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How to Access Trade Finance: a Guide for Exporting Smes Geneva: ITC, 2009 HOW TO ACCESS TRADE FINANCE A GUIDE FOR EXPORTING SMEs USD 70 ISBN 978-92-9137-377-2 EXPORT IMPACT FOR GOOD United Nations Sales No. E.09.III.T.12 © International Trade Centre 2009 The International Trade Centre (ITC) is the joint agency of the World Trade Organization and the United Nations. ITC publications can be purchased from ITC’s website: www.intracen.org/eshop and from: Street address: ITC, 54-56, rue de Montbrillant, ᮣ United Nations Sales & Marketing Section 1202 Geneva, Switzerland Palais des Nations CH-1211 Geneva 10, Switzerland Postal address: ITC, Fax: +41 22 917 00 27 Palais des Nations, E-mail: [email protected] (for orders from Africa, Europe and the Middle East) 1211 Geneva 10, Switzerland and Telephone: +41-22 730 0111 ᮣ United Nations Sales & Marketing Section Room DC2-853, 2 United Nations Plaza Fax: +41-22 733 4439 New York, N.Y. 10017, USA (for orders from America, Asia and the Far East) Fax: 1/212 963 3489 E-mail: [email protected] E-mail: [email protected] Internet: http://www.intracen.org Orders can be placed with your bookseller or sent directly to one of the above addresses. HOW TO ACCESS TRADE FINANCE A GUIDE FOR EXPORTING SMEs Geneva 2009 ii ABSTRACT FOR TRADE INFORMATION SERVICES 2009 F-04.03 HOW INTERNATIONAL TRADE CENTRE (ITC) How to Access Trade Finance: A guide for exporting SMEs Geneva: ITC, 2009. x, 135 p. Guide dealing with the processes involved in obtaining finance for exporting SMEs – explains the credit process of financial institutions from pre-application to loan repayment; examines the SME sector and barriers to finance, as well as the risks in lending to the SME sector as perceived by financial institutions; addresses SMEs’ internal assessment of financial needs, determining the right financing instruments, and finding the appropriate lenders and service providers; discusses how to approach and negotiate with banks; tackles cash flow and risk management issues; includes examples of real-life business plans and loan requests; includes bibliography (p. 134). Descriptors: Trade Financing, Export Financing, Export Credit, Risk Management, SMEs, Manuals. English ITC, Palais des Nations, 1211 Geneva 10, Switzerland The designations employed and the presentation of material in this publication do not imply the expression of any opinion whatsoever on the part of the International Trade Centre concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. Mention of firm names, commercial products and brand names does not imply the endorsement of ITC. Digital image on the cover: © Jupiterimages © International Trade Centre 2009 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, electrostatic, magnetic tape, mechanical, photocopying or otherwise, without prior permission in writing from the International Trade Centre. P237.E/BE/09-XI ISBN 978-92-9137-377-2 United Nations Sales No. E.09.III.T.12 Foreword This book addresses one of the critical needs of business: access to trade finance. Even in the best of economic times, small exporters single out trade finance as a major challenge. In the current economic downturn, trade finance for small exporters in developing countries has all but dried up. Uncertainty from investors and consumers has led to a massive contraction in demand: a 60-year low in world trade, a fall-off in foreign direct investment, a drop in commodity prices and a contraction in remittances. The world’s poorest countries have suffered most from the global trade slump, with their export earning slashed by up to 50% in the first half of 2009 as compared to the same period in 2008. Trade finance has a critical role in accelerating economic recovery, and to help developing countries fulfill their aspirations. A commitment from governments, in partnership with the banking sector, is essential to the maintenance of credit flows. It is in this context that ITC offers this very practical guide to help small and medium-sized exporters in developing countries tap into trade finance. The guide provides an overview of financing issues from the perspective of small exporters, offers understanding of which financial instruments are most suitable, which service providers are most relevant, and how to approach them. Ten years ago, ITC issued a forerunner of this guide, entitled How to Approach Banks. This new guide, How to Access Trade Finance: A Guide for Exporting SMEs reflects an evolution in the trade development sector. There is growing understanding of the partnership needed between the banking sector and governments to boost SME exports. Consequently, ITC has worked with banks, development funds, chambers of commerce, trade promotion