Magazine article Business Credit

Overcoming Obstacles to Securing Financing for Service Exports. (International Affairs Section)

Magazine article Business Credit

Overcoming Obstacles to Securing Financing for Service Exports. (International Affairs Section)

Article excerpt

Financing service exports has been a challenge for both borrower and lender. Everyone has heard that banks do not lend to anyone who needs money. Service exporters are no exception to this rule. One of the main problems that these exporters face is that lenders insist on borrowers providing, as security, traditional collateral such as inventory and other fixed assets, including plants and equipment. Typically, service exporters have nothing to pledge as security other than an assignment of the proceeds of a service contract--hardly the "stuff' that could be auctioned "on the courthouse steps." Fortunately, government finance programs have been modified to accommodate both the lender as well as the borrower. By way of definition, it should be made clear at the outset that, for the purposes of this article, "financing" only relates to providing working capital to service exporters.

Typically, financial institutions are very conservative in their lending policies for service firms and will often not take foreign receivables into account in calculating lines of credit. Service exporters face two major obstacles to securing working capital lines. First, since retained earnings represent their primary mode of export financing, any unusual increases in transaction costs or the cost of capital will severely limit their ability to extend credit. Second, to the extent that service exporters need to rely on debt financing, they are constrained by conservative definitions of collateral or security since the only property typically available as security is their accounts receivable. Service firms do not carry large inventories or fabricate heavy equipment in factories with sophisticated machinery. Sometimes a service firm's most valuable asset is a license, copyright, patent or service contract--hardly the kinds of assets banks are used to taking as security. It should be pointed out that commerci al bankers are not to blame for this dilemma. Central banks and other bank regulatory agencies responsible for the safety and soundness of the industry control what is deemed prudent in terms of taking security for loans. It is helpful to review lending guidelines, which banks must follow in regard to the definition of appropriate security. Ask your banker to review bank regulatory policies with you, or check them yourself by searching the web sites of the regulators. Examples of a few relevant web sites are www.federalreserve.gov, www.fdic.gov and www.occ.treas.gov.

Typically, bankers rely on inventory as well as accounts receivable as collateral for working capital lines of credit. For service exporters, bankers, usually with the help of a government guarantee (discussed later in this article), are able to substitute the value of "work in progress" for inventory. Work in progress is valued by an assessment of the costs incurred by the provider to develop the product (fulfill a contract obligation). Costs include direct expenses (e.g., salaries of personnel who work on the project) and a fair share that are indirect (rent, insurance, etc.).

Due to service exporters' lack of traditional inventory in which a security interest could be perfected, bankers pay particular attention to who the foreign obligors are and the payment mechanism. Even well known and highly solvent obligors have avoided payment for a myriad of reasons, some not as legitimate as others, if payment is not done with a letter of credit (L/C). Moreover, even if payment is structured with a L/C, it is vital to examine the terms of the L/C since it is usual for one party to gain an advantage over another in negotiating an L/C. This situation is exacerbated when the negotiating strength of the parties is unequal such as when an engineering or architectural firm performs services for a foreign multinational construction firm.

It is quite common for a L/C issued in favor of a service firm to call for progress payments. This usually alleviates the need for working capital and also serves to mitigate the risk that the buyer might question the value of the services received and block payment. …

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