29 May 2009
Trade Finance Drought Forces Exporters to Find Alternatives
Importers and some transportation companies have a tougher time
Washington — More than two years ago, Thar Technologies found a buyer in Turkey for its cutting-edge organic-solvent technologies. But before executives had a chance to open champagne bottles, the buyer announced he could not secure credit to finance the deal due to tightening credit market conditions.
Thar turned to PNC Global Trade Group, which, working with the Export-Import Bank of the United States, arranged a $5 million loan to the Turkish buyer.
Ex-Im Bank supports U.S. exports to emerging market and developing countries in which credit is not readily available or is prohibitively expensive. It offers export credit insurance, loan guarantees and other services.
The bank’s mission took on new importance when the credit crunch hit world markets. Private banks worldwide decreased trade credit lines and other trade-related services for corporate clients.
Where credit is still available, it is harder to get due to higher costs, increased scrutiny and heightened rivalry among firms for shrinking financing. Significantly higher costs of credit and credit guarantees put private-sector financing out of reach for many small and medium-size businesses. In some instances in China, Turkey, Pakistan, Argentina and Bangladesh, the cost of a letter of credit — the most common form of trade financing — has doubled or tripled, according to the International Chamber of Commerce.
“The cost of trade finance has shot through the roof,” the chamber says in a November 2008 report.
The brunt of the trade finance crunch is being borne in parts of Asia and by almost all traders in Africa.
U.S. small and medium-size companies also “are starving for financing solutions,” said John Koch, president of World Trade Consult LLC. His firm, based in Memphis, Tennessee, arranges trade risk insurance for small and large companies. He noticed more aggressive interest in such insurance in the beginning of 2008. Since then, his firm’s revenue has tripled.
Ex-Im Bank reports a 90 percent increase in a working capital program, an almost 130 percent increase in a trade insurance program and a 110 percent increase in the overall number of small-business transactions from the first six months of the fiscal year 2008 to the same period of 2009. Among its beneficiaries in 2008 was Combustion Associates Inc. of Corona, California, whose sale of eight small power plants to Benin went through thanks to the bank’s letter of credit guarantee.
To accommodate greater demand, the bank has relaxed some rules, introduced fast-track processing and started exercising a rarely used authority that allows it to lend money directly to non-American buyers of American products. For example, in 2008 it lent about $12 million to enable a sale of helicopters to Brazil.
Koch, the Memphis insurance consultant, told America.gov that many exporters that traditionally have relied on banks and private brokers for trade finance discover they can receive support from Ex-Im Bank.
But the Ex-Im Bank’s funds are insufficient to satisfy all applicants, according to a bank vice president, Robert Morin, who spoke at the bank’s April 16 annual conference.
Exporters are finding some success turning to the Small Business Administration and a host of other federal and state agencies. At least 27 states have programs to help exporters find trade financing.
U.S. importers, however, are in a less enviable situation. They cannot count on the extensive support network on which exporters rely. In September 2008, seeing shipments from overseas declining, United Parcel Service Incorporated (UPS), the world’s largest package-delivery company, offered small U.S. importers an option to use their in-transit UPS shipments as collateral for loans, reducing the need for letters of credit.
Trade finance problems notwithstanding, some businesses are looking forward.
Linda Denny, the president of the Women’s Business Enterprise National Council, which provides certification of women-owned companies, told America.gov that members of her organization are positioning themselves for better times. They are arranging in-advance trade financing to seize on trade opportunities when the economy regains strength.
