The relentless migration of U.S. manufacturing overseas, especially to Asia, has slashed costs, while requiring new skills in managing long-distance supply chains. But it has also demanded mastery of unfamiliar financing tools and a fresh strategy in arranging working capital.

Or, to put it another way: the conversion of producers into traders has meant a crash course in the financial side of international business, especially for middle market and smaller companies.

"It's been a steep learning curve for many," said Michael Scheller, senior vice president, international banking, at New York-based Sterling National Bank (www.sterlingnational.com). "As our manufacturer customers become importers, they have to deal with the inherently riskier nature of international trade, compared with domestic transactions."

And that means working with new and complicated documentation and procedures, especially the use of letters of credit (LC), the classic trade finance tool, that "substitutes the reputation and creditworthiness of a bank for that of the importer, guaranteeing payment on the transaction when the conditions of the LC are met," Scheller noted.

Supporting suppliers' working capital

Meanwhile, sourcing abroad has also meant paying attention to the working capital requirements of overseas suppliers, not just the U.S. importer. Typically, a U.S. manufacturer may rely on a bank or finance company for working capital to buy raw materials, finance inventories, and discount receivables.

Asian manufacturers, however, rely heavily on U.S. importers' LCs (and their guarantee of payment) to arrange working capital from their local banks. That has long been a central part of Asian business culture, and U.S. companies have had to support the practice. But, as Scheller points out, gradually importers usually move to documentary collections (the Asian factory's bank sends the appropriate trade documents to the importer's bank, which pays)--a much simpler, and less costly procedure.

And lately, he adds, the financial tools have been changing further. The 2001 terrorist attacks on New York slowed some U.S. imports drastically for a while, and many Asian factories, facing intense competitive pressure, shifted to accepting partial up-front payments to cover their raw materials purchases, thus displacing their insistence on letters of credit, or even documentary collections. But that has been the case only with experienced importers that enjoy established relationships with Asian suppliers.

The Asian factories have been accepting a 20-30 percent deposit up front, sent through a wire transfer, to fund the raw materials. When the order is finished and the merchandise shipped, the factory notifies the importer, and asks for payment. And the importer may borrow up front through its working capital credit lines to pay the deposits.

Financial packages vary

The financing packages that have developed to cover overseas payments and working capital now vary widely, depending on the institution involved. Banks, such as Sterling National Bank, still do the bulk of the business, but a growing cluster of specialty finance companies has emerged, and each of these has its own business model.

Capstone Business Credit (www.capstonetrade.com) in New York, for example, works with importers that sell to sizable retailers and wholesalers, and a number of its clients have moved from U.S. manufacturing to sourcing in Asia.

"One of our growing trade finance models is a loan structure with several elements," says Joseph Ingrassia, a managing partner. These include working capital for inventory finance (which supports fast delivery to customers), letter of credit support for the overseas supplier, and a factoring line that takes the risk out of receivables from the U.S. buyers.

Capstone's strategy is to work with a customer for two to three years, enabling it to grow and build profits and assets. At that point, the company is prepared to access more traditional bank credit.

Take Jet Set Style, a women's sportswear firm in Miami, which began working with Capstone early in 2005. "We produce one of our lines through contract manufacturing in Asia (mostly China and India), and sell to large U.S. retailers," said Katalin Posztos, chief executive. The firm works with its bank to pay suppliers through wire transfers, but works with Capstone to factor the receivables from its U.S. customers, she explained.

"Capstone advances us 80 percent of the invoices, then pays the final 20 percent, minus its fees, after collection from the final customer," she added. The discount is sometimes expensive, but, Posztos said, it provides valuable financial liquidity.

Or take Ultimate Apparel, in Belmore, New York, which sources its clothing (jeans, flannel pants, sweatshirts) in China, India, and Pakistan, and sells to Midwest stores. Capstone injects its own resources to support the company's letters of credit, which finance the transactions created by U.S. customers' purchase orders. Then, it factors all of the orders, paying Ultimate Apparel up front.

