EXPORTS: FINDING THE FUNDING
Byline: Valerie Seckler
NEW YORK — Trade lenders expect exports to boom for U.S. apparel vendors, a trend that started to unfold with the consolidation in U.S. retailing. The big hangup, though, could be the difficulty of financing such sales abroad.
WWD recently gathered a group of four trade lenders for a roundtable discussion on how to finance offshore sales and purchases of apparel.
In a wide-ranging conversation, they offered their views about other business moves that need to be made when aiming at export sales, and pitfalls that should be avoided for the successful execution of such deals, as well as identifying export hot spots for American apparel around the globe.
These lenders, on the cutting edge of apparel financing, included:
David Goldberg, partner, Marketing Management Group, Pacific Liaison Group Inc., here.
Kenneth V. McGraime, vice president, State Street Bank & Trust, Boston.
Richard V. Romer, executive vice president, The CIT Group/Commercial Services, here.
Anthony K. Brown, managing director, Trading Alliance Division, MTB Bank, here.
Goldberg’s services range from financing apparel exports to Europe, all the way to deals that begin with the manufacture and shipment of an exporter’s supplies in one nation and end with the collection of an apparel importer’s receivables in another. He will do transactions that use instruments besides the traditional letter of credit (LC).
An LC essentially is a promise by a bank to pay a factory when it ships the goods it has produced to its purchaser. And to get an LC from a bank, the client first needs to establish a line of credit.
At State Street, McGraime runs the North American division’s activity, fitting together structures to finance U.S. firms’ trade with Europe and Asia, as well as offering asset-based lending.
Romer’s Commercial Services division at CIT offers exporters credit guarantees on open-account terms. It also acts as a bank for importers, factoring receivables, and opening LCs and revolving credit lines.
At MTB, Brown’s division doesn’t offer lines of credit. Instead, it helps clients, 80 percent of whom are in the apparel and textiles industries, when they reach their limit at their bank or factor or in asset-based loans. His group provides financing for the finished goods its clients buy, for which those apparel firms have purchase orders.
While bankers and economists are bullish on the outlook for apparel sales abroad, the traditional financing roadblock facing those exporters remains: It is difficult to find lenders willing to risk their money against goods yet to be made and sold.
This despite a 15 percent increase in the value of all women’s, men and children’s apparel and accessories exports in 1993 to $4.96 billion from $4.2 billion the previous year, and a more than twofold increase over the $2.22 billion-worth sold abroad back in 1989.
In the first eight months of 1994, the value of those exports rose 12.3 percent to $3.63 billion from $3.23 billion in the comparable prior-year period.
Addressing the ongoing problem of securing trade financing, Brown asserted: “In the U.S., banks tend to be woefully ignorant of international trade and the mechanisms to finance that trade. Hong Kong banks are far more aggressive and creative than U.S. banks because they’ve been dealing with trade transactions for years.”
Other members of the roundtable agreed, citing the apparel industry’s almost entirely domestic marketplace until the last several years and the prospective lenders’ resulting lack of exposure to trade transactions.
In fact, Goldberg said he sees “the efforts of apparel entrepreneurs moving substantially ahead of the financial community’s support for them.”
“Basically, U.S. lending tends to be tied to assets on the balance sheet,” he explained. “But trade lending is financing an exporter selling to an importer and is [implemented] transaction to transaction. It’s not a style U.S. lenders are familiar with.”
Most U.S. bankers, said the group, examine a firm’s assets, and its projected profits and cash flows to determine the borrower’s ability to pay back its loans, and a credit line is established for the firm to borrow against.
“The banker isn’t terribly concerned about the transaction per se, as the loan is made against balance sheet collateral,” observed Brown, who executes transactional loans.
While most trade lenders have an asset-based focus, which works for well-capitalized, steadily growing businesses, said Brown, apparel companies grow in fits and starts, living through hot and cold streaks and seasonal cycles.
As a result, they often don’t have much of a balance sheet to lend against, a problem which is exacerbated for vendors that don’t manufacture and thus lack fixed assets.
In contrast, transactional lenders, often the source of export financing, base their lending on the dollar value of the deal: the goods a U.S. company is selling to a foreign buyer or importing from abroad. To protect themselves, these trade lenders size up the credit rating and international experience of their U.S. client and the client’s offshore customer.
