Winning the Trade Game with Export Finance How SBA teams up with lenders and exporters

Winning the Trade Game with Export Finance How SBA teams up with lenders and exporters Brent McMahan Certified Global Business Professional Senior Area Manager US SBA Mobile, AL

2016 Small Business Exporting Survey * 58% of small businesses have exported. Small firms account for 98% of US export firms. Small firms account for 34% of US export value. For 47% of small exporters, exports are < 10% of sales. For 19% of small exporters, exports are a majority of sales. Major concerns of exporters: 44%... worry about getting paid 11%... can t get financing to offer foreign customers So most small firms don t offer terms to their foreign buyers. * http://www.nsba.biz/?p=11263 (survey of 530 business owners)

The financing you offer is part of your value proposition The quality of your product + The cost of your product + The profit you need + The delivery role you undertake (INCOTERMS) + The payment terms you offer (Terms of Sale) + The currency terms you offer (Currency) + The risk mitigation measures you need = The total cost of the product to the buyer and the competitiveness of your product vs. another Every exporter needs a range of well-thought-through export pricing options to negotiate from

As US exporters move toward Open Account terms Cash in advance means having the foreign buyer s prepayment for your working capital Open account means the exporter must provide for their own working capital a need for business financing a supportive lender? backed by SBA loan guarantees?

Financing for the exporter What do they need to get the deal done?

Two types of financing that an exporter needs 1. To fulfill export orders working capital for production and pre-shipment costs (raw materials, inventory, labor, etc.); post-shipment carrying costs (assuring sufficient cash flow while offering competitive terms) 2. To position the firm for export success fixed assets, equipment, permanent working capital, debt restructuring to improve competitive position and be more efficient

SBA works with lenders to unlock both kinds of financing. How? With 7(a) loan guarantees for commercial lenders.

SBA s 3 Export Programs Specialized 7(a) loan guarantees for financing your exporter: 1. International Trade Loan (ITL) Positioning the firm to export 2. Export Working Capital Program (EWCP) Fulfilling export orders 3. Export Express Smaller loans for either need

SBA assistance is limited to small businesses What is a small business? SBA s traditional small business definition defines small businesses by NAICS code: Industry Category Small Business Size Standard * Ag producers $750,000/year revenue Wholesalers Retailers Manufacturers Professional services 100-250 employees $7.5-38 MM/year revenue 500-1,500 employees $7.5 - $38.5 MM/year revenue * There are lots of exceptions, so check with SBA

SBA assistance is limited to small businesses Or you can use SBA s Alternate Size Standard : Tangible net worth of $15 million, and 2-year average NET income after taxes (excluding carryover losses) of $5 million So small business can actually be pretty BIG...

SBA Export Lending the pinnacle of SBA lending 1. The highest % guarantee the Export Boost 2. Robust eligibility guidelines more deals than you think 3. A suite of SBA programs for nearly every need and niche

SBA Export Lending The highest % guarantee the Export BOOST!

The EXPORT BOOST Typical SBA loan guarantees range from 50% to 85% SBA export loans receive: 90% Why? Because exports are critical to national economic success

The EXPORT BOOST part 2 SBA Express : 50% guarantees on streamlined business lending The maximum SBA Express loan is $350,000 Export Express : 90% guarantees for loans up to $350,000 75% guarantees for loans up to $500,000 Export Express loans can be made in addition to regular SBA Express loans

SBA s export focus Fine print Bear in mind that SBA charges its fees based on the guaranteed % of the loan, so 90% guarantees carry proportionally higher fees than 75% fees However. Fee relief for loans of $150,000 or less applies to SBA export loans as well. Veteran s Advantage fee relief applies to SBA export loans too.

SBA Export Lending 2. Robust eligibility guidelines There are more export deals than you might think

SBA s export eligibility What is an export? Goods or Services $$$ s Must be delivered from the US Can t be drop-shipped (e.g., China assembly to EU market, never entering the US) Export service providers (e.g., freight forwarders) are not exporters unless they have foreign customers.

SBA s export eligibility What is an SBA-eligible export? Must be shipped from the US Exporting goods or services No US-content requirement Licensed defense exports allowed

SBA s export eligibility INDIRECT exporters qualify for all 3 SBA export programs A firm that sells goods/services to a domestic customer who in turn incorporates them into their own export is an exporter too! Selling into an exporting supply chain Selling to an export broker Document this with a letter from the borrower s customer

SBA s export eligibility International tourism the overlooked export Tourism is an export of recreational services The foreign buyer brings foreign exchange into the US The foreign buyer picks up the service in person

SBA s export eligibility Recap: What is an export? Goods Services Indirect exporters International tourism

What Is a U.S. Export for SBA Financing Purposes? Yes No Goods shipped from the U.S. states and its territories? Goods sold to the U.S. military at a base overseas? Services provided drilling for hydrothermal resources in E. Africa? Consultancy services for a conference in, or to provide management advice to, a customer in U.K.? Marketing and expansion of U.S.-based hospitality assets to attract and serve foreign visitors from Germany? Selling logistics services to a Chinese company exporting to the U.S., i.e. freight and/or insurance and in-country (USA) transportation services? U.S. designed and ordered goods, manufactured in China and shipped directly to buyer in Japan?

