EXPORT OPPORTUNITIES A Look at Trends Affecting Small- to Mid-Sized U.S. Exporters — Plus Challenges and Solutions Since the mid-1990s, reduced trade barriers, the Internet and a significant decline in the dollar against many major world currencies have driven export sales to new heights for small to medium-sized U.S. exporters. But, as with most business pursuits, success in exporting doesn’t come without overcoming obstacles. Compared to domestic trade, selling internationally presents a distinct set of challenges. Developments since the mid-90s have both sharpened those challenges and fostered a wide range of export solutions. In this edition of International Insights, we review a number of trends impacting U.S. export efforts, and report on some of the successful financial strategies that have emerged to help companies pursue export opportunities. Rising U.S. export volume U.S. export volumes continue to climb. According to U.S. Department of Commerce statistics, U.S. export sales in 2007 grew by 12.2% to $1.62 trillion. The largest export mar- kets for U.S. goods last year were Canada ($248.9 billion, up 7.9% over 2006), Mexico ($136.5 billion, up 1.9%), China ($65.2 billion, up 18.2%) and Japan ($62.7 billion, up 5.1%). In fourth quarter 2007, exports comprised 12.3% of U.S. gross domestic product (GDP), compared to 9.6% just five years earlier (in fourth quarter 2002). Small- to mid-sized enterprises (SMEs), defined as companies with fewer than 500 workers, have contributed greatly to U.S. export growth. According to the Commerce Department, the number of U.S. SME exporters more than doubled from 1992 to 2005, going from 108,026 to 232,612, or 97% of all U.S. exporters that year. The rise in export revenues for U.S. SMEs during those years was simi- lar, escalating from $102.8 billion to $228.5 billion. Why are opportunities greater? The biggest driver of U.S. export growth in recent years has been a decline in the value of the dollar relative to many other major world currencies. “What that means is foreign companies are looking to make purchases of U.S. goods and services,” says Laurie McCulley, a Principal at consulting firm Treasury Strategies, Inc. 2008 – No. 1 ➥ Inside: Key Multicurrency Account SM Subscribe to International Insights or other Key publications at www .key .com/subscribe . International Insights Archives For global trade tips & trends, visit www .key .com/interna tionalinsights .
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EXPORT OPPORTUNITIESA Look at Trends Affecting Small- to Mid-SizedU.S. Exporters — Plus Challenges and SolutionsSince the mid-1990s, reduced trade barriers, the Internet and a significant decline in thedollar against many major world currencies have driven export sales to new heights forsmall to medium-sized U.S. exporters. But, as with most business pursuits, success inexporting doesn’t come without overcoming obstacles.
Compared to domestic trade, selling internationally presents a distinct set of challenges.Developments since the mid-90s have both sharpened those challenges and fostered awide range of export solutions.
In this edition of International Insights, we review a number of trends impacting U.S.export efforts, and report on some of the successful financial strategies that haveemerged to help companies pursue export opportunities.
Rising U.S. export volumeU.S. export volumes continue to climb.According to U.S. Department of Commercestatistics, U.S. export sales in 2007 grew by12.2% to $1.62 trillion. The largest export mar-kets for U.S. goods last year were Canada($248.9 billion, up 7.9% over 2006), Mexico($136.5 billion, up 1.9%), China ($65.2 billion,up 18.2%) and Japan ($62.7 billion, up 5.1%).
In fourth quarter 2007, exports comprised12.3% of U.S. gross domestic product (GDP),compared to 9.6% just five years earlier (infourth quarter 2002).
Small- to mid-sized enterprises (SMEs),defined as companies with fewer than 500 workers, have contributed greatly to U.S. exportgrowth. According to the Commerce Department, the number of U.S. SME exporters morethan doubled from 1992 to 2005, going from 108,026 to 232,612, or 97% of all U.S.exporters that year. The rise in export revenues for U.S. SMEs during those years was simi-lar, escalating from $102.8 billion to $228.5 billion.
Why are opportunities greater?The biggest driver of U.S. export growth in recent years has been a decline in the valueof the dollar relative to many other major world currencies. “What that means is foreigncompanies are looking to make purchases of U.S. goods and services,” says LaurieMcCulley, a Principal at consulting firm Treasury Strategies, Inc.
