[2]
Credit insurance providers

AIG UK Ltd
Askrindo (Indonesia)
Atradius
AXA Assurcredit (France)
AXA-Winterthur (Switzerland)
BPI - MS (Philippines)
CESCE (Spain)
CLAL (Israel)
Coface
COSEC (Portugal)
Credit Guarantee (South Africa)
Ducroire|Delcredere (Belgium)
ECICS (Singapore)
Equinox Global (United Kingdom)
Ethniki (Greece)
Euler Hermes
Executive Risk Insurance Services (Canada)
Export Credit Guarantee Corporation of India
Export-Import Bank of the United States
Garant (Austria)
GCNA (Canada)
Groupama Assurance-Crédit (France)
HCC International (United Kingdom)
ICIC (Israel)
Liberty Mutual Europe (United Kingdom)
Malayan Insurance (Philippines)
Mapfre (Spain)
Mitsui Sumitomo (Japan)
Nippon Export and Investment Insurance (Japan)
Oriental Assurance Corp (Philippines)
PICC Property and Casualty Company (China)
Prisma (Austria)
QBE Insurance (Australia, United Kingdom and The Americas)
SACE BT (Italy)
SGIC (Korea)
SID First Credit (Slovenia)
Sompo Japan (Japan)
Tokio Marine & Nichido Fire (Japan)
Trade Credit Re Insurance Company
Zurich Surety, Credit and Political Risk (USA)
Zurich Versicherung (Germany)
Pre-Import Working Capital Loan Program
Introduction

For a North American Importer/Distributor an import transaction can present a major

financial challenge. This stems from the fact that most imports are relatively large
wholesale purchase orders, and imports by ocean shipment can take many weeks of
delivery time. After spending significant time and resources to develop import sales,
American importers often can not secure the funds they need to complete the orders.
Even when an importer obtains a letter of credit from their American buyer, a limited few
of the 9600 banks operating in North America are willing to finance the importer's import
purchase based only on the Letter of Credit collateral. This transaction based type of
trade financing supported by letters of credit is rarely found in North America . The
extensive skills, abilities and knowledge required to provide this type of financing is
more commonly found in the financial centers of traditional trading nations such as Hong
Kong, London , Zurich . 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. Only a few lenders in North America have the ability to structure this
financing and to actually provide it.
Example

Fresco Corporation is an importer of specialty produce and other food products from
Mexico . The company President, Mr. Martinez, had negotiated the supply of various
food products with grower cooperatives in Mexico . The cooperative grower members
were keen to begin export of volumes of product direct to the U.S. rather than through
multiple intermediaries. Mr. Martinez also connected with a 19 store Market Chains in
Los Angeles that was interested in contracting for purchase of volumes of food products
direct from the Mexican growers. The Market Chain Purchasing Manager was impressed
with the plan and the potential cost savings. Because of the level of cost savings the
Purchasing Manager was willing to open a 6 month Revolving Letter of Credit for
$435,000 in favor of Fresco. The terms of the L/C allowed weekly drawdowns of funds
based on warehouse receipts.

Although Fresco could obtain the L/C, the deal could not proceed because the supplier in
Mexico still needed assurance that they would be paid. Mr. Martinez and the Fresco
company are well known to the principals of TEFO. Mr. Martinez consulted with TEFO
on the gaps in the transaction. We recommended our Trade finance partner's Pre-Import
Working Capital Loan Program to finance the importation costs. We also suggested that
TEFO provide a commitment to the Mexican supplier that they would get payment for
the shipment of product before Fresco Corporation received any funds.

The weekly shipments of product from Mexico began. TEFO worked with Fresco to
submit all the documents required by the Letter of Credit to the negotiating bank. TEFO's
Trade finance partner was reimbursed for each drawdown of loans and fees by the
negotiating bank under an Assignment of Proceeds issued by Fresco. The Mexican
growers, the Market Chain and Fresco all benefited from the transaction.
Features
Requires that an Irrevocable Documentary Letter of Credit be opened by a North
American buyer in favor of beneficiary importer.
Provides working capital to the L/C beneficiary to pay designated suppliers.
Financing available in amounts from US $10,000 to $10,000,000.
Loan repayment from funds generated through negotiated Letter of Credit.
Loan amount covers cost to produce or purchase product - not profit margin
Collateral normally only the Assignment of Proceeds of L/C and promissory note from
the beneficiary.
Financing ranges from a minimum time of 5 days to a maximum of 180 days.
Funds disbursed to suppliers by wire transfer 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 standard 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.
Importer management must have strong credibility.
Loan proceeds must be used to comply with terms of the Letter of Credit.
Advantages to Importer
Provides quick access to working capital to support import purchase order.
Increases import volume capability and profitability.
Increases cash flow and financial capacity to perform the import contract.
Leads to strengthened balance sheet and enhanced borrowing potential.
Financing does 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 Importer
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 inventory collateral and/or 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
Importer may obtain guidance from lender during negotiations with domestic Buyer
Importer negotiates letter of credit terms and conditions as part of purchase contract
Importer - beneficiary of the L/C - applies to the lender for pre-import financing.
Lender reviews application, copy of L/C and conducts due diligence.
Importer assigns proceeds of L/C to the lender for the loan amount and mark-up.
Lender disburses funds to Importer and/or Importer's suppliers.
Lender coordinates and manages the transaction documents on behalf of the Importer.
Supplier ships product and Importer 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 reimburses the Lender for loan amount and service fee
The negotiating bank remits remaining funds to L/C beneficiary/ Importer.

