Export working capital (EWC) financing allows exporters to purchase the goods and services they need to support their export sales. More specifically, EWC financing provides a means for small and medium-sized enterprises (SMEs) that lack sufficient internal liquidity to process and acquire goods and services to fulfill export orders and extend open account terms to their foreign buyers.
EWC funds are commonly used to finance short-term business operational needs in three major areas: (1) materials; (2) labor; and (3) inventory; but they can also be used to finance receivables generated from export sales as well as secure standby letters of credit used as performance bonds or payment guarantees to foreign buyers. An unexpected large export order or many incremental export orders can place challenging demands on working capital.
EWC financing helps to ease and stabilize the cash flow problems of exporters while fulfilling export sales and extending the appropriate levels of open account terms to foreign buyers. Because EWC financing does not eliminate the risk of non-payment by foreign buyers, risk mitigation is necessary for exporters to safely offer open account terms in global markets. EWC financing is usually secured by the corporate assets, specifically accounts receivable and inventory, and often requires personal guarantees of ownership.
Due to the repayment risk associated with export sales, EWC financing for U.S. SMEs is generally only available through commercial lenders participating in the EWC Guarantee Programs administered by one of the two federal agencies, the U.S. Small Business Administration (SBA) or the Export-Import Bank of the United States (EXIM). By guaranteeing the repayment of loans, both SBA and EXIM encourage commercial lenders to extend otherwise unavailable EWC financing to eligible U.S. SMEs in need of liquidity to help accept new business and compete more effectively in global markets.
Characteristics of an Export Working Capital Facility
Applicability: Used to finance short-term business operational needs in three major areas: (1) materials; (2) labor; and (3) inventory to fulfill a large export sales order or recurring export sales orders as well as extend open account terms.
Risk: Repayment and other risks associated with export sales can prevent lenders from providing the working capital needed to fulfill export orders and offer open account terms.
Pros: Enables fulfillment of export sales orders and extension of open account terms. Empowers borrowing against assets that lenders would otherwise be unwilling to include as collateral.
Cons: Generally available only to SMEs with access to lendable assets or high-value receivables, and a personal guarantee is often required by commercial lenders. Commercial lenders may not offer government guaranteed EWC financing.
Key Points
• An EWC facility can support a single export transaction (transaction-specific loan) or multiple export transactions (revolving line of credit) on open account terms.
• A transaction-specific loan is generally issued for up to one year or a period of time corresponding to a specific export project while a revolving line of credit is generally issued for a one-year period of time but may extend up to three to five years.
• Availability is generally limited to financially-stable large corporations or SMEs with access to strong personal guarantees, lendable assets, or high-value accounts receivable.
• EWC financing for U.S. SMEs is generally only available through commercial lenders participating in loan guarantee programs administered by SBA and EXIM.
• Exporters need risk mitigation to safely offer the appropriate levels of open account terms.
Government Export Working Capital Guarantees
SBA and EXIM provide guarantees for EWC facilities extended by participating lenders to eligible U.S. SME exporters. These government guarantees allow U.S. SME exporters to obtain needed credit facilities from participating lenders when commercial financing is otherwise not available or when their borrowing capacity needs to be increased. Advance rates offered by commercial lenders on export inventory and foreign accounts receivables are generally not sufficient to meet the needs of SME exporters. In addition, some commercial lenders simply do not lend to SME exporters without a government guarantee due to repayment risks associated with export sales.
Necessity of Risk Mitigation
While EWC financing certainly makes it easier for exporters to offer open account terms in today’s highly competitive global markets, the use of such financing itself does not necessarily eliminate the risk of non-payment by foreign customers. Thus, risk mitigation is necessary for exporters to safely offer open account terms in global markets and to obtain EWC financing.
For example, a lender may require an exporter to obtain export credit insurance on its foreign receivables as a condition of providing working capital and financing for exports. Exporters should also be aware that a government guarantee protects the lender and not the business and thus should not take the place of a risk mitigant.
Where and How to Obtain an Export Working Capital Facility
Many commercial lenders offer EWC facilities guaranteed by SBA or EXIM. To qualify, exporters generally need: (a) to be in business profitably for at least 12 months (not necessarily exporting), (b) to demonstrate a need for financing, and (c) to provide documents to demonstrate that a viable transaction exists. Note that personal guarantees, collateral assets, or high-value accounts receivable are generally required for SMEs to obtain SBA or EXIM guaranteed EWC facilities.
The lender will place a lien on the exporter’s corporate assets, such as inventory and accounts receivable, to ensure repayment of a loan. In addition, all export sale proceeds will usually be collected and applied to the principal and interest by the lender before the balance is passed on to the exporter. Fees and interest rates are usually negotiable between the lender and the exporter.
Revolving Lines of Credit and Transaction-Specific Loans
There are two types of EWC facilities: (1) revolving lines of credit and (2) transaction-specific loans. Revolving lines of credit represent the most common form of EWC and are appropriate for recurring export orders because they are designed to cover temporary funding needs. Revolving lines of credit have a very flexible structure that enables exporters to draw funds against their current account up to a specified limit.
Transaction-specific loans, which are appropriate for large and periodic export orders often related to a specific project, are typically used if the outflows and inflows of funds are predictable over time. Transaction-specific loans are often structured in 12 months that correspond with need or the tenor of a specific project.
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