2008 – No. 1
➥
Inside:Key Multicurrency AccountSM
Subscribe toInternational Insights orother Key publications at www.key.com/subscribe.
International InsightsArchivesFor global trade tips & trends, visitwww.key.com/internationalinsights.
Most significant, McCulley says, has been the dollar’s decline against the euro. Between2002, when the euro was introduced as a cash currency, and 2007, the one-year averagevalue of the dollar fell from 1.06 to .73 euros, according to Federal Reserve statistics.
During that same five-year span, the dollar also declined significantly against theJapanese yen (125.22 to 117.76), as well as against the British pound sterling (.67 to .50), China’s renminbi (8.28 to 7.61), and the Canadian dollar (1.57 to 1.07),the Fed reports.
Other major drivers of U.S. export growth have included:
• The Internet. The information superhighway has enabled U.S.companies to market their products through online cataloguesthat are accessible worldwide. “You put up a Web site and all ofa sudden you aren’t just an Ohio company or an Indiana com-pany any more, you’re worldwide,” notes Patrick Hayes,Regional Export Finance Manager in Cleveland for the SmallBusiness Administration (SBA).
• Reduced trade barriers. U.S. exporters have benefited fromthe elimination of many costly tariffs through regional tradeagreements, most notably the North American Free TradeAgreement (NAFTA) in 1994 involving the United States,Canada and Mexico.
• Government support. Federal and state export assistanceagencies provide an array of financial and promotional supportto U.S. exporters.
• Strategic diversification. “If the U.S. economy is not doing well,by exporting you can diversify your sales and become lessdependent on the U.S. market,” explains Sue Whitney,Cleveland Office Director for the U.S. Commercial Service, atrade promotion unit within the Commerce Department.
Challenges — time, timely paymentOne of the essential challenges of exporting, particularly for smaller companies, is find-ing the time to do all the things required to sell to overseas markets, Whitney says.
“Usually at a small company it’s the president who wants to go international,” she says.“But how does the president split up his time even further when he’s already working 80hours a week?”
Whitney advises outsourcing. “Instead of trying to do it all yourself, use serviceproviders like law firms, banks and freight forwarders,” she says. “Then, when you havedeveloped sales, you can think of bringing export duties in house.”
Exporters initially also must overcome the fear of not getting paid by overseas tradingpartners, SBA’s Hayes says. “It’s the number one fear of companies when they start toexport,” he says.
For exporters, the commercial risk that a customer’s financial situation might lead toslow payments or insolvency is exacerbated because it’s more difficult to obtain reliablefinancial information on foreign companies.
Additionally, overseas customers often pose an increased political risk of non-paymentdue to developments such as wars, riots, insurrections and currency inconvertibility.
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To stay competitive with
European firms, many U.S.
exporters are finding it
necessary to offer open
account terms.
Terms of sale: options and a trendThe challenge of getting paid is impacted greatly by a transaction’s terms of sale.
Cash in advance terms represent the least risk to the exporter and are typically usedin new relationships where transactions are small and the buyer has little choice butto prepay.
When cash in advance isn’t feasible, letters of credit (L/Cs) have been the legal financialinstruments most frequently used to guarantee payment for exported goods and serv-ices. An L/C is issued by the buyer’s bank, advised through a bank in the seller’s country(in most cases, the seller’s bank), then forwarded to the seller bythe advising bank. The letter specifies the terms and conditionsthat must be met before payment is rendered.
Another option is documentary collection terms. A documentarycollection requires the seller to forward collection instructions,appropriate documents and the seller’s draft through the bankingsystem to the buyer’s bank. Banks act as intermediaries, pro-tecting the interest of both parties. Although documentary collec-tions do not guarantee payment, they generally result in pay-ment more prompt than with open account terms. Documentarycollections also typically are less expensive than using an L/C.
Finally, there are the aforementioned open account terms. Openaccount offers no assurance of payment and ties up the seller’scapital until payment is made. However, increasingly U.S.exporters are finding it necessary to trade on this basis. “L/Csare a very reliable way of getting paid,” Hayes says. “But moreoften now, U.S. companies are being forced to offer openaccount terms to stay competitive with European firms.”
Risk mitigation, financing solutionsThe added risk and payment delay created by open accountterms requires both risk mitigation and export financing.
