Small Business: Exporting



Success Overseas
The domestic economy is weak, which means
now is the perfect time to tap foreign markets

Learn more: State, Federal Agencies Offer Helpful Programs

By Heidi Russell Rafferty

Steve Cavanaugh had never been out of the United States, but in 1997, he found himself negotiating a deal to engineer a new water system for Iasi, Romania.

 “It was like the country boy going to the city,” says Cavanaugh, president of Cavanaugh & Associates PA & Cavanaugh International LLC. The 38-person civil and environmental engineering firm is based in Winston-Salem, and most of its clients are counties and municipalities.

Iasi County signed a declaration of intent to contract for a 100-million-gallon-per-day wastewater plant — “which is huge,” Cavanaugh says. But when it came time to seal the deal, the county told him he would have to pay for a pre-feasibility study before he could bid on the design of the project. Cavanaugh had already invested up to $12,000. “It was like a pin prick in the balloon,” he says.

Cavanaugh says it would have been easy to walk away, but he continued discussions and learned that Iasi County still needed help with their water leak detection system. He showed officials how he could apply engineering principles he used in the United States to solve their problem.

“We were there at the right time. . . . It was a phenomenal success,” Cavanaugh says, citing the experience as evidence he can use to show larger U.S. firms how his company can be their expert for niche services on the international stage, too.

State and federal commerce officials say that small-to-medium-sized companies can learn from Cavanaugh’s example of keeping the big picture in mind when it comes to exporting. Especially in the midst of a harsh domestic economy, international opportunities abound for every conceivable product or service, says Debbie Strader, acting state director for the U.S. Export Assistance Center of the U.S. Department of Commerce. Like Cavanaugh, companies need to think creatively to sell their wares overseas. “Things go through a cycle. When the domestic market declines, usually the international market is more favorable for business,” Strader says. “We say that now is the time to focus on this.”

Although no grants are available for exporting, state and federal organizations offer loans to help you with exporting expenses, as well as insurance to protect you in unknown markets. They also provide trade events and overseas travel opportunities to meet potential clients, market research and seminars to help you learn the ins and outs of the exporting process and how to cut your bottom line.


Ripe During a Recession

Most people might think that an economic downturn would be the time to avoid a new exporting strategy, but the opposite is actually true, experts say. Businesses fail to see how exporting can help them in the long term, says Pamela Davison, secretary of the board of directors of the World Trade Center North Carolina (WTCNC).

“I think that only 10 percent of the companies that could be involved in international trade actually are,” she says. “Right now, because things are dangerous on the world scene, a lot of people who might be looking to source their materials are hesitant. But big companies and those companies that are already successful in foreign markets will keep their feet in.”

According to the International Trade Division of the N.C. Department of Commerce, leading exports have indeed dropped, from $17.9 billion in 2000 to $16.8 billion in 2001, the latest figures available for the state.

But recent national statistics from the Foreign Trade Division of the U.S. Census Bureau are more positive. Exports increased to $81.9 billion in January 2003 from $80.5 billion in December 2002, while imports decreased to $123 billion in January from $125.5 billion in the previous month.

Strader says that anecdotally, she definitely noticed a pickup in the interest in exporting, beginning in January 2002. “We’re becoming increasingly more and more busy,” she says. “Things are starting to increase. We are getting a lot of calls.”

She and others agree that when the U.S. domestic market is down, there will always be a need somewhere else in the world for a particular product. Here are some reasons that companies should do business overseas:

Competing overseas may result in a better domestic product, as in Cavanaugh’s case.

Your long-term business success may depend on your participation in the global economy.

Diversification abroad can offset loss of sales at home.

Entering new markets will challenge your company to stay current with technological developments.

Good markets abroad may still exist for products that have reached the end of their domestic life cycle.

Increased sales can produce increased profits and spread costs for development and production.

“If you have confidence in the quality of your product, you can find that market niche in the world where you can sell it,” says Ken Dillo, director of the Small Business Center at Wake Technical Community College. “This would be the time to put the efforts in marketing a product and making your contacts and connecting with organizations like the state Department of Commerce. … If you find your market, then you’ll be in good shape a year from now.”


