FINANCING EXPORT TRANSACTION
Exporters naturally want to get paid as quickly as
possible, and importers usually prefer delaying payment at
least until they have received and resold the goods.
Because of the intense competition for export markets,
being able to offer good payment terms is often necessary
to make a sale. Exporters should be aware of the many
financing options open to them so that they may choose the
one that is most favorable for both the buyer and the
seller.
An exporter may need (1) preshipment financing to produce
or purchase the product or to provide a service or (2)
postshipment financing of the resulting account or accounts
receivable, or both. The following factors are important to
consider in making decisions about financing:
- The need for financing to make the sale. In some
cases, favorable payment terms make a product more
competitive. If the competition offers better terms
and has a similar product, a sale can be lost. In
other cases, the exporter may need financing to
produce the goods that have been ordered or to finance
other aspects of a sale, such as promotion and selling
expenses, engineering modifications, and shipping
costs. Various financing sources are available to
exporters, depending on the specifics of the
transaction and the exporter's overall financing
needs.
- The cost of different methods of financing. Interest
rates and fees vary. The total costs and their effect
on price and profit should be well understood before a
pro forma invoice is submitted to the buyer.
- The length of time financing is required. Costs
increase with the length of terms. Different methods
of financing are available for short, medium, and long
terms. However, exporters also need to be fully aware
of financing limitations so that they can obtain the
financing required to complete the transaction.
- The risks associated with financing the transaction.
The greater the risks associated with the transaction
-- whether they actually exist or are only perceived
by the lender -- the greater the costs to the exporter
as well as the more difficult financing will be to
obtain. Financing will also be more costly.
- The creditworthiness of the buyer directly affects the
probability of payment to the exporter, but it is not the
only factor of concern to a potential lender. The political
and economic stability of the buyer's country also can be
of concern. To provide financing for either accounts
receivable or the production or purchase of the product for
sale, the lender may require the most secure methods of
payment, a letter of credit (possibly confirmed), or export
credit insurance.
If a lender is uncertain about the exporter's ability to
perform, or if additional credit capacity is needed, a
government guarantee program may enable the lender to
provide additional financing.
- The availability of the exporter's own financial
resources. The company may be able to extend credit
without seeking outside financing, or the company may
have sufficient financial strength to establish a
commercial line of credit. If neither of these
alternatives is possible or desirable, other options
may exist, but the exporter should fully explore the
available options before issuing the pro forma
invoice.
For assistance in determining which financing options may
be available, the following sources may be consulted:
- The exporter's international or domestic banker.
- The exporter's state export promotion or export
finance office.
- The Department of Commerce district office.
- The SBA.
- The Eximbank, Washington, D.C.
EXTENDING CREDIT TO FOREIGN BUYERS
Exporters need to weigh carefully the credit or financing
they extend to foreign customers. Exporters should follow
the same careful credit principles they follow for domestic
customers. An important reason for controlling the credit
period is the cost incurred, either through use of working
capital or through interest and fees paid. If the buyer is
not responsible for paying these costs, then the exporter
should factor them into the selling price.
A useful guide for determining the appropriate credit
period is the normal commercial terms in the exporter's
industry for internationally traded products. Buyers
generally expect to receive the benefits of such terms.
With few exceptions, normal commercial terms range from 30
to 180 days for off-the-shelf items like consumer goods,
chemicals, and other industrial raw materials, agricultural
commodities, and spare parts and components. Custom-made or
higher-value capital equipment, on the other hand, may
warrant longer repayment periods. An allowance may have to
be made for longer shipment times than are found in
domestic trade, because foreign buyers are often unwilling
to have the credit period start before receiving the goods.
Foreign buyers often press exporters for longer payment
periods, and it is true that liberal financing is a means
of enhancing export competitiveness. The exporter should
recognize, however, that longer credit periods increase any
risk of default for which the exporter may be liable.
Thus, the exporter must exercise judgment in balancing
competitiveness against considerations of cost and safety.
Also, credit terms once extended to a buyer tend to set the
precedent for future sales, so the exporter should
carefully consider any credit terms extended to first-time
buyers.
Customers are frequently charged interest on credit periods
of a year or longer but infrequently on short-term credit
(up to 180 days). Most exporters absorb interest charges
for short-term credit unless the customer pays after the
due date.
Obtaining cash immediately is usually a high priority with
exporters. One way they do so is by converting their
export receivables to cash at a discount with a bank.