Application Process
Written application.
Full description of the underlying transaction.
Original L/C or Preliminary Advice of L/C.
Importer may request a Preliminary Commitment.
Importer may request 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.

Inventory Financing for Importers

Introduction

Importer/Distributors commonly need to maintain a complete stock of inventory to

supply North American buyers as required. But large stock levels can easily tie up
significant amounts of working capital. One way to maximize the amount of financing
available for inventory is to seek a commercial finance company that specializes in
Asset-Based Inventory financing. Inventory financing, as a part of broader Asset-Based
Lending (ABL), is an important source of financing in the United States . This category
of asset-based financing accounts for about one- third of total U.S. commercial and
industrial loans. This form of financing is currently only significant in two other
countries, Canada and the United Kingdom . To be feasible, asset-based inventory
lending requires well-defined commercial law that clearly specifies security interests, an
efficient lien registration system that clearly defines when liens are filed, and an efficient
bankruptcy system that preserves lender priority and minimizes time in bankruptcy.

As opposed to a traditional bank line of credit, which may take Inventory as backup
collateral, asset based inventory lenders considers inventory to be the primary source of
repayment. The amount of credit extended under an asset-based inventory loan is
explicitly linked to a formula based upon the type of inventory collateral and how quickly
it can be sold. This link is continuously monitored to ensure that the value of the
inventory always exceeds the amount of the loan. A key benefit of asset-based inventory
lending is that the common high leverage of Importer/Distributors is not necessarily a
barrier to finance if the company's underlying inventory assets have sufficient liquidation
value. Thus, asset-based inventory lending is well suited to highly leveraged
Importer/Distributors.

Many Asset Based lenders will include inventory financing as a lesser component of a
line of credit that primarily provides advances against the Accounts Receivable. Since the
liquidity of Inventory is lower than Accounts Receivable, most all Asset Based lenders
advance a relatively low amount against qualified inventory. The TEFO Network
includes the small group of North American lenders that specialize in inventory
financing. These lenders serve a variety of industries including Importer/Distributors.
Lenders that specialize in inventory financing work closely with their clients to develop
expertise in their client's business processes and the type of inventory. This hands-on
approach enables the specialist to provide a much higher percentage amount of financing
against inventory than standard bank or ABL loans.
Example

Soleria Inc. is an importer and distributor of innovative solar roof tiles. Solaria has
worked with the Australian manufacturer for over two years and has established good
terms of purchase for the solar roof tiles. Terms of 30 days acceptance have been
negotiated whereby the manufacturer ships the product and sends the shipping documents
through bank channels. Solaria is obligated to sign a 30 day trade acceptance draft (a
promissory note) in order for the Bank to release the shipping and title documents. In 30
days, Solaria pays the bank for the solar roof tiles and the funds are be remitted back to
the manufacturer in Australia .

After 6 months of intense marketing Solaria received a large order from a major regional
roofing contractor for $325,000 in product every 3 months. This good news was
accompanied by some bad news. Solaria's finances could not handle this new business. A
cash flow analysis showed that there was a major gap in income and outgo. The problem
stemmed from the need for Solaria to maintain 48 days of inventory in stock at all times
to accommodate incoming orders. Since Solaria had to pay the Australian supplier in 30
days there was a disconnect. The Manufacturer was sympathetic but had their own
problems and could not help. Solaria's Bank advised that they could not help with
anything more than their minimal working capital line of credit.