SBA s export eligibility No go zones? SBA follows Export-Import Bank s Country Limitation Schedule prohibited countries. Currently just five countries are off limits: Cuba North Korea Iran Syria Bolivia

SBA s export eligibility Exporting threshold for the borrower to qualify for SBA export programs? There is no absolute $ or % export test. * The firm must simply have: (1) an annual export revenue PROJECTION (2) an export PLAN product and target market(s) * Remember, only 19% of exporting SME s said that exports are a majority of sales. 47% of exporting SME s said exports were less than 10% of total sales. (2016 Small Business Exporting Survey)

SBA s export eligibility Exporting threshold for the loan to qualify for SBA export programs? For real estate, equipment, and refinancing loans the loan may support the borrower s domestic operations provided it contributes to the expansion of exporting too. For working capital loans International Trade Loan - the loan must contribute to the expansion of exporting Export Express 70% export-dedicated if General LOC EWCP 100% export-dedicated use

SBA s export eligibility Required borrower experience/history in exporting? Ideally, in business for 12 months If not, still eligible for export programs if key management has documented: Sufficient export expertise Substantial previous business experience New-to-export is okay

Exporting is not exotic It s more common that we think A sale to Canada is an export our #1 export partner! Can you find the Canadian?

Sampling of SBA export clients Emergency gear wholesaler Craft brewery Roller coaster contractor Heavy trucking contractor Parachute harness maker Seafood processor Data center services Food processor Aerospace parts maker Public relations & management consulting Wire fabric manufacturer Used & refurbished equipment vendor Medical device maker Computer software maker Video game designer Herbs & spices wholesaler Winery Specialty popcorn maker Fruit packer Boutique soap maker Wooden toys

SBA Export Lending 3. A suite of SBA programs for your highest potential customers

SBA s export financing programs #1 International Trade Loan (ITL) Positioning the firm for export success 90% guarantees on loans up to $5 million Equipment, real estate, refinancing, permanent working capital (No transfers of ownership) Financing for projects that improve the competitive position of US exporter so as to increase exporting Term loan: RE - 25 yrs; M&E or WC - 10 yrs FY2016: $375MM, 214 loans.

International Trade Loan (ITL) Features It s just a regular 7(a) term loan but with a 90% guarantee! Same 7(a) application & process just add an export plan. PLP lenders may use PLP authority provided collateral is a first lien on assets being financed. Personal guaranties of all 20+% owners; at least one. Saleable on secondary market. Companies adversely affected by imports may also qualify for ITL; such companies need not be exporters.

ITL case study direct exporter 20-year old California business that makes high tech furnaces for semiconductor wafers. Highly competitive business with lots of global demand 1/3 of sales are exports approaching $2+MM The company has been leasing their facilities, but an opportunity has arisen to purchase a larger existing building nearby, initially occupying 77% of space, with room to expand and with tenants in remainder. Annual debt service will be less than current lease, improving competitive position and allowing business to grow exports Community bank with an active SBA division. $2,360,000, 25-year fully amortized term loan, using PLP authority ITL provides 90% guarantee on the loan Collateral is 1 st lien on RE and M&E. < 85% LTV on RE. Approved by lender using their PLP authority. Guaranteed portion sold on the secondary market.

ITL case study indirect exporter Midwestern machine shop that s been in business for 20 years with $2.1MM in annual sales. Has had contracts for 8+ years to provide seat brackets to Boeing. Expansion of facilities needed to fulfill increased work for Boeing 737 s. $200,000 to add warehouse space; $550,000 for new manufacturing equipment. Boeing gladly certifies they have 737 orders from multiple foreign airlines. Regional lender. $750,000, 10-year fully amortized loan. SBA provides 90% ITL guarantee. Collateral is 1 st purchase money lien on equipment; 2 nd lien on real estate & equipment behind lender s first (i.e., lender has first lien).