Another way is to expand working capital resources. A third
approach, suitable when the purchase involves capital goods
and the repayment period extends a year or longer, is to
arrange for project financing. In this case, a lender makes
a loan directly to the buyer for the project and the
exporter is paid immediately from the loan proceeds while
the bank waits for payment and earns interest. A fourth
method, when financing is difficult to obtain for a buyer
or market, is to engage in countertrade to afford the
customer an opportunity to generate earnings with which to
pay for the purchase.
The options that have been mentioned normally involve the
payment of interest, fees, or other costs. Some options are
more feasible when the amounts are in larger denominations.
Exporters should also determine whether they incur
financial liability should the buyer default.
COMMERCIAL BANKS
The same type of commercial loans that finance domestic
activities -- including loans for working capital and
revolving lines of credit -- are often sought to finance
export sales until payment is received. However, banks do
not usually extend credit solely on the basis of an order.
A logical first step in obtaining financing is for an
exporter to approach its local commercial bank. If the
exporter already has a loan for domestic needs, then the
lender already has experience with the exporter's ability
to perform. Many exporters have very similar, if not
identical, preshipment needs for both their international
and their domestic transactions. Many lenders, therefore,
would be willing to provide financing for export
transactions if there were a reasonable certainty of
repayment. By using letters of credit or export credit
insurance, an exporter can reduce the lender's risk.
When a lender wishes greater assurance than is afforded by
the transaction, a government guarantee program (see the
"Government Assistance Programs" section of this chapter)
may enable a lender to extend credit to the exporter.
For a company that is new to exporting or is a small or
medium-sized business, it is important to select a bank
that is sincerely interested in serving businesses of
similar type or size. If the exporter's bank lacks an
international department, it will refer the exporter to a
correspondent bank that has one. The exporter may want to
visit the international department -- of the exporter's own
bank or a correspondent bank -- to discuss its export
plans, available banking facilities, and applicable fees.
When selecting a bank, the exporter should ask the
following questions:
- What are the charges for confirming a letter of
credit, processing drafts, and collecting payment?
- Does the bank have foreign branches or correspondent
banks? Where are they located?
- Can the bank provide buyer credit reports? At what
cost?
- Does it have experience with U.S. and state government
financing programs that support small business export
transactions? If not, is it willing to consider
participating in these programs?
- What other services, such as trade leads, can it
provide?
Banker's acceptances and discounting
A time draft under an irrevocable letter of credit
confirmed by a prime U.S. bank presents relatively little
risk of default. Also, some banks or other lenders may be
willing to buy time drafts that a creditworthy foreign
buyer has accepted or agreed to pay at a specified future
date. In some cases, banks agree to accept the obligations
of paying a draft, usually of a customer, for a fee; this
is called a banker's acceptance.
However, to convert these instruments to cash immediately,
an exporter must obtain a loan using the draft as
collateral or sell the draft to an investor or a bank for a
fee. When the draft is sold to an investor or bank, it is
sold at a discount. The exporter receives an amount less
than the face value of the draft so that when the draft is
paid at its face value at the specified future date, the
investor or bank receives more than it paid to the
exporter. The difference between the amount paid to the
exporter and the face amount paid at maturity is called a
discount and represents the fees or interest (or both) the
investor or bank receives for holding the draft until
maturity. Some drafts are discounted by the investor or
bank without recourse to the exporter in case the party
that is obligated to pay the draft defaults; others may be
discounted with recourse to the exporter, in which case the
exporter must reimburse the investor or bank if the party
obligated to pay the draft defaults. The exporter should be
certain of the terms and conditions of any financing
arrangement of this nature.
Project finance
Some export sales, especially sales of capital equipment,
may sometimes require financing terms tailored to the
buyer's cash flow and may involve payments over several
years. Often the buyer obtains a loan from its own bank or
arranges for other financing to enable it to pay cash to
the exporter. If other project financing is required,
either the exporter or the foreign buyer can initiate the
proposal.
U.S. exporters frequently benefit from project finance in
which federal agencies such as the Eximbank and OPIC
participate. Although these programs are designed to
support the purchase of U.S. goods and services, many U.S.
companies export without being parties to the project
finance or even being aware of its existence.
OTHER PRIVATE SOURSES
Factoring, forfaiting, and confirming
Factoring is the discounting of a foreign account
receivable that does not involve a draft. The exporter
transfers title to its foreign accounts receivable to a
factoring house (an organization that specializes in the
financing of accounts receivable) for cash at a discount