One answer is trade credit insurance. “A typical credit insurance policy for export coversboth commercial and political risks of non-payment,” explains Brandon Baker, a Partner withInternational Risk Consultants, a global brokerage specializing in this form of insurance.
Credit insurance both protects an exporter’s balance sheet and provides the risk mitiga-tion that’s vital to getting a bank to assist with financing foreign receivables, Baker says.
One provider of export credit insurance is the Export-Import Bank of the United States.Visit www.exim.gov/products/insurance/index.cfm for details.
Ex-Im Bank also has a working capital guarantee program in which it typically guarantees90% of a working capital loan provided to an exporter by a commercial lender(www.exim.gov/products/work_cap.cfm). These loans enable an exporter to fulfill exportsales orders and turn export-related inventory and accounts receivable into cash. Anotherfederal government source of export financing is the SBA (www.sba.gov/international),which provides similar loan guarantees through Export Express and the Export WorkingCapital Program.
Foreign currency paymentsExporters also face the question of how best to be paid: In their own or another currency?
Pricing products in U.S. dollars alone can limit sales, experts warn, particularly in mar-kets where customers are accustomed to comparing prices in their local currency. “We
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always recommend that clients price their products in both U.S. dollars and foreign cur-rency,” McCulley notes. “But to do so, they have to be willing to accept the risk of for-eign currency volatility related to the exchange rate.”
Pricing in multiple currencies requires exporters to learn about foreign exchange riskmanagement. Banks offer foreign exchange hedging products, including forward con-tracts, that enable an exporter to lock in profits between the time of a sale and paymentsettlement, regardless of exchange rate movements.
Another way to help manage this risk is the use of foreign cur-rency accounts. Foreign receivables can be deposited directlyinto these accounts, enabling exporters to minimize the expenseof conversion to U.S. dollars. (See related article on the newKey Multicurrency AccountSM on this page.)
Advances in trade document processingExporters are taking advantage of banking technology toimprove information flow around trade document processing.“Exporters want their L/C or transaction detail delivered a lotfaster than when we mailed it 10 years ago,” says SandyMarrone, Senior Vice President with KeyBank’s Global ProductManagement Group.
Banks have responded with Web-based, front-end trade infor-mation reporting systems like KeyBank’s QuickTrade® Web.
Business surveys conducted by Treasury Strategies confirm thevalue of such systems, McCulley says. “Respondents tell ustime and again that they want Web-based systems that let theminitiate L/Cs and report on all of the trade finance activity they’reconducting with their bank,” she says. “It’s a major plus from thestandpoints of convenience, control and efficiency.”
Identifying trading partnersWith so many factors driving export opportunities, and the wide range of financing andother support available to exporters, there’s still the not-so-small matter of finding suit-able foreign customers.
The Commerce Department offers one solution: an International Company Profile. TheU.S. Commercial Service conducts thorough background checks of potential foreigncustomers, including in-person visits, and recommends whether your firm should dobusiness with a prospect. To learn more about this service, visit buyusa.gov to identifythe U.S. Export Assistance Center serving your area, and give them a call. ■
For more information on how KeyBank can help your company with trade endeavors,contact Michael Bellardine, Director/SVP, Global Trade & International PaymentServices, at 216-689-4975.
This report is designed to provide general information only. It is distributed with theunderstanding that the author and publisher are not engaged in rendering legal advice.If legal advice or other expert assistance is required, the services of a competent pro-fessional person should be sought. The accuracy or completeness of this information isnot guaranteed, nor does KeyBank make any warranties regarding the results obtainedfrom its use.
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International Insightsis published by KeyBank as aservice to clients. To learn moreabout our international productsand services, visit us atwww.key.com/International.
Key Multicurrency AccountSM
Exporters seeking to increase sales byaccepting payment in foreign currenciesshould consider the new Key MulticurrencyAccount.
The new account enables companies toreceive payments in most major internationaldenominations, including euros, yen andpounds sterling.
Depositing foreign receivables in thisaccount eliminates the expense of convert-ing foreign currencies to U.S. dollars. Also,because no conversion is required, receiv-ables can be credited to the account faster,improving liquidity and minimizing foreignexchange risk.
Furthermore, a Key Multicurrency Accountallows companies to maintain balances inmultiple currencies to efficiently satisfy inter-national payment obligations.
