One of the most important elements in establishing a successful exporting business is understanding financing and pricing issues associated with international trade. Production costs and product pricing are profoundly interrelated aspects of any business venture; an enterprise has to fully understand its marketing, production, distribution, and other operating costs if it hopes to make an informed decision regarding pricing strategies for its product line. These factors are complicated enough in the domestic arena. For a company to successfully expand into foreign markets, it needs to gather even more information—often on a market or markets with which it is largely unfamiliar. This market research is essential to any company hoping to make informed decisions regarding pricing strategies—the cornerstone of any push into a new market—and secure financing. As the Small Business Administration (SBA) has noted, "setting proper export prices is crucial to a successful international sales program; prices must be high enough to generate a reasonable profit, yet low enough to be competitive in overseas markets."


Whereas large corporations are usually able to easily secure financing for exporting initiatives, either internally or through venture capitalists or lenders, small businesses often have difficulty getting financing for such plans. This is a significant obstacle, for small business owners are far more likely to need such outside financing in order to execute their exporting strategy. Analysts thus recommend that small businesses have their financial arrangements firmly in place before launching their exporting business.

Before hunting down financing for their exporting business, prospective exporters need to understanding the differences between the two general financing options that are available through commercial lenders: working capital financing and trade financing. With working capital financing, a small business can get money for long-term development. Trade financing, however, is aimed only at financing a specific business transaction, sale, or event. These loans, which are easier to qualify for than working capital financing, generally have several notable stipulations attached. Principal among these is its "self-liquidating" character. This means that the bank structures the loan so that it receives payment directly from the foreign company that is purchasing the borrower's goods. The bank subsequently applies the sales proceeds to the loan before crediting whatever money is left to the borrower's account. Small business analysts note that trade financing is often utilized by small and/or undercapitalized companies who have no choice but to accept the more stringent conditions associated with those loans. This does not mean that a trade financing arrangement should necessarily be avoided; it simply reflects: 1) the limited bargaining power possessed by many small businesses; and 2) the caution with which many lending institutions approach exporting financing arrangements.

Small businesses may choose from several types of institutions when seeking financing for exporting. The first of these is the local bank with which they already do business. Banks that are active in small business lending or maintain an international department are more likely to be agreeable to providing a loan than will banks without those characteristics. Since many banking institutions do not focus on export financing, it may be necessary to go elsewhere. During this search, however, the small business owner should be mindful of the differences between international trade lending and international trade services. Some banks offer international trade services, such as negotiating letters of intent, but these services do not include financing. To secure financing, the owner must make arrangements with an international lender. He or she is more likely to be successful in securing financing with such a lender if he or she can show that repayment can be made through a secondary source if necessary. The small business owner who negotiates with a bank for financing should also be prepared to provide a variety of documentation on the business, including domestic and export business plans; purpose of loan; export transaction-related documentation; tax returns (usually for the past three years); financial statements (again, for previous three years); projections of income, expenses, and cash flow; schedule of term debts; and signed personal financial statements.

If these financing avenues prove fruitless, the small business owner still has other places to turn. These include factoring houses, export trading companies, private trade finance companies, export management companies, and U.S. government agencies.

Factoring houses purchase export receivables on a discounted basis. These companies, which are also known as "factors," agree to purchase exported materials at a certain percentage below invoice value (the percentage rate is dependent on, among other things the intended market and the type of buyer). Under this arrangement, the exporter does not receive full value for its goods, but it does receive payment immediately, and does not have to worry about future collection hassles with foreign customers who are tardy with their payments.

Private trade finance companies provide a range of financing options to small businesses in exchange for fees, commissions, or outright involvement in the transactions under consideration.

Export trading companies (ETCs) and export management companies (EMCs) are popular with some small exporters as well. In addition to providing assistance in arranging financing for exporters, ETCs and EMCs may offer a wide range of potentially helpful other services, including international market research, legal assistance, insurance, administration, warehousing and distribution, and product design. As small business consultants note, a small business that utilizes these services intelligently can productively leverage its resources.

