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For many years, this medical device manufacturer’s business focused on contracted production for long-term contracts. In recent years, the company’s business model shifted away from contracted production to quickly fulfill orders without the ability to allocate time to a specific production run.
When the company operated through contracted production runs, it utilized a transactional Export Working Capital Program that allowed for the flexibility to fund working the capital to complete their orders individually. That method allowed the company to offer varying terms to the buyers based on the contract. As the company’s model shifted toward immediate fulfillment, the need to maintain standing inventory was apparent.
In order to support this change, the Export Working Capital Program line of credit migrated to a combination of an asset based line of credit for day to day business and a transactional line of credit to support long-run projects. The support afforded by the Small Business Administration (SBA) and EWCP allowed for aggressive advance rates on both foreign accounts receivable and inventory.
The combination of financing methods allowed the company to grow and meet the needs of their customers. The transactional EWCP line of credit provided support for large scale production that would not ordinarily be supported under an ABL model. The ABL line allowed the company to leverage their inventory to provide the working capital necessary to produce and sustain a greater amount of standing inventory. The company has now graduated from the EWCP program and was able to take advantage of the SBA 504 program to purchase its own facility.
This distributor was a young company with considerable experience prior to venturing out on their own. The problem is that they had modest starting capital in an industry with some of the lowest margins of any industry. To get started, they needed a loan that would allow them to make payments directly to their vendors so they could amass some business and qualify for larger facilities.
To bridge this gap, First American Bank issued a Transactional EWCP line of credit designed to fund against Purchase Orders. This allowed the Bank to fund the company’s vendors directly, allowing for the goods to be shipped and the customer invoiced. This process also allowed the Exporter to begin building a credit profile with their vendors which would eventually lead to the company securing terms from their suppliers.
As the company grew, First American migrated the Transactional EWCP line to an Asset Based EWCP line of credit that allowed the company to further scale with its growth. The migration to an Asset Based EWCP line also allowed for further efficiencies within the company as the reporting requirements were not as stringent as they are under transactional structures.
The support provided by the Export Working Capital Program allowed for the exporter to obtain a flexible Purchase Order structure at the outset that is not as readily available in the market. As they continued to grow and further capitalize the business, the EWCP allowed for them to transition to an ABL structure at an earlier point than is available conventionally. Combined, these two methods allowed these entrepreneurs to leverage their industry experience and begin their own business in an industry that is very much governed by your access to capital.
A heavy equipment distributor that sells machinery to mines throughout the world required a loan that allowed them to finance transactions with terms that extend well beyond the normal terms eligible under ABL credit lines.
Understanding the unique needs of this company, First American Bank proposed a Transaction EWCP line of credit to provide a working capital structure to the business that would both accommodate purchase order financing as well as accommodate the extended buyer terms required by the industry.
Working with their trade credit insurer, the distributor was able to negotiate an insurance policy that would offer terms of up to 360 days. Coupled with the flexibility of the EWCP structure, we were able to provide financing based on the cost of the vendor purchase order while simultaneously recognizing the benefit the trade credit insurance policy brought in supporting the extended terms.
The Transactional model is where the flexibility of the EWCP structure shines. The ability to provide purchase order financing, is considerably beneficial as the structure is inherently more risky due to the fact that the capital is extended before an asset (a receivable in this case) is created. As such, the support provided by the SBA allows for this flexible financing to be deployed. At the same time, the structure allows for the Bank to administer credit based on the individual needs of each order rather than under blanket ABL eligibility.
A custom machine manufacturer received a purchase order for a large specialty packaging machine that would take approximately six months to construct. The manufacturer required a down payment of 30%. With this contract, the buyer required that the down payment be secured with an Advanced Payment Guaranty. That guaranty would come in the form of a letter of credit issued by the manufacturer to the benefit of the buyer with the goal of insuring that the down payment is repaid in the event of a breach of contract.
It is completely reasonable for the buyer to request this guaranty of the vendor; the challenge comes in the way of the burden placed on the manufacturer in this case. The down payment allows the manufacturer to begin production of the machine and progress the project to the point where they can submit for another payment or, combined with existing capital, complete the machine and submit for a draw prior to shipment.
When a manufacturer has to provide an Advanced Payment Guaranty, the letter of credit that has to be issued must be secured in order to be issued. Most commonly the letter of credit is secured with the initial deposit or with availability on an asset based line of credit. Under both scenarios, the manufacturer will see a reduction in their working capital position for the duration of the letter of credit.
In order to leverage the down payment and allow the manufacturer to put it to work toward the production of the packaging machine, the SBA EWCP and CAPLine program allow for the letter of credit to be issued with less collateral than required under conventional structures. Under either of these SBA programs and depending on the terms of the contract, the letter of credit can be issued with 25% to 50% cash collateral instead of the conventional requirement of 100% collateralization.
The ability to partner with the SBA for the issuance is one of the most unique aspects of the EWCP and CAPLine programs. The issuance costs of the letter of credit and costs associated with the SBA loan are often much less than the borrowing cost under a line of credit. As such, there is an inherent savings granted by utilizing the down payment in place of borrowed funds.
A seasonal goods distributor has contracts with several big-box retailers throughout the United States. Under the terms, the retailers have 90 day payment terms from the receipt of the goods which accounts for the time necessary to place the product on shelves and sell through the seasonal goods.
Approximately 90 days before the products are needed on the retail shelves, the distributor must issue purchase orders to the factories in China along with a 50% down payment. In total, the business cycle for these products can run nearly 180 days. When dealing with purchase orders, they are not accounts receivable until they ship and thus do not provide the collateral to a lender that you typically see with an Asset Based line of credit.
Understanding the business cycle of seasonal businesses, First American Bank recommend a Seasonal CAPLine, one of the specialty uses of the SBA’s CAPLine Program. Under the seasonal structure, we were able to finance the payments to the manufacturer on a per-purchase order basis until the retailer made payments nearly six months later.
This distributor was in the process of expanding their supply chain to beyond their primary domestic vendors. As a largely export company, this meant that a portion of the orders will be drop-shipped from foreign vendors to foreign buyers. As is the case when beginning to work with a new vendor, payment terms will take some time to get established. As such, the distributor had to find a way to finance their existing orders to provide the liquidity necessary to pay their new vendors prior to shipment.
To address this challenge, First American Bank recommended an Asset Based CAPLine. Similar to the SBA’s EWCP, the CAPLine Program could be structured on an asset base that would allow the distributor to pool all of their eligible receivables as collateral for the line. Unlike the EWCP, the CAPLine program does not require the goods to be exported directly from the United States. This allowed the lenders to implement a structure to support future orders, even those that drop-shipped.
Dropped-shipped orders are a challenge for most export specific programs, such as the SBA EWCP or Express Programs or the EXIM Bank, as they do not qualify as a “domestic export” since they did not ship directly from the United States. In these situations, we look to the CAPLine Program as a solution for companies engaged in drop-shipping. All other financing requirements remain intact, including the need for trade credit insurance.