A Guide to Help American Exporters Navigate Trade Finance

For many exporters in the United States, understanding the intricacies of trade finance is often a challenging undertaking. Encouragingly, the International Trade Administration (ITA), a U.S government agency whose mission is to create prosperity by strengthening the international competitiveness of U.S. industry, promoting trade and investment, and ensuring fair trade and compliance with trade laws and agreements, created The Trade Finance Guide: A Quick Reference for U.S. Exporters.

The guide defines trade finance as "a set of techniques or financial instruments used to mitigate the risks inherent in international trade to ensure payment to exporters while assuring the delivery of goods and services to importers. In other words, trade finance is a means to turn cross-border trade opportunities into real transactions by effectively managing the competing risks as well as the inherent risks facing both exporters and importers." The guide importantly adds: "The WTO estimates that trade finance plays a key role in facilitating and supporting as much as 80 to 90 percent of international trade. However, the availability of trade finance and the risk of non-payment are among the most often cited obstacles by U.S. SMEs considering selling in global markets."

The ITA says its Trade Finance Guide "explains the basics of trade finance so that U.S. companies, especially small- and medium-sized enterprises (SMEs), can evaluate appropriate financing options to help ensure they get paid for their export sales." What is more, exporters "will also find information on how digitalization is helping to transform trade finance, with the prospect of increasing access, streamlining processes, and reducing costs."

The guide is designed to help exporters answer the following questions:

1. Is your business looking to make that first export sale or expand into more markets, but needs clarity on financing options and methods?
2. Did you know that having open account terms may help win customers in competitive markets?
3. Is insisting on cash-in-advance always a good idea?
4. What are the advantages of exporting on consignment?
5. What should you know about export working capital financing or export credit insurance?

Segmented in 17 chapters including "Access to Capital for Startups in Global Markets, "Methods of Payment in International Trade," "Export Working Capital Financing and Government Guarantees," and "Export Credit Insurance," the guide provides introductions to each of the three U.S. government finance agencies (Export-Import Bank of the United States' Office of Small Business; U.S. Small Business Administration's Office of International Trade; and U.S. Department of Agriculture's Foreign Agricultural Service's Credit Programs Division) in their respective chapters and have updated other chapters, as appropriate, in collaboration with experts from relevant fields. The ITA will be continuously updating the online Trade Finance Guide on an as-needed basis, with a revised PDF version available for download on an annual basis.

While myriad of opportunities exist for U.S. exporters, they also face major types of risks including:

• Country risk is the risk of exposure to financial loss caused by political, economic, and social conditions and events in a foreign country.
• Commercial risk is the risk of non- and delayed payment caused by the importer’s insolvency or cash-flow problems.
• Foreign exchange risk is the risk of exposure to financial loss due to the fluctuation of an exchange rate change when trading with countries that have a different currency.
• Cultural influences are an additional risk factor that can negatively affect all aspects of international business.

And as an advisor to many American exporters, I appreciate the following tips for exporters:

• Be mindful of emerging trends that could reduce the complexity, cost, and processing time of trade finance transactions.
• Inquire with your current trade finance provider about available or planned digital options that could enhance efficiency and reduce costs.
• Explore trade finance options, including consulting new fintech-based trade finance providers about both traditional instruments and innovative offerings.
• Be cautious of potential fraud and cyber security risks that may accompany new technologies and online trade finance platforms.

In presenting the benefits of exporting, the guide notes:

The United States is the world's second largest exporter, with $2.5 trillion in goods and services exports in 2021, according to the U.S. Census Bureau and the U.S. Bureau of Economic Analysis. However, less than one percent of America's 32 million companies export; and of those do, about 60 percent sell to just one or two markets—Canada and Mexico, for example. And SMEs, which account for 98 percent of the nearly 280,000 American exporters, are even less likely to export to more than one market. With 95 percent of the world's consumers living outside of the United States, beginning to export-- or expanding to additional export markets—can help SMEs expand their sales, diversify their portfolios, and insulate them against periods of slower growth in the domestic economy.

What tips do you have on financing new export sales?

Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.