SBA s export financing programs #2 Export Working Capital Program (EWCP) Working capital to fulfill the export order 90% guarantees on loans up to $5 million Pure export working capital line, usu. revolving Typically 1 year loans; re-issued annually Advance rates of 75-90% on export sales Structure: (1) Asset-Based, (2) Transaction-Based, or (3) Standby Letter of Credit SBA s lowest guaranty fee (0.25%) FY2016: $313MM, 166 loans

Export Working Capital Program (EWCP) Features Designed so you can lend safely against foreign A/R. All prudent selling terms are permitted; not limited to sales using export credit insurance or L/C s. Self-liquidating loan; the loan is repaid by the successful completion of the export transactions being financed. EWCP lines must be monitored at least monthly; extraordinary servicing fees are allowed. ABL collateral: foreign A/R and export inventory TBL collateral: purchase order work in progress & A/R SBLC collateral: cash/other equal to 25% of face amount No US content rules on exports; licensed military sales okay. Personal guaranties of all 20+% owners; at least one.

EWCP case study asset-based loan (ABL) Oregon business that sources and recycling e-waste and scrap metal. All scrap is all sold to buyers in China, Japan, and India. Increasing demand for product, but the company is constrained by small line of credit that assigns no value to foreign A/R ($2MM). Regional lender with international division. $2,500,000, 12-month Asset-Based revolving line of credit for export and to take out existing small export line with another bank. EWCP provides 90% guarantee on the ABL. Advances are aligned with a monthly Borrowing Base Certificate calculation 80% on eligible A/R; 75% on eligible inventory. Collateral is 1 st lien on foreign A/R and export inventory. SBA fee is 0.25% fee. Loan is replaced annually with new EWCP at 0.25% fee.

EWCP case study transaction-based loan (TBL) California business that has pioneered a miniature x-ray probe. German research consortium places a $6+MM purchase order. Company needs working capital to complete large order. Local lender with technical experience in manufacturing. $1,900,000, 12-month loan for export working capital tied specifically to the production of the German order. SBA provides 90% EWCP guarantee on the loan The loan is secured by a first lien on the purchase order and associated WIP, A/R, and sales proceeds. All sales proceeds are paid into a control account. SBA fee is 0.25% fee.

EWCP case study - standby letter of credit (SBLC) Kansas business that makes molds for concrete construction. $2.1MM contract to provide wood and metal forms for large concrete construction project in Canada (dam) Will receive milestone payments but needs $324,000 performance bond with 12-month term. Regional lender with international division. $324,000 Standby Letter of Credit issued as a performance bond. EWCP provides 90% guarantee on the SBLC. SBA only requires 25% collateral to guarantee standby s. Remaining milestone payments are available to fulfill the contract. SBA fee is 0.25% fee. No interest accrues on the loan because no principal is advanced.

EWCP second life for SBA lending As Small Businesses grow into Middle Market borrowers, SBA assistance tends to drop away just as exporting activities develop. Consider retaining or reengaging with SBA to support the Middle Market customers higher risk export working capital line. Remember SBA EWCP offers: Robust definition of small business and exporter status 90% guarantee Lowest SBA guaranty fee (0.25%) No SBA prescription on interest rate and servicing fees

SBA s export financing programs #3 Export Express Fast-track for smaller export-related loans 90% guarantees on loans up to $350,000 75% guarantees on loans up to $500,000 Use lender s own underwriting/collateral standards Any export development activity fixed assets; market development; refinancing; general line of credit if at least 70% will be export-related Term loan or revolving line FY2016: $22MM, 101 loans.

Export Express Features Same SBA Express application & process just add an export plan. Export Express lenders have delegated approval authority. A simple pathway to offer a revolving export line. A $500,000 export line meets the need of most small exporters. Intensive line management not required. Ideal for export promotion and development needs like web site translation & localization, trade shows, foreign marketing activities, travel to meet with foreign buyers. May also be used for small standby L/C s (with same 25% collateral requirement as EWCP).

Export Express too small for you? Avg. export revenue/year = $938,000 (for businesses with 20 employees), per US Census So typical exporting financing needs are likely $500,000 or less Export Express is an ideal solution to address the financing need of the small business exporter. It s an easy add-on to your domestic business financing.

Export Express case study Washington business that makes memory solutions for mobile devices. Significant demand for this company s product overseas. Company needs a revolving line of credit to produce export orders and cover cash flow between delivery and receipt of payment. Company uses ExIm export credit insurance to cover risk of nonpayment. Regional lender with international division. $250,000, up-to-7-year revolving line of credit for export working capital. Export Express provides 90% guarantee on the line. Lender uses their normal line management practices for a small LOC. Using this small Export Express line (and a $185,000 ITL), the company has grown exports from $1.5MM in 2014 to $2.2MM in 2015, and they expect to reach about $4.0MM in 2016.

Welcome to the SBA export suite Export Working Capital Program Powerful; specialized for export orders Export Express Ideal for small loans; the ultimate flexible tool for multiple uses International Trade Loan good place to start; most accessible; it s just a 7(a) loan but with a 90% guarantee!