If an apparel firm is growing quickly, Brown explained, it can’t sufficiently finance its new orders based on current inventories and receivables because alone they’re not enough and “hardly any lenders accept purchase orders from retailers as collateral.”
“That’s why there are transactional lenders,” he added. “It’s the purchase order from the end buyer that we focus on; we check the order, understand the goods, to open the credit line. The key is doing what we can to ensure the timely delivery of quality goods and the creditworthiness of their buyer.”
Noting MTB lends based on the degree of control it gets in a transaction, in part secured by extensive documentation, Brown said his bank typically finances 65-70 percent of the seller’s receivable.
Enter JSG Inc., a small, five-year-old vendor of women’s better sportswear whose export sales already generate 15 percent of the business, and are expected to account for 25-30 percent next year and perhaps as much as 40 percent a few years from now, according to president Sandy Glazman.
The firm’s initial foray into export markets, which now include Canada, the United Kingdom and Japan, was sparked a few years ago by the request of a retail customer that has stores around the world.
Since then, JSG has actively expanded its export sales and presently is negotiating a deal with a major retailer in Mexico, which he declined to name.
“Business in the U.S. is getting harder and harder,” acknowledged Glazman. Sales abroad are “absolutely an avenue for growth.”
The problems faced by small apparel exporters are myriad, among them, lack of financial muscle and knowledge base, and the need to wear many hats, said the JSG executive who declined to disclose the firm’s volume.
“As your export business expands,” he said, “financing becomes a very large part of what you do. Rather than simply having a controller in our company, we have a partnership with MTB, better enabling us to grow.
“Tony Brown’s been on the phone with me at midnight on a Sunday telling me my goods have left China,” he added, illustrating the trade lender’s attention to detail.
Two keys to the successful financing of export operations, said Glazman, are finding financiers willing to deal with LCs and who understand transactional lending.
“There aren’t many bankers around like [that],” he noted. “There are so many downfalls along the way, transactional lenders can hold your hand. “It’s also worth it because you avoid adding people to your payroll and you’re paying a relatively small fee,” he said. For the typical export startup, fees average 1.5 percent of monthly sales. And as the exporter establishes a relationship with his source factories and timely payments become more certain, costs can be cut via shorter lead times on LCs.
JSG, said Glazman, finances exports in a typical manner whereby the end customer for the goods is putting in the LC, assuring the factory is paid after successful delivery of the merchandise.
“This helps ensure we stick to the quality and size of shipment agreed upon, and the delivery schedule, as well as providing us with the security of payment.”
Glazman characterized another form of trade financing, back-to-back LCs, as one “most banks hate” but which is “a marvelous thing for a small guy.”
With this instrument, the end purchaser of the goods pays the landed duty price, via LC, while the exporter puts up another LC to cover the fob price of the goods, duties, overhead, insurance and such. The seller of the apparel retains the difference in the costs and ultimately pays the lender a fee.
In transactional financing arrangements such as JSG’s, the lender’s interests align with the seller’s: The institution gets its money back when the goods have been produced and paid for by their end purchaser.
Most trade deals still are financed against balance sheet assets or factored receivables, said the roundtable participants. This is why, according to Brown, “these transactions often end up in an undercapitalized situation. That’s because until items are produced, there are no goods against which a loan can be collateralized.”
Export receivables are even less acceptable than their import counterparts to most lenders, because after suffering through a spate of bad loans, banks are less inclined to risk foreign-country exposure.
Export finance packages “typically are all over the place,” said McGraime. “We try to understand the business, the risk parameters, whether the company wants to do its own collections or outsource them.”
If State Street issues a letter of credit to a U.S. importer that can’t get credit the usual way, said McGraime, and it gives the Hong Kong apparel manufacturer an LC, “we tie those transactions together so we have only to pay out on the international LC … and we don’t have to pay if the goods aren’t produced. That’s why a tremendous amount of attention is paid to documentation.”
Servicing international trade “means custom tailoring — it’s not formula financing,” agreed CIT’s Romer. “We have many customers who we’ll lend to over and above their collateral. It’s based on the credit of the client and our experience with them.”
Despite the difficulties and complexities of financing trade transactions, lenders emphasized funding is just one part of the business plan.
Concluded McGraime: “The key is servicing your customers’ needs onshore. You don’t need financing if you haven’t made a sale.”
— Fairchild News Service