Think Creatively

Creativity is essential when it comes to brainstorming the potential market for your product or service. There are some traditionally popular North Carolina wares — tobacco and technology among them — but business people fail to consider that their little-known widget may be a huge success in another country, says Susan Vondette, director of membership and membership services at WTC-NC.

“It’s amazing what people can think of exporting,” Vondette says. In January, she met with a husband-and-wife team who had both been laid off. They wanted to export lighting products because of the husband’s expertise with lights and light fixtures. Their company, Manufacturing Consultants of Wrightsville Beach, has just landed its first $20,000 transaction to China.

“They’re doing a couple of different things — sourcing light bulbs priced competitively with those in the U.S. Sometimes they’re importing the product, but then they redesign it to be re-exported,” Vondette says.

Another company, Trans East/New Growth Designs of Greenville, imports artificial flowers and stems from Asia and assembles finished arrangements using North Carolina-made pottery, Vondette says. The products ship worldwide.

Vondette also assisted Harris Consulting Group Inc. of Raleigh in its idea to export fertilizer from North Carolina to Kenya and Zimbabwe. “It was a match made in heaven,” she says.

Vondette notes that to be successful with exporting, you should either have knowledge about the potential country or extensive product knowledge. “If you have either one of those two components, it’s a lot easier than if you have no idea of what to export. You’ll see results a lot faster,” she says.

Strader laughs as she recounts some of the most remarkable pairings that her office helped to make: one company exported cockroaches to Mexico. “There was a particular variety they wanted to study in a scientific laboratory down there,” she says.

“We’ve also exported sand to Saudi Arabia. The type of sand they needed for building wasn’t the kind that they had. And we’ve exported used German automobiles to Germany. Go figure.”


Beware Unexpected Costs

Most of the cost of exporting is paid by the buyer. But there are hidden expenses that can quickly add up for you, says Dan Holt, international finance specialist at the Small Business Administration (SBA) in Charlotte.

“Many people get in trouble exporting, because they don’t understand the cost of doing business,” Holt says. Some smaller expenses include phone bills and travel. Business owners also forget to calculate the salary equivalent for the time they have to spend on each deal.

 “A lot of people also have interest expenses,” Holt adds. “If you’re selling to someone in Europe, for example, you make the item and borrow the money to do it. The interest expense creeps in. You’re renting money for the product to go to Europe. Then, because the product is floating on a ship, you may have 30 to 60 days before the account receivable converts back to cash.”

Several years ago, the SBA realized that it was difficult for small businesses to obtain bank loans for small exporting needs, such as $50,000 to ship one container. “Your bank would look at you like you lost your mind,” Holt says. “Most banks exclude foreign receivables from your borrowing.”

The SBA established the Export Working Capital Program (EWCP) to make such loans attractive to lenders. Each deal is a customized transaction, and the maximum interest rate is 2 1/2 percent. “We’re your rich uncle,” Holt says. “We sign for you. We guarantee up to 90 percent on that loan, and the bank is less constrained with collateral issues. They require a lot of collateral, and we stand in for that requirement.”

For a loan of more than $750,000 a business would use the program of the same name through the Export-Import Bank of the United States, an independent U.S. government agency that helps finance the overseas sales of U.S. goods and services. In 65 years, Ex-Im has supported more than $300 billion in U.S. exports. In North Carolina, the Ex-Im Bank is half-funded by the University of North Carolina System and half-funded by the SBA.

Annetta Brady is director of international business development at the Small Business and Technology Development Center, which is a partner of the Ex-Im Bank in North Carolina. She says the loan program helps U.S. exporters land difficult sales. “If you had a buyer in Brazil that wanted to purchase a $2 million piece of equipment and the interest rates there were quite high, then the seller would intercede and try to find a bank based in the U.S. that would finance the sale to Brazil. The theory is that the interest rate would be less expensive than what the company would have to pay in Brazil,” Brady says.