With the specter of lost business opportunity, Solaria called TEFO. The TEFO team
reviewed the deal, conducted due diligence and brought in a specialized inventory
finance partners. Our finance company recognized Solaria potential and was quite keen
on participating in an alternative energy project. After reviewing Solaria's business
processes, they did recommend new inventory controls which Solaria quickly adopted.
The new inventory line of credit saved the new business opportunity by enabling the
payment of the manufacturer in 30 days and enabled Solaria to maintain their 48 days of
inventory turnover.
Features
Revolving inventory loan facilities is a form of inventory financing for working capital
needs.
 Under a "Revolver" credit is s ecured by a security interest in all existing and future
inventory
Under a Revolver advances are made based upon a specified percentage of the value of
the borrower's eligible inventory
Credit lines normally have a one year maturity
Credit lines c ommitments range from $100,000 on up
"Purchase-money financing" is an alternate form of inventory financing
"Purchase-money financing" is where a lender loans funds to enable the purchaser to
acquire specific goods and receives a security interest in the specific goods.
"Floor-planning" is a common form of inventory financing where a lender makes loans
to finance the acquisition of a borrower's stock of inventory.
"Floor-planning facilities are often provided to dealers of vehicles, computers and large
consumer appliances.
Warehouse Receipts Financing is a method of inventory financing is for businesses that
carry large inventories composed of finished goods or raw materials with a good disposal
market.
With Warehouse Receipts Financing inventories are placed in a bonded warehouse as
security for loans of up to 80 percent of their value.
As a business draws inventory from the warehouse, the loan is paid down the amount
drawn.
Prerequisites
For businesses with good credit and sales history.
Lenders must feel is secure with the inventory collateral.
May require computerized Perpetual Inventory System for maintaining status
information on company inventory.
May require reliable, timely financial and inventory reporting
May require reporting to lender the status of your inventory including aging, costs, etc.
May require Weekly/Daily Collateral Reports
May require efficient and planned inventory purchasing
May require strong inventory control and inventory maintenance systems
May require demonstration of purchase orders to indicate inventory will not age.
May require personal guaranties of company principals
May require financial covenants
Advantages To Importer
Offers importer increased credit availability based on security in financed inventory.
Allows distributors and resellers to stock inventory with extended payment terms
Improves importer/distributor's working capital position
Enables company to accept larger orders that would otherwise have been passed up.
Enables increased purchasing power to take advantage of volume discounts
Can facilitate expanded sales and increased profits
Frees up cash that is currently tied-up in existing inventories to make more
Supports seasonal demands for increased inventory.
Repayment schedules can be structured to accommodate seasonal cash flows
Disadvantages To Importer
Financing not available for obsolete or hard-to-sell merchandise.
Is not available for companies with very slow turnover of inventory
 Lender may require additional collateral, such as equipment or property.
Must have the ability to produce reliable, timely financial and inventory reporting
Lender may require right to regularly inspect financed inventory
Lender may require inventory to be audited or appraised by independent third parties.
Credit line minimum amounts may be too high for some importer/distributors
Determining Inventory Advance Rates
Lenders evaluate inventory, as they do receivables, in order to establish advance rates.
Advance rates on inventory are usually lower than those on receivables because
inventory is less liquid.
Outstanding accounts need only be collected; goods in inventory must be finished, sold,
and paid for.
An additional risk factor in lending against inventory is the potential of a priority claim
by the supplier of the inventory goods.
In some industries and states the seller of the inventory may have an automatic prior lien
(known as a purchase money security interest) on that inventory even if there is no UCC
filing.
Advance rates on inventory generally range between 20 percent and 65 percent.
When establishing inventory Loan-To-Value rates, lenders often limit risk by using the
liquidation value rather than the higher market value of the inventory pledged.
Lenders strive to build in a sufficient margin to protect against price risk and marketing
and administrative costs.
To establish the value of various types of inventory, lenders often rely on expert
appraisals or evaluations and their experience liquidating similar types of inventory.
Inventory advance rates vary depending on the inventory's product type and state, i.e.,
raw materials, work-in-process, or finished goods.
Finished goods and commodity-like raw materials usually receive the highest advance
rates because they are easiest to sell.
Advance rates for some finished products such as fungible goods or goods with
established markets are normally of greater value than specialized or perishable goods
(unless such goods are adequately insured).
As for raw materials, commodity items such as iron ore used by a steel maker are much
easier to resell than customized items such as specialty pigments used to manufacture
paint.
Customized component parts may have only nominal resale value.
Work-in-process is frequently excluded from the collateral used to determine the
borrowing base because it has limited liquidation value since it requires additional
production cost to be converted to salable merchandise.
Determining Eligible Inventory Collateral
Only salable inventory is considered eligible collateral.
Some inventory is excluded from collateral because of age or some other measure of
obsolescence.
Lenders pay particular attention to borrowers in fashion-sensitive industries to ensure
that obsolete inventory is written off in a timely manner.
Eligibility may also be limited because of the location of the goods.
Inventory stored in multiple locations may be assigned a lower advance rate because it is
more difficult to monitor and control and often is more costly to liquidate.
 Consignment goods are normally considered ineligible because they, too, are more
difficult to control.
Lenders assess the reasonableness of advance rates by comparing such rates over time
and review trends in similar industries.
Procedure
Make application to TEFO
Provide TEFO with basic financial package
Provide an up-to-date business plan that shows your business is growing
Demonstrate ability to make loan payments.
What to Watch Out For
High interest rates or other fees.
An ambiguous definition of what constitutes eligible Inventory can lead to problems
Some lenders will require borrower to pay off the line of credit for up to one month a
year
If inventory turnover slows borrower may be forced to unload your inventory at a loss to
pay down line of credit.
Lenders may require strict inventory control
Cost
Cost of financing is based on the following factors:
Amount of credit required - the higher the credit, the lower the cost
Inventory turnover - the faster it sells, the lower the cost
Type of inventory - the greater the collateral strength, the lower the cost
Fees range from 2% to 6% over Prime or Libor rate.

