Letters from America: Export Financing as a Key Component of U.S. Trade Strategy with China
This is Part V of our ongoing Letters from America to Asia Series, featuring opinions and observations on America’s trade relations with China and emerging Asia from Chris Devonshire-Ellis.
Oct. 29 – In this week’s letter from America to China, I have invited Gray Sasser, an attorney with the America law firm Frost Brown Todd, to discuss export financing programs available to American companies looking to export overseas. Frost Brown Todd is a partner firm of Dezan Shira & Associates, and is one of the largest law firms based in the Midwestern United States. The practice currently has over 475 attorneys working in nine offices throughout Tennessee, Kentucky, Ohio, Indiana, and West Virginia, and a thriving international desk, with much of their on-the-ground China, India and Asian work being handled in conjunction with our practice.
Gray has expertise of particular relevance to U.S. companies in the Mid-West looking to export to China, as he previously served as VP of the Export-Import Bank of the United States, was educated in part at Beijing University, and advises American enterprises on expanding their global footprint with particular emphasis on China. Gray’s article below deals with the fundamental issue of how American companies can obtain financing for export-driven programs, and the likely political environment following the upcoming U.S. presidential elections.
Over to Gray:
As America’s election looms, politicians up and down the ballot fill their talking points and television commercials with references to small businesses. With small and medium-sized business enterprises (SMEs) representing 99 percent of American companies, encouraging export growth for this important segment of the U.S. economy will remain a priority for whichever political party captures the White House.
Currently, only about 1 percent of SMEs export, and just 10 percent of this miniscule amount export to China. As previously noted by Chris in last week’s edition of the Letters from America series, China’s macroeconomic climate offers tantalizing opportunities for U.S. companies. Even though a review of applicable PRC government regulations remains an important first-step when developing a China-focused export plan, American SMEs considering China should also evaluate export financing programs offered by federal agencies such as the Export-Import Bank of the United States (Ex-Im Bank) or the Small Business Administration (SBA).
The website www.export.gov offers a wealth of information regarding various export support programs and serves as a good starting point to begin navigating the various options, requirements and paperwork. It should also be noted that while other U.S. agencies such as the Overseas Private Investment Corporation and the Department of Agriculture also offer export financing programs, the SBA and Ex-Im Bank programs generally are the most applicable to SMEs. These two agencies administer separate programs designed to assist exporters with accessing commercial capital by limiting a commercial bank’s exposure to foreign credit or country risk. While Ex-Im Bank is authorized to directly lend funds in certain limited instances, SMEs likely would take advantage of one of three main types of support:
- Working capital loan guarantees
- Export credit insurance
- Medium and long-term loan guarantees
For exporters seeking working capital, both SBA and Ex-Im Bank work with commercial lenders to guarantee up to 90 percent (including both principal and interest) of financing provided to exporters. These guarantees reduce the cost of capital for SMEs as they replace 90 percent of the credit risk associated with such loans with a guarantee backed by the full-faith and credit of the United States. Furthermore, there are no minimum financing amounts for the working capital guarantee programs administered by either agency, although the SBA program has a US$5 million maximum and generally limits maturity to 12 months. Also, to qualify for the Ex-Im Bank program, a borrower must have at least 12-months’ operating history, so many start-up SMEs begin with SBA and “graduate” to Ex-Im Bank financing as they increase their operating history and eventually need access to larger sums with lengthier terms.
While the working capital programs typically require receivables or other evidence of existing or future export sales, SBA recently inaugurated its “Export Express Program” to provide up to US$500,000 in guarantees which can finance a company’s first step towards China sales. Such funds could be used to finance existing orders, but also “may be used for business purposes that will enhance a company’s export development…to fund participation in a foreign trade show…[or] translate product literature for use in foreign markets.” Companies availing themselves of this program must have at least 12-months’ operating history, although such SMEs do not need any prior exporting experience.
In addition to working capital financing, Ex-Im Bank also provides export insurance to insure against the risk of buyer non-payment and/or political risk. Because such policies can be assigned to lenders, this insurance offers another tool to finance foreign receivables. Also, rather than demanding cash in advance from foreign buyers before shipping the goods, these insurance products allow sellers to offer competitive credit terms directly to foreign purchasers. Short-term policies provide up to 360 days insurance on payments for capital goods (and 180 days for other exports), and medium-term policies can generally be extended up to five years. Multi-buyer policies that cover more than purchasers are also available.