The SBA also has a new program for small loans under $150,000 in which lenders can become “express lenders,” meaning they can make the loan with no government paperwork, Holt notes. “That means a bank can get a guarantee for a small loan, say for $25,000. It allows for anyone to play, and there is no transaction cost on top of it that would keep the bank from making money,” he says.


Insure Your Receivables

Exporters also need assurance that their buyers overseas will pay up. The Ex-Im Bank provides the Export Credit Insurance Program to protect exporters against loss should a foreign buyer or other foreign debtor default for political or commercial reasons. Using the insurance policy, you will be able to sell more because you will be able to offer open account terms. If you’re selling on 60-day open terms and don’t receive payment, you would be reimbursed for 95 percent of that order, Brady says. Not only is there commercial coverage, but political risk coverage as well. If you were denied payment for political reasons, you would be reimbursed 100 percent.

Another advantage, according to Brady, is that the insurance can enhance your borrowing capacity with banks. “If you tell them you have U.S. government insurance, they’re much more inclined to loan you money,” she says.

Brady notes that there is a “country limitation schedule,” or a rating system by which Ex-Im determines whether it can do business with a country’s public or private sector.

One way to cut your exporting costs is by using a Foreign Trade Zone, says Davison of the WTCNC. The zones are neutral, secured areas that are legally outside of U.S. Customs territory. Foreign or domestic merchandise may enter these enclaves without a formal customs entry or the payment of customs duties or government excise taxes, and without a thorough examination.

If the final product is exported from the United States, no U.S. customs duty or excise tax is levied. If the final product is imported into the United States, customs duty and excise taxes are due only at the time of transfer from the Foreign Trade Zone. The fees are charged either to the product itself or its imported parts, whichever is lower. Spoiled, damaged or waste goods may be disposed of or re-exported without payment of duty.

“This can be a real help, particularly if you can locate your storage and warehousing in the zone or have a manufacturing facility made into a sub zone or general purpose zone,” Davison says.

So while expanding a business into foreign counties doesn’t come without its share of headaches and occasional roadblocks, the positives certainly can outweigh the negatives and boost a company’s bottom line.

That was the case for Cavanaugh & Associates in Winston-Salem, which parlayed a successful international foray into growth back home. “We took that international experience, came back to North Carolina and realized there was no one doing leak detection,” says Steve Cavanaugh.

Its resume fortified, Cavanaugh & Associates soon landed leak-detection projects in the towns of Hillsborough, Waynesboro and Spencer, and the company’s business has continued to prosper. “We learned lessons overseas,” Cavanaugh says. “We applied American ingenuity to serve as a niche business for us. … We came back, hired people and have grown a business that has served us here.”




State, Federal Agencies Offer Helpful Programs

If this is your first foray into the world of exporting and you need expertise and assistance for your market research and business introductions, there is a network of organizations that works collaboratively to meet a company’s needs through a myriad of programs. Here’s a snapshot of three of them and what each offers:

International Trade Division, N.C. Department of Commerce (www.exportnc.com). Director Peter Cunningham encourages companies to start their inquiries with his division. “Our services are free,” he says.

 The division has trade representatives in Canada, Germany, China, Japan, Mexico and Korea. They work with North Carolina companies abroad and also come stateside for an annual “Road Show,” which was in April this year. During the five-day Road Show, they consult with export-ready companies on how to access overseas partners. The event has helped hundreds of North Carolina companies, Cunningham says.

The division also has a staff of seven consultants who focus on specific industry sectors:

Chemicals, plastics, paper products and boats;

Industrial and construction machinery, transportation equipment/automotive, infrastructure, power generation and services;

Information technology, software, electronics and computers/peripherals;

Telecommunications; environmental, biotech/pharmaceuticals, medical equipment, lab equipment and rubber;

And textiles, apparel, hosiery and textile machinery.

In addition, there are trade shows and exhibitions abroad. About a dozen are scheduled for 2003, Cunningham says.

The “Fast Track Service” is another free benefit. A company travels abroad at its own expense and then works with the state’s foreign trade representative. The division has helped about 15 companies since the program was launched last year. Businesses have made connections with partners in Germany, Japan, China and Korea.

