Foreign demand for U.S. hardwoods is growing, fast becoming a significant profit center for U.S. hardwood lumber sawmills as well as hardwoods wholesale distributors. Exports for FYE 2003 totaled $1,284 million, up 3.48% from the prior year. China has been the fastest growth market for U.S. hardwoods, taking $109 million during 2003 (the latest full year FAS data), up 29.47% from 2002.

Yet, some of our NHLA members have not taken advantage of this new, growing foreign demand because either 1) they do not trust foreign buyers to pay as agreed or 2) they are uncomfortable with complex, costly commercial letters of credit. In a recent survey of small businesses with concerns about exporting conducted by the Export-Import Bank of the United States (Ex-Im Bank), the majority of respondents said ‘Getting Paid' was their highest concern and biggest risk.

Hardwood sales to U.S. buyers are usually made on ‘Open Account' terms subject to appropriate creditworthiness. Now, U.S. hardwood sawmills and wholesale distributors can give ‘Open Account' terms to foreign buyers and be reasonably assured that they will ‘Get Paid' Using Export Credit Insurance is a) cheaper and b) more reliable than using costly letters of credit. Letters of credit cost your foreign customer 2-3% of the amount of the shipment. They also tie up your foreign customer's bank credit with their local bank. Costs for Export Credit Insurance, by contrast, are much lower and range between .25% and .65% of the shipment value, saving the foreign buyer about 2 – 2.5%. By not having to issue letters of credit, your foreign customer will save money AND free up their credit with their local bank, while the hardwoods lumber exporter can realize a greater profit, allowing you to absorb this low cost insurance and still mark up your profit margin by the 2 – 2.5% savings.

Export More: Many members of the NHLA are deemed ‘Small Business'. Ex-Im Bank, the official U.S. Government Export Support Agency, has an Export Credit Insurance Policy designed specifically for U.S. ‘Small Business'. If you operate a Sawmill or manufacture Flooring and Millwork and your total number of employees if 500 or less, you are a ‘Small Business' (without regard for your annual sales). If you are simply a Wholesale Lumber Distributor and have 100 or fewer employees, you are likewise considered a ‘Small Business' Since a significant number of the NHLA members fall into these categories, they might be eligible for Ex-Im Bank's Small Business Export Credit Insurance Policy. Why is this important? Because the cost to insure export shipments under the Small Business Export Credit Insurance Policy is low and the loss coverage is higher than most other export credit insurance policies – features that are designed to encourage U.S. Small Businesses to export more reducing our Trade Deficit.

To be specific, the loss coverage for default of shipment invoices by your foreign customer is a high 95% - 100% and there is NO First Loss Deductible! For example, if your foreign customer defaults on 3 outstanding invoices totaling $150,000 simply because they will not or cannot pay them, the loss paid under the policy would be $142,500 with no deductible. Assuming your annual sales to this foreign customer totaled $500,000 and your payment terms were Cash Against Documents (CAD), the annual premium would be about $1,200.00 for these annual sales to this one customer. If your payment terms were up to 60 days from date of shipment, your annual premium would be about $3,250. By comparison, the cost of issuing a letter of credit would be about $10,000 - 15,000, a cost of your foreign customer.

By using Export Credit Insurance, you will save your foreign customer about $8,000 - $12,000, which you can add to your profit margin by quoting a higher price (without requiring a letter of credit).

Other eligibility requirements to receive a Small Business Export Credit Insurance Policy issued by Ex-Im Bank include 1) being in business at least one year with profitable operations, 2) maintaining a positive Net Worth and 3) having average annual Export ‘Credit' Sales of $5,000,000 or less ( excluding sales to Canadian buyers). Ex-Im Bank does require that all export shipments (usually excluding sales to Canada) are to be insured in order to offer such high loss indemnity and modest premium cost.

Using an Ex-Im Bank Small Business Export Credit Insurance Policy has allowed several of our clients to triple and even quadruple export sales without a loss. With more U.S. small businesses increasing their export sales, our National Trade Deficit would be significantly reduced. And if your company finances its working capital with a local bank, your lender will usually include your ‘export' accounts receivable in your borrowing base, helping you increase your borrowing capacity to finance sales growth.

John R. Koch is President and Founder of WorldTradeConsult, Memphis , TN , an NHLA Associate Member. He can be reached at 901-202-3958 or by contact form . WorldTradeConsult is a Registered Broker with the Export-Import Bank of the United States and represents many other insurance carriers helping businesses protect assets and income from loss with Trade Insurance Services.