Letters of Credit for Importers

Introduction

A letter of credit (L/C) is the most widely used trade finance instrument in the world.
Over 17% of the one trillion dollars of the annual trade between the US and the world is
conducted by Letters of Credit. The L/C has been used for the last several hundred years
and is considered a highly effective way for banks to finance export and import trade.
The letter of credit is a formal letter issued for a bank's customer that authorizes an
individual or company to collect a specific amount of money from the bank under certain
conditions (ie. providing evidence of product shipment and the release of the title
documents for shipped goods). An L/C may be considered a way for an importer to get its
bank to substitute the bank's substantial and known credit for the unknown credit of the
importer.

Through the use of an L/Cs banks plays an intermediary role to help both Importers and
Exporters facilitate the payment of the trade transaction. While the L/C can be used as
payment mechanism, it can also be used to provide financing to the importer. Structured
Letter of Credit terms such as Deferred Payment and Acceptance credits (i.e. term
credits) are considered to be financing instruments for the importer. Both payment
structures provide the importer/buyer the time opportunity to sell the goods and pay the
amount due with the proceeds.
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.

Purchase Order Financing for Exporters

Introduction

A Purchase Order (P.O.) is a legal agreement signed by a buyer requesting a seller to

provide goods or services. Purchase Orders normally list the amount of goods or services
required and the terms and conditions of delivery and payment. Major creditworthy
overseas buyers in stable developed countries will often issue a P.O. requiring extended
payment terms such as "Net 30 days." Domestic suppliers will usually ask for COD or
sight draft Letter of Credit terms. For a middleman exporter, the difference in terms of
purchase and terms of sale can create a cash flow dilemma.

Purchase Order Financing can be an important part of a solution to this cash flow
problem. P.O. Financing is a short-term funding technique used to finance the purchase
or manufacture of goods that have been pre-sold to a creditworthy customer. The funding
is collateralized by the purchased inventory and confirmed purchase orders. Funds may
be used for issuing Letters of Credit or cash payments to suppliers to obtain the finished
goods, raw materials and/or direct labor required to fulfill the Purchase Order. P.O.
Financing is considered a risky form of financing requiring extensive due diligence
resulting in high cost. Only a handful of finance companies in North America have the
experience and skills to perform this financing for the export of product to fulfill
Purchase Orders issued by overseas buyers.
Example

Scan Masters Inc. is a Reno , Nevada based refurbisher and marketer of General Electric
Cat Scanners. The company had landed an order for one cat scanner from Frazier General
Hospital in Victoria , British Columbia Canada . A Purchase Order in the amount of
$725,000 arrives from Frazier General Hospital . The P.O. indicates payment will be
upon delivery but requires that the scanner must be delivered in 45 days.

Scan Masters was short of scanner inventory and needed to purchase a used cat scanner
in order to refurbish it for the Frazier purchase order. A cat scanner was located at
Huntington Memorial Hospital in Pasadena California . This used cat scanner could be
purchased for a cost of $312,000. However, Huntington Memorial Hospital required full
payment before they would release the equipment. Scan Masters didn't have $312,000 in
operating capital and their bank was no help - the company had already exhausted their
small bank credit line.