Finally, Ex-Im Bank offers both medium and long-term loan guarantees, and these products which guarantee up to 85 percent of the principal and interest on loans to finance foreign sales are the most well-known product offered by the bank. For an SME undertaking its first trans-Pacific transaction, these guarantees may not be applicable, but they play a critical role in international finance. The comparative use of their respective government export credit agencies also remains a simmering policy concern often raised by U.S. officials with their Chinese counterparts.
The ongoing Sino-U.S. discussions on the proper role of export credit agencies will likely be confined to the annual Strategic and Economic Dialogue and have little impact on American SMEs seeking access to the Chinese market. However, Ex-Im Bank’s “content” policies may impose meaningful restrictions on some SMEs.
Because Ex-Im Bank’s mission is to promote the employment of U.S. workers by supporting the sale of U.S. goods overseas, goods eligible for export support must contain certain minimum U.S. content. For short-term insurance and working capital products, the exported products must contain at least 50 percent U.S content, which according to the bank’s Short-Term Content Policy, can include “all direct and indirect costs, including but not limited to labor, materials, research and administrative costs, exclusive of profit.” For medium and long-term financing, the determination of U.S. content is subject to a tighter definition. SMEs can avoid (or at least postpone) this content analysis by utilizing SBA programs which do not contain similar restrictions.
With discussions of a “fiscal cliff” on one side of the Pacific and a “fifth-generation” of leadership on the other shore, many U.S. businesses are waiting for November’s dust to settle. Given the lip-service both presidential candidates are giving to small business, it is hard to imagine the demise of U.S. export support programs regardless of the outcome on Election Day. Fortunately, Congress reauthorized Ex-Im Bank for another three years in May, removing at least this cornerstone of U.S. export policy from any post-election morass. Instead of simply waiting for the final unveiling of the Standing Committee or the last returns to trickle in from Ohio, a thorough analysis of the export promotion programs offered by Ex-Im Bank and SBA will likely prove time well-spent while waiting for November’s political winds to blow themselves out.
Back to Chris:
Gray’s article stresses that several programs are available to fit a wide variety of American corporate needs. This is especially true at the SME and mid-market level, where such support programs are, in fact, readily accessible to American businesses. As we noted last week, the trend for American exports to China is on the up as China’s middle class (now some 250 million people) is set to expand to 600 million consumers within the next decade. Many of the regional law and tax firms Dezan Shira & Associates partner with throughout the United States are familiar with the programs provided by the Ex-Im Bank and their affiliates, and work extensively with their local American clients to assist with preparations and financial strategies for taking advantage of the programs on offer. For the Mid-West, Frost Brown Todd provide an excellent service, and please contact Dezan Shira & Associates directly should you require introductions to relevant law or tax practices elsewhere in the United States.
We thank Gray for his comments and insights in this week’s article.
Chris Devonshire-Ellis is the founding partner and principal of Dezan Shira & Associates. The firm was established in 1992 and assists foreign companies with legal, tax and operational issues in China and Asia, and has 17 offices across the region, including 12 in China. Chris is now based in North America and assists American manufacturers with their export plans and how to develop their strategy throughout Asia. The firm also partners with U.S.-based law and tax practices to assist them in developing their international practice as concerns client development into China and Asia. If you would like to discuss any of these issues, please contact Chris at usa@dezshira.com or visit www.dezshira.com.
Dezan Shira & Associates runs an American partner firm program which provides American law and tax firms with access to our China and Asian infrastructure and to our in-house American expatriate lawyers and tax experts. We are also available to discuss assistance with the development of an international desk for U.S.-based firms within their own practice, and with the development of services that may be sold by their firm to local clients who wish to start exporting overseas. We are in the process of building a national American network of partner firms to jointly develop and profit from the evolution of American corporations developing export markets and business strategies overseas. To learn more about and become part of our U.S. Partner Firm program, please contact Jessica Tou at jessica.tou@dezshira.com.
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