Finally, small business owners may choose to seek assistance from the government. Several federal agencies—and some state agencies—maintain programs that offer financial aid to small enterprises seeking to expand or consolidate their businesses in foreign markets. Loan programs offered by the Small Business Administration, for example, include the International Trade Loan Program, a long-term financing option; the ERLC (Export Revolving Line of Credit) Program, which lasts for up to 36 months; regular SBA business loans. Businesses may also seek loans through the Small Business Investment Company (SBIC), the Department of Agriculture's Commodity Credit Corporation (CCC), or the Export-Import Bank of the United States (Ex-Im Bank). The latter is an independent federal agency charged with assisting U.S. exporters of goods and services through a wide range of programs. Some of these export assistance programs are maintained in cooperation with various state governments. Lastly, some small business owners choose to secure financing for deals in moderate-to high-risk emerging markets through the Overseas Private Investment Corporation (OPIC), an organization that guarantees and/or provides project loans to American companies in developing nations around the world, or the U.S. Agency for International Development (USAID). The latter agency, said Working Woman' s Jan Alexander, "commits loans and awards grants to eligible countries, with the requirement that the country use the money for projects that buy commodities or services from U.S. suppliers. If [an American small business] can address a market need in any one of four areas—the environment, agribusiness, the health sciences, or information technology—[the business] might be able to get a so-called procurement opportunity, paid for by USAID."


A business that seeks to determine its total operating expenses for export products—whether doing so for its own internal records or to secure export financing—needs to make certain that it includes only those costs that are pertinent to its international efforts. For example, a company that has incorporated the total annual cost of raw materials that are used in products sold in both domestic and international markets into calculations of exporting expenses is unintentionally inflating the cost of its forays into the foreign market. Myriad other operating cost factors can be misconstrued or misinterpreted as well.

To arrive at an accurate understanding of total exporting costs, then, many businesses utilize "marginal cost pricing." This method calculates the direct operating expenses of producing and selling products for export as a way of establishing a bottom-line figure below which a company cannot set a price without incurring a loss. In order to tabulate this figure accurately, businesses first determine the fixed costs (production costs, overhead, administration, research and development) of producing an additional unit for export. They then incorporate any product modification expenses that are necessary into the equation. Once this "floor price" has been established, businesses should deduct any operating expenses that are not attributable to international operations. Moreover, they should prorate other operating costs—including insurance, rental or leasing obligations, factory over-head costs, taxes, administration, communications, patent and trademark fees, legal expenses, and office supplies—that cover a business's combined domestic and foreign operations. Finally, companies need to calculate the various costs involved in manufacturing the product or products for export.

The primary costs associated with producing a good for export are usually direct materials and labor costs. Other cost factors associated with exporting can include promotional materials (including brochures, magazines, catalogs, slide shows, and videos), sales commissions, travel expenses, export advertising, packing materials, market research, translation costs, product modification expenses, consultancy fees, and distribution expenses (from freight fees to tariffs to customs duties). These cost factors can be extremely variable, depending on the nature of the product, the exporting company's business philosophy, and its chosen channels of distribution. They can also be fundamentally altered by political, economic, and environmental changes within a target market, and legal and/or regulatory developments in the world of international commerce.

Currency value fluctuations, for instance, can dramatically alter a company's profit margin. The SBA recommends that small businesses new to exporting arrange transactions in U.S. dollars; that is, they should both price their goods and request payment for those goods in U.S. dollars. This precaution provides a company with significant protection against such fluctuations. If a buyer balks at conducting the transaction in U.S. dollars, an exporter can still protect him or herself through factoring or hedging. In factoring, the exporter transfers title to its foreign accounts receivable on a discounted basis to a factoring house, which will subsequently assume take care of the client's credit, collection, and accounting needs. Hedging, meanwhile, guarantees a set exchange rate through the use of option and forward contracts.

A second international pricing method that is sometimes utilized is called the "cost-plus" method. This is arrived at by taking a company's domestic price for a product and adding all exporting costs, including documentation expenses, freight charges, customs duties, and international marketing costs. Trade experts note that this method allows a business to maintain its domestic profit margin percentage, but it does not factor in local market conditions that might make introduction of the product a questionable endeavor.


"Pricing products to be competitive in international markets can be a challenge," cautioned the SBA in its exporting guidebook, Breaking into the Trade Game: A Small Business Guide. "Pricing that works in one market may be totally uncompetitive in another." A well-considered pricing strategy, then, is regarded as an essential component of any business's exporting plan.

Any business, large or small, needs to ponder several factors when putting together a pricing strategy for foreign markets. In addition to considering operating and marketing expenses, businesses should weigh both competition and product demand within the targeted country. Finally, a business owner pondering entry into the world of international trade needs to establish practices that are in concert with his or her ultimate goals. "Your goals will vary depending on the target overseas market," noted the SBA. "Are you entering the market with a new or unique product? Are you selling excess or obsolete products? Can your product demand a higher price because of brand recognition or superior quality? Maybe you are willing to reduce profits to gain market share for long-term growth. Your pricing decisions will be affected by your company's goals."

