By Alan Beard and Brady Edholm
Last month, David Yanofsky from Quartz wrote an article entitled, “For the first time, the combined GDP of poor nations is greater than the rich ones.” The article examined the comparative growth of purchasing power for both developed and emerging economies. The findings should be a wake up call for those companies thinking overseas business is exotic and doing business in developing countries is nothing more than an afterthought. In recognition of this trend, a number of companies, sometimes belatedly, are developing strategies to take advantage of this economic shift.
Based upon data and projections from the International Monetary Fund (IMF), in 2013 the combined gross domestic product (GDP) of emerging and developing countries will account for $1.6 trillion more than the GDP of developed countries ($44.4 trillion versus $42.8 trillion). The chart below illustrates the historic trend of both economies since the 1990s. The IMF forecasts a growing dominance of these economies over the next five years.
For years companies have recognized the need to look overseas as they seek to maintain or build their revenues and customer base. But for many U.S. companies this focus has been primarily on the developed countries of Europe and Asia. However, as the above chart demonstrates, increasingly the business opportunity is in the developing world, or as it is more fashionably termed: emerging markets. With now more than half the world’s GDP in emerging markets, successful businesses can no longer ignore this trend.
Recently the Export-Import Bank of the United States (Ex-Im Bank) had a press release stating U.S. exports of goods and services were at an all-time high of $191.2 billion in June 2013. It went on to state that exports totaled $2.2 trillion for the past twelve months and were growing at an annualized rate of 10.4 percent. It is important to note that Ex-Im Bank is a U.S. government agency that primarily finances export sales of U.S. goods and services to emerging markets. Since FY 2008 the annual number of exports it has supported has grown from $14.4 billion to $35.8 billion in FY 2012.
It is not only the large multinational companies that are looking beyond their borders, their smaller counter parts are also focused on selling to international customers. A recent study by CFO Research indicates that two-thirds of its surveyed small-to-midsized businesses (SMB) expect to expand their international business in the coming year. More than four in five of the respondents reported international markets to be a top priority for them in the next three years.
Unfortunately, SMBs have found it extremely difficult to finance exports, particularly in emerging markets. Most of their bankers are reluctant to deal with overseas transactions of any kind, let alone accounts receivable originating in emerging markets. Ex-Im Bank supported commercial lenders can assist larger companies, but often SMB’s are banked by community or smaller regional banks that have no expertise in this area. It is important to note that in spite of Ex-Im Bank seeking to encourage bankers into this area, over the last decade the number of active banks in its programs has not changed significantly. Indeed, the financial turmoil of 2008 actually saw some pull back in the banking community to do emerging market finance with Ex-Im Bank support.
Fortunately, the growing importance of emerging markets has made it too attractive to overlook this business opportunity and financiers are again beginning to provide support to these important markets. To that end, Interlink Capital Strategies, a 20 year old Washington, DC-based financial advisory firm specializing in structuring emerging market finance, has joined with RedRidge Finance Group, an asset-based lending institution based in Chicago, to create a dedicated financing solution to help SMBs increase exports generally as well as go after the growing emerging marketplace. The new joint venture, called Ex Works Capital, LLC., will offer the following services:
Export Trading Company: For those companies uncomfortable taking the initial steps in exporting, or have limitations due to existing bank covenants or risk appetite, this new joint venture can take delivery ex works from the U.S. operations and handle logistics, and structure appropriate trade terms with the overseas buyer, thereby making this like any domestic customer. By outsourcing this activity to Ex Works Capital, an SMB essentially takes no risk in selling to the overseas buyer.
Working Capital Financing: For those companies which are already comfortable selling overseas but can’t get the working capital they need from their local bank to more aggressively service their export business, Ex Works Capital can extend revolving lines of credit or transaction specific loans to an SMB to assist it in growing this important market. This type of funding can also provide the ability for an SMB to provide more generous terms without undue risk to its overseas buyers, thereby allowing their customers increase their purchases and compete more effectively with overseas competition from China or Europe. (Certainly companies in other countries have long since understood the importance of this marketplace and they have been aggressively extending credit to win market share.)
Medium-Term Financing to Overseas Importer: When the size of the transaction is sufficiently large (e.g., $200-300,000) or the type of equipment being sold necessitates it, the ability to provide a loan of two or more years to the overseas customer may make all the difference in whether or not it can afford to make the purchase, or increase the size of the purchase. Since most U.S. lenders cannot take the risk of extending credit internationally, Ex-Im Bank can support this activity and make it possible. Ex Works Capital provides this competitive advantage to SMB’s seeking to grow their business in emerging markets.
A few years ago the U.S. Postal Service created a manual on how to use its services to ship products internationally. In the introduction it characterized exporting as a way “… to eat new foods and meet interesting people.” The tone suggested a certain edginess in doing business overseas. However, as globalization has accelerated with most of the world’s GDP outside the U.S. – now more than half the world’s GDP in emerging markets – U.S. SMBs cannot avoid this huge potential market and do so at their peril. With financing companies like Ex Works Capital dedicated to helping SMBs penetrate this important marketplace by providing the necessary financing, U.S. exports should continue their rapid growth both to developed and emerging market countries.
Alan Beard is the managing director of Interlink Capital Strategies. For further information please contact Brady Edholm firstname.lastname@example.org