Various Financing Instruments for Small Businesses

For many small businesses, a significant barrier to global marketing is not being able to access financial resources. The usual sources of business financing, including customer-based, are not available for exporting and other international trade endeavors. However, commercial banks, alone or in cooperation with the U.S. Small Business Administration, as well as the Export-Import Bank and trade intermediaries, have financing products available to support international trade. These forms of assistance include letters of credit, export loan programs, and international trade loans.

Various financing instruments for small businesses

Letters of Credit: A commercial letter of credit is a financing instrument that is issued by (usually) a bank on behalf of a customer and serves as a promise to pay a certain sum of money once specific conditions are met. It is used for financing the movement of goods internationally. The letter of credit adds the reputation and resources of the financial institution to that of the customer. Letters of credit are only as good as the bank that issues them.

Each letter of credit is customized for the particular circumstances and is valid for a single transaction. Such letters are particularly valuable for exporters because they know that they will be paid, as long as the letter of-credit terms are met.

A standby letter of credit provides credit from the issuing bank for a transaction not involving the movement of goods. Standby letters of credit are irrevocable once issued, making it much like a bank guaranty.

Working Capital Loan Program (EWCP): The EWCP is a loan-guaranty program offered to commercial banks by the SBA to encourage lending to businesses that generate export sales and need working capital. Banks can make loans of up to $2 million for working-capital purposes to companies exporting goods from the United States, and the SBA will provide a 90-percent guaranty as a credit enhancement, up to $1.5 million. It has the same 90-percent guaranty for amounts over $1.5 million through a co-guaranty program with the Export-Import Bank of the United States. Loans are typically made for 12 months, and interest rates are set by the lenders. EWCP borrowers must have been in business for a minimum of one year (waivers are possible) and meet SBA eligibility and size requirements. There is not a content requirement from the government, but exports must be shipped and titled from the United States. Shipments to embargoed nations are excluded. Collateral requirements include the receivable generated by the sale and the export-related inventory. EWCP loans can be reissued annually.

Export Express Loan Program: In this SBA guaranty program, lenders use their own credit underwriting and documentation and receive expedited review and response (24 hours or fewer) from the SBA. The program is for loans and lines of credit up to $250,000 that are available for “manufacturers, wholesalers, export trading companies and service exporters.” Lenders obtain an 85-percent guaranty for loans of up to $150,000, and loans from $150,000 to $250,000 get a 75-percent guaranty. Interest rates are set by the lenders, as are collateral requirements. Loans are set with differing maturities, depending upon their purposes. The SBA Web site’s list of permitted export development activities includes:

  • Standby letters of credit,
  • Foreign trade-show participation,
  • Translation of marketing materials,
  • General lines of credit,
  • Transaction-specific needs for export orders, and
  • Real estate and equipment to produce exports.

Export Express loans come with technical assistance for exporters from the SBA’s Export Assistance Centers and other agency resources, such as Small Business Development Centers (SBDCs) and the Service Corps of Retired Executives (SCORE).

International Trade Loans: The International Trade Loan program from the SBA is for exporters and for companies that have been adversely affected by imports; it is intended to improve the borrower’s competitive position. The program operates through SBA lenders and permits a higher SBA-guaranteed portion ($1.75 million versus $1.5 million) than with a regular “SBA 7(A)” loan. The maximum gross loan amount is $2 million, and the interest rate is determined by the lender. Collateral requirements for SBA International Trade Loans include a first-lien position or first mortgage on the property or equipment being financed, with additional collateral used to reach the full value of the loan, if possible. This loan is designed for financing long-term fixed assets, and working capital cannot be part of the loan. Maturities vary from 10 to 25 years.

The London School of Business and Finance is the one-stop solution to learn more about various financing instruments for small businesses.

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