organizations and financial associations to develop this guide. It is our hope that these institutions, along with small exporters, will use this guide to help make trade finance more accessible, and build a stronger trade platform to support small businesses around the world. Patricia R. Francis Executive Director International Trade Centre Acknowledgements This guide was prepared by the International Trade Centre (ITC), in partnership with the Association of Development Financing Institutions in Asia and the Pacific (ADFIAP), an organization based in Manila (Philippines), with 109 member banks from 41 countries. Several authors have contributed to this publication, and the initial draft was reviewed by a sample of the expected users of the manual – trade support institutions in six countries. This was followed by an intensive review by ITC’s trade finance and publications team, in order to develop the final outline and contents for this guide. A number of distinguished authors, bankers and university professors contributed to this guide. ITC would especially like to recognize the contribution of Gloria Pasadilla (Philippine Institute for Development Studies) as the leading contributor. ITC would also like to recognize the work done by Tony Maghirang (University of the Philippines), Victor Abainza (Planters Development Bank), Isidro A. Sobrecarey (ADFIAP) and Octavio B. Peralta (ADFIAP). Several experts contributed fact sheets about the challenges to access finance in their countries: Ambassador Jesus P. Tambunting (Planters Development Bank of the Philippines); Bayarsaikhan Dembereldash (Micro-Finance Development Fund of Mongolia); Bold Magvan (Xac Bank of Mongolia); Diana Smallridge (International Financial Consulting); Francisco S. Magsajo Jr (Philippine Export- Import Credit Agency); Michael Gondwe (Eastern and Southern A frican Trade and Development Bank); Nick Rischbieth Gloe (Central American Bank for Economic Integration); Sailendra Narain (Centre for SME Growth and Development Finance); and Venkat Subramanian (Export-Import Bank of India). Peer reviews of the initial draft of this publication were contributed by Afework Yohannes Germamo (Business Creation and Development); Alexander R. Malaket (OPUS Advisory Services International); Demberel Sambuu (Mongolian National Chamber of Commerce and Industry); Juri Jenkins (COMPITE), Cambodochine Dao (Economic and Trade Development strategist); Leelalath Watcharas (International Institute for Trade and Development); and Sailendra Narain (Centre for SME Growth and Development Finance). The guide was conceived and directed by Roger A. Mégélas, who manages ITC’s Trade Finance for SMEs programme. Aicha Pouye, ITC Director of the Division of Business and Institutional Support provided the encouragement for this guide. Mauren Devolder, Trade Finance Adviser for SMEs, developed and managed the content of this publication, assisted by Uyanga Dorjgotov, programme assistant and Sirirat Kiatichaipaibul, intern. Thanks also to Dianna Rienstra for her extensive editing. Editorial management and promotion was conducted by Natalie Domeisen. Marilyn Langfeld prepared the book for printing. Contents Foreword iii Acknowledgements v Introduction 1 Chapter 1 Overview of SME finance 4 Importance of SMEs 4 Finance: a key constraint to SME growth 5 Barriers to formal finance: financial institutions’ perspective 6 High transaction costs 6 Imperfect information 7 High default risk of SMEs 8 Limited collateral 8 Barriers to formal finance: SME perspective 9 Chapter 2 Understanding your financial needs: do you really need to borrow? 11 Cost and benefit of external finance 11 Efficient financial management 12 Assessing your financial need 14 Chapter 3 Understanding various financing instruments 19 Some important differences between domestic and international transactions 19 Various financing transactions 21 Trade credit, promissory notes and bills of exchange 21 Cash advances 22 Outgrower schemes 22 Discounting receivables 22 viii Term loans 23 Leasing 24 Grants and subsidies 24 Equity finance (stock shares, venture capital and business angels) 25 Financing international transactions 27 Methods of payment in international trade 27 Trade financing options 37 Understanding and managing risks 45 Effects of the crisis on lending and trade finance 50 Chapter 4 Choosing the right service provider 52 Types of service providers 52 Commercial banks 52 Specialized financial institutions 54 Non-bank financial institutions 56 Equity sources 58 Choosing the right financial institution 59 Chapter 5 Securing finance 61 Application 62 Applying for a loan 62 Applying for other sources of finance 66 Application evaluation 67 Loans 67 Other financing
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