Take-away lesson Consider making it your practice to ask each customer Do you export?

INDIRECT EXPORTERS TOO! Consider making it your practice to ask each customer Do you sell to anyone who exports?

Stake your export claim! Simple to document. Document your borrower s export eligibility: 1. Written 12-month export revenue target 2. Brief narrative plan reasonably explaining how to reach this target a. Product to be exported b. Countries to sell to 3. Explanation of how loan will enable business to enter new or expand existing export market(s) 4. If indirect exporter letter or other documentation from borrower s customer certifying that they will export what they buy from the borrower

Stake your export claim! The lender must ask for it. Document the export eligibility of your borrower, then. International Trade Loan: In E-TRAN, be sure to request the guarantee under ITL, asking for the 90% guarantee. Export Express: Be sure your institution has executed the Supplemental Export Express Lender Agreement. EWCP: Be sure your institution has executed the EWCP Lender Agreement. Work directly with your local SBA export program manager. * SBA One does not yet support SBA export programs, so just use your traditional method.

See you on the summit. Don t leave SBA export benefits laying on the table! Use SBA export programs to support your small business borrowers and enhance your own commercial portfolio.

www.sba.gov/international

SBA Network of Export Finance Specialists at US Export Assistance Centers ATLANTA Territory: Georgia, Alabama, Kentucky, West/Central Tennessee Davidl.Leonard@sba.gov 404-815-1496 ARLINGTON, VA Territory: Virginia, Maryland, District of Columbia, West Virginia William.Houck@sba.gov 202-557.4063 CHICAGO Territory: Wisconsin, Illinois Dennis. Foldenhauer@sba.gov 312-353-8065 CLEVELAND Territory: Ohio, Western New York, Western Pennsylvania, Patrick.Hayes@sba.gov 216-522-4731 MINNEAPOLIS Territory: Minnesota, North Dakota, South Dakota, Iowa Carlos.Sosa@sba.gov 612-348-1642 NEW ORLEANS- Louisiana, Arkansas, Mississippi, Gulf Coast of Texas Houston Reginald.Harley@sba.gov 504-589-6730 BOSTON Territory: Maine, Vermont, New Hampshire, Massachusetts, Connecticut, Rhode Island John.Joyce@sba.gov 617-565-4305 CALIFORNIA IRVINE Territory: Southern California, Nevada Martin.Selander@sba.gov 949.660-8935 LOS ANGELES Territory: Southern California, Arizona Pellson.Lau@sba.gov 213-894-8267 SAN FRANCISCO Territory: Northern California Bakersfield to the Oregon border Jeff.Deiss@sba.gov --415-744-7730 CHARLOTTE Territory: North Carolina, South Carolina, Eastern Tennessee Dan.Holt@sba.gov 704-333-4886 x226 DALLAS/FORT WORTH Territory: West/North/Central Texas, Oklahoma Alale.Allal@sba.gov 817.684.5506 DENVER Territory: Colorado, New Mexico, Utah, Wyoming Bryson.Patterson@sba.gov 303-844-6622 DETROIT Territory: Michigan, Indiana John.Ogara@sba.gov 313-226-3038 FLORIDA MIAMI Territory: S. Florida, Puerto Rico, Virgin Islands Mary.Hernandez@sba.gov 305-526-7425 ext. 21 TAMPA Territory: Central & North Florida Vacant: Call Miami USEAC NEW YORK CITY Territory: New York City & 5 Boroughs, Eastern Upstate New York, New Jersey Toni.Corsini@sba.gov 212-809-2645 PHILADELPHIA Territory: Eastern Pennsylvania, Delaware Robert.Elsas@sba.gov 610-382-3069 PORTLAND Territory: Oregon, S. Idaho, Montana; Hawaii & Guam James.Newton@sba.gov; 503.326.5498 SEATTLE Territory: Washington, Alaska, N. Idaho, Leland.Gibbs@sba.gov; 206-553-0051 ex.228 ST. LOUIS Territory: Kansas, Missouri, Nebraska Larry.Cresswell@sba.gov; 314.260.3788

Alabama International Trade Center Ready to grow your business by exporting? Do you have an Export Plan? Would you benefit from a strategic approach to targeting the best markets? Worried about getting paid, or looking for ways to mitigate risk? If you answered yes to any of these questions, AITC offers a variety of programs and services designed to help Alabama companies expand globally.

Alabama International Trade Center AITC.ua.edu Offers Training, No-Charge 1-on-1 Counseling SBA & EXIM Working Capital Export Financing Solutions EXIM Regional Export Promotion Partner Part of the Export Alabama Alliance

Export Finance Assistance Brent McMahan Brent.mcmahan@sba.gov 251-544-7401 Senior Area Manager US SBA, AL www.sba.gov/