 “We wrap them in the North Carolina flag and offer appointments” with potential partners, Cunningham says. “We take good care of them. This is designed for companies that are committed and have done great research.”

The division works with seven North Carolina community colleges to offer its “Export Ready” program, a one-to-two-day event to prepare businesses for international competition. Scheduled courses are offered at Wake Technical Community College, Asheville-Buncombe Technical Community College, Cape Fear Community College in Wilmington, Central Piedmont Community College in Charlotte, Forsyth Technical Community College in Winston-Salem, Lenoir Community College in Kinston and Rockingham Community College in Wentworth.

The division is planning to launch an online course in cooperation with Pitt Community College in Greenville this summer. The directed study will allow a company to work with a professor on its own timetable.

“It’s like Exporting 101,” Cunningham says. “The idea is that we help companies define an export marketing plan and work on key functions of international business – how law, finance is impacted, what they need to know about the culture, etc. We try to break it down into modules.”

Ken Dillo, director of the Small Business Center at Wake Technical Community College, says he also offers trips, which are planned and scheduled based on participation in the Road Shows and the Export Ready programs. Two years ago, a group traveled to Mexico. This year, Dillo is discussing a trip to Toronto with the Canadian foreign trade representative.

Another upcoming course at Wake Tech is “Successful Importing,” which will be offered from Sept. 18 to Nov. 6. “We start with basics on how to import into the United States — how do you get it here — from transportation, to import regulation, to all the documentation associated with it. How do you finance it? What are the requirements of customs to bring it into the country?” Dillo says.

World Trade Center North Carolina (www.wtcnc.org). Members of the WTCNC have access to distributors, buyers and trade leads worldwide, as well as programs that address importing and exporting, says Susan Vondette, its director of membership services.

“We’re the only entity allowed to do that. All the government agencies help people with exporting but they’re not allowed to help on the importing side,” she says.

Business owners can either have an individual or a corporate membership. Individual memberships are $500 per year. “There are 336 World Trade Centers in 100 countries,” Vondette says. “When you join, you are, in essence, a member of every center around the world. When you travel overseas, you’re able to announce yourself before you get there. You can use an office space there if you don’t want to entertain someone in your hotel.”

Other benefits include contracting with an interpreter using a World Trade membership rate. The center also negotiates preferential discounts at trade clubs, rental car agencies and international cellular phone companies.

“We’re a one-stop shop. … You make one call with 15 questions, and we’ll answer all 15 within 24 to 48 hours,” Vondette says.

U.S. Export Assistance Center/U.S. Department of Commerce (www.buyUSA.com and www.USAtrade.gov). This center helps U.S. firms by combining the international services of the federal Commerce Department, the Export-Import Bank and the Small Business Administration. There are three centers in North Carolina — Raleigh, Greensboro and Charlotte — and 106 nationally. Internationally, the centers are called the “Commercial Service” and are based in U.S. embassies.

“Some (foreign representatives) are American citizens, and others are foreign service nationals. They live there and know the market and have worked in a particular field,” says Debbie Strader, acting state director for the U.S. Export Assistance Center. “They have a good knowledge of their industry and provide market research information and trade leads.”

The center’s export promotion services include a Gold Key Service, which is similar to the state Commerce Department’s Fast Track Service. It is offered in 47 countries. The center also provides customized market analysis, international market research, a catalogue that allows a business to showcase its product or service to 161 overseas markets, background checks on potential trading partners and international partner searches.

“The big key is that we only deal with companies whose products have 51 percent U.S. content. They can’t import something from China and re-sell it. It has to be 51 percent made in the United States,” Strader says.

The centers charge fees for most of their services, under a Congressional mandate. Counseling is free. Fees range depending on the task and time involved. Strader says she recommends that businesses first check out resources through the state Commerce Department, because its services are free. “We want to see North Carolina companies succeed,” she says. “I want to see a North Carolina company get the export just as much as state government does.”  -- Heidi Russell Rafferty

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