In today’s global arena, small business exporters face the challenge of providing a standby letter of credit in favor of their foreign buyers after landing an export order. The ability to post a standby letter of credit can mean the difference between obtaining new business or letting a business opportunity pass by.
When an exporter quotes an order with a down payment requirement, the foreign buyer may only agree if the exporter provides a standby letter of credit in an equal amount to the down payment. The letter of credit ensures the down payment will be returned to the buyer if the seller does not fulfill his/her obligations on the delivery of goods or services. In business terms, this is a performance or “advance payment guarantee.”
This “advance payment guarantee” requires the exporter to approach his/her bank to issue the required standby letter of credit. Today’s standard bank practice is for the small business to put up 100% cash collateral for the standby letter of credit amount or put a restriction on their domestic line of credit for the entire amount of the standby letter of credit. This standard bank practice reduces the exporter’s working capital and ability to buy materials, pay staff, and may impact the ability to fulfill the export order.
The U.S. Small Business Administration has placed a priority on helping small business exporters and offers them an alternative approach to finance standby letters of credit.
By using the SBA Export Express or Export Working Capital Programs, small businesses can get standby letters of credit from participating lenders that only require collateral equal to 25% of the face value of the standby letter of credit. This is a significant percentage decrease and frees up working capital to help them compete and win export orders.
Standby letters of credit help establish trust with your clients and are a powerful tool to help meet your business’s goals. SBA’s export assistance programs can help you finance standby letters of credit for your clients. Learn more about all of SBA’s resources including our export products.
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