"It has helped us move up to the next level," said president Evan Platt. "We used to be jobbers, buying and selling, but now we are custom manufacturers working with offshore factories. We couldn't have done that without Capstone."

In Richmond, Virginia, Ex-Im Trade Finance, a veteran of these import structures (it was launched in the mid-1980s) uses its own unique combination of tools to finance companies that have shifted production to Asia.

"We want to see the U.S. importer with a purchase order from a creditworthy company," explained Ex-Im president David Shepardson, an ex-banker. "We will arrange the letter of credit, and we often make use of credit insurance to cover the final buyer." In most cases, Ex-Im takes title to the goods, which enhances its control and its ability to arrange the LC.

And then there's TradeCard (www.tradecard.com) in New York, whose Internet-based financial services support a large volume of purchases from Asia on behalf of middle market and corporate importers and retailers. TradeCard has pioneered ways to assure payment without a letter of credit, and to make financing available to the Asian suppliers.

The centerpiece of its approach has been to create a kind of "club" that includes all of the parties to a transaction--the U.S. importer, its ultimate customer (say a retailer), and its overseas suppliers. They are all pre-qualified, or underwritten, on their creditworthiness.

Then, once that is in place, TradeCard can bring in the services of COFACE (www.coface-usa.com), a leading credit insurer, or CIT (www.cit.com), a leading finance company, which offer payment protection to the overseas vendors. And it has created a network of banks in Asia that can be automatically pulled in to finance the suppliers.

"The vendor gets an interest rate based on the buyer's credit strength, not the seller's," says Lou Bruu, TradeCard vice president, market development. "A Taiwan firm that has landed an order can just click on the Taiwan banks list on our Web site, and apply for working capital finance automatically."

It just goes to show you: generate the trade flows, and imaginative ways to finance them will show up.

Sidebar: Some LC terms...

Accepting Bank - The bank named in a term Letter of Credit on which drafts are drawn that has agreed to accept the draft. By accepting the draft, the Drawee Bank signifies its commitment to pay the face amount at maturity to anyone who presents it at maturity. After accepting the draft, the Drawee Bank becomes the Accepting Bank.

Advising Bank - The bank to which the Issuing Bank sends the Letter of Credit, with instructions to notify the Exporter (Beneficiary).

Applicant - The party that has contracted to buy goods; the Importer in the Letter of Credit process.

"Available With" Bank - The bank authorized in the Letter of Credit to effect payment under, accept or negotiate the Letter of Credit.

Beneficiary - The party that has contracted to sell the goods; the Exporter in the Letter of Credit process.

Confirming Bank - The bank which, at the request of the Issuing Bank, adds its confirmation to the Letter of Credit. In doing so, the Confirming Bank undertakes to make payment to the Exporter upon presentation of documents under the Letter of Credit assuming all terms and conditions of the Letter of Credit have been met.

Drawee Bank - The bank named in the Letter of Credit on which the drafts are to be drawn.

Issuing Bank - The bank issuing the Letter of Credit at the request of its customer the Importer (Applicant) in favor of the Exporter (Beneficiary), guaranteeing payment under the Letter of Credit if all terms and conditions are met.

Letter of Credit - A written instrument issued by a bank at the request of its customer, the Importer (Applicant), whereby the bank promises to pay the Exporter (Beneficiary) for goods or services provided that the Exporter presents all documents called for, exactly as stipulated in the Letter of Credit, and meets all other terms and conditions set out in the Letter of Credit.

Reimbursing Bank - The bank designated in the Letter of Credit to reimburse the "available with" Bank which submits payment claims under the Letter of Credit.

Transferring Bank - The bank authorized by the Issuing Bank to transfer at the Beneficiary's request all or part of the Letter of Credit to another party.

Source: TD Commercial Banking (www.tdcommercialbanking.com)