Very few exporters are able to set prices for their goods and services without carefully evaluating their competitor's pricing policies. In a crowded foreign market that features a number of competitors, an exporter may have little choice but to match the going price or even go below it to establish a market share. Conversely, an exporter armed with a product or service that is new to a particular foreign market may be able to set a higher price than normally charged domestically. Of course, sometimes a company introduces a brand new product or service into a foreign market, only to discover to its great distress that nobody is interested in the product or service. Businesses that find themselves in such situations almost invariably did not devote sufficient time or resources to assessing market demand.


There are five principal arrangements that exporters use in securing payment for their products or services. The most popular method of payment among exporters is, understandably, one in which they receive payment for their goods in advance. Indeed, many small businesses refuse to make exporting arrangements with a buyer who is unwilling to agree to this transaction method.

PAYMENT IN ADVANCE This protects exporters from buyers who prove unwilling or unable to make full payment once they have received the ordered goods. Some business analysts contend, however, that this insistence on such advantageous (for the exporter) terms may cost a company business over time if it is not careful. They point out that some importers of their goods might interpret this stipulation as a suggestion that they do not conduct their business honorably. Well-established and respected buyers with good credit histories—exactly the sort of customers that small businesses should court—are even more likely to take offense at such a requirement. Consultants thus encourage some small business clients to be somewhat malleable regarding payment mechanisms instead of insisting on strict adherence to up-front payments on all occasions.

LETTER OF CREDIT Another payment method is known as the letter of credit (LC). The LC payment mechanism is a complex transaction that can seem somewhat cumbersome, but its safeguards make it quite attractive to many businesses involved in international trade. In this situation, a bank in essence insures that the importer's credit is good by bestowing upon it an LC. Under this arrangement, the bank makes payment to the importer. Financial experts note that if a letter of credit comes from a U.S. bank, it virtually eliminates the commercial credit risk of an export sale. In other words, the exporter is assured of receiving his or her due compensation for the sale. The terms of an irrevocable letter of credit cannot be changed without the express permission of the exporter once it has been opened. The letter of credit also extends some protection to importers, for it includes steps that ensure that the exporter has fully complied with the terms of sale discussed in the LC. But some importers balk at the added costs that LC arrangements bring on them.

Letters of credit can be shaped in accordance with a number of different payment schedules. For instance, some LCs call for payment within 72 hours, while others call for payment a certain number of days after export materials have been received. Most exporters, however, prefer to have a specified date of payment included in the letter of credit.

DOCUMENTARY COLLECTION This payment mechanism, which is also known as a draft, is roughly equivalent to COD (cash on delivery) or payment by check terms. Under this system of payment, a draft is drawn that requires the buyer to make payment either on sight (sight draft) or by a specified date (time draft). Legal possession of the products does not pass from the exporter to the importer until the draft has been paid or accepted. Analysts note that this arrangement serves to protect both parties (although an exporter may still have to pursue legal options to secure payment if the buyer defaults).

CONSIGNMENT Under terms of consignment, an exporter receives no revenue for his or her sale until the buyer of the goods has sold the products. Exporters run a greater risk of being burned financially under this arrangement than under any of the above-mentioned payment systems. If the importer proves unable to sell all the goods that he or she has received, the exporter's profits, already compromised, can be lost completely because of the cost of recovering the unsold products. Indeed, even if the goods are all sold, the exporter has no way of predicting the amount of time that will be required to do so.

OPEN ACCOUNT Among exporters, this is the most unpopular of the various international payment mechanisms that are available. It should be avoided by small businesses except in circumstances when you have an established, secure relationship with a healthy buyer who is operating in a stable country. With this arrangement, goods are manufactured and delivered to the buyer before payment is required. In some cases, payment is not required until as long as 60 days after delivery.


Alexander, Jan. "Where the Money Is." Working Woman. December 1997-January 1998.

Branch, Alan E. Elements of Export Marketing and Management. Chapman and Hall, 1990.

Breaking into the Trade Game: A Small Business Guide. Washington, DC: U.S. Small Business Administration, n.a.

Burpitt, William J., and Dennis A. Rondinelli. "Small Firms' Motivations for Exporting: To Earn and Learn?" Journal of Small Business Management. October 2000.

Sandhusen, Richard L. Global Marketing. Barron's, 1994.

Sletten, Eric. How to Succeed in Exporting and Doing Business Internationally. Wiley, 1994.

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