Scan Masters called TEFO. We evaluated the options and recommended a specialized
export Purchase Order finance company. After intense due diligence the PO finance
company agreed to have their bank open a Letter of Credit for $312,000, on behalf of
Scan Masters. The Huntington Memorial Hospital , as L/C beneficiary, shipped the
refurbished cat scanner and was paid by the bank. Scan Masters quickly refurbished the
cat scanner and delivered it to Frazier Hospital in Vancouver . The Letter of Credit was
negotiated and $426,000 in funds received. The PO company was repaid for their Letter
of Credit financing plus financing fees. The remaining funds went to Scan Masters.
Prerequisites
Must be a USA company with principles residing in the United States .
Goods must be pre-sold as evidenced by a confirmed purchase order.
The purchase order must be unconditional, non-cancelable.
Must have a viable purchase order from a credit worthy customer or a Letter of Credit
that satisfies credit criteria.
P.O. may not have a consignment or guaranteed sale clause.
The company issuing the purchase order must be substantial, preferably publicly traded.
Issuing company must be credit worthy with a track record of paying their bills
Client company must demonstrate a clear business history.
Client company must have history of selling the goods identified in the P.O.
Supplier must have proven ability to produce the goods.
Supplier must be able to meet the ultimate buyer's terms and quality criteria.
Ready-to-ship, finished goods are easier to finance than non finished goods.
The purchase order must be for a product not a service.
The transaction or a contracted series of transactions must be valued at a minimum of
$200,000.
The transaction must be profitable for all parties.
Client must be in business for at least two years.
Client must have experience and previous transactions with Buyer or similar Buyers.
The more complex the transaction the more experience company should possess
No Commercial or Residential Construction deals accepted
Must retain a minimum of 20% profit on each transaction
Purchase Order Financing may be utilized for the following costs:
Deposits
Raw Materials
Components and Sub-Assemblies Project-specific Labor
Finished Goods
Overhead
Direct Manufacturing
Shipping
Letters of Credit
Letters of Guarantee
Capital equipment
Advantages To Exporter
Provides 100% funding for cost of goods on drop-ship type sales.
Supplemental source of financing beyond what your bank is able or willing to provide.
Financing used to fulfill purchase orders resulting in increased sales.
Allows smaller companies to handle big sales through leverage of others money.
Enables growth without increased bank debt or selling of equity.
Enables cash purchases resulting in better prices and discounts from suppliers.
Enables marketing to major new accounts.
Financing does not increase debt load.
Financing can be for a one-time transaction or a series of transactions.
Purchase Order financing entails the sale of an asset not the acquisition of a loan.
There is no negative impact on your balance sheet or debt to repay.
Purchase Order financing may be used with factoring or bank A/R financing.
Disadvantages To Exporter
A highly skilled, specialized P.O. financing lender is required.
Due diligence is extensive and time consuming.
Lenders consider PO Financing a high risk form of financing.
Reflecting perceived risk, the costs for this financing can be high.
Funds or Letter Of Credit will be sent directly to your suppliers.
May need to coordinate security interest in purchased assets/inventory with your bank
Due Diligence Process

Purchase Order financing company will check, review and verify the following:
The exact deal structure, production and delivery timing and the flow of funds.
The credit quality and payment history of the issuer of the Purchase Order.
The credit quality, background, references, reputation of the client company.
The validity of the Purchase Order.
The terms and conditions of the Purchase Order.
The profit calculations for the transaction.
The shipping documents, and relevant insurance.
Potential liens, encumbrances, judgments.
Options for credit insurance.
The history and credit of your suppliers.
Title search on the collateral for the funding - product, invoice(s), assets.
Required Information
Completed Purchase Order Application Form.
Copy of Pro forma invoice to buyer.
Copy of Pro forma supplier's invoice.
Copy of Pro forma purchase order sent to your supplier.
Profit calculations on transaction.
Most recent corporate Financial Statements (P&L/Balance Sheets).
Most recent Financial Statement of all principals of company.
Most recent company tax return.
Credit information on buyer.
Supplier information.
Copy of Articles of Incorporation or Partnership Agreement.
DBA filing, if applicable.
Short biographical history of company, products, markets, objectives, strategy.
Short biographical history of principals of Company related to experience.

Cost of PO Financing

Each Purchase Order transaction is individual and unique. Therefore the PO financing
pricing varies. Fees commonly range from 4% to 8% of the gross amount of the Purchase
Order. Final quote won't be given until a thorough due diligence has been completed. The
greater degree the materials being purchased are to be manipulated or changed impacts
the complexity, risk and cost of this financing. Costs can depend on the following factors:
Credit quality of your customer buyer
Type of goods being produced
Whether the goods are finished or non-finished products
Terms of the Purchase Order
Amount of time from funding to collection
Reputation of your suppliers

Total cost of your transaction must include the potential additional costs of Letter of
Credit issuance and the costs to finance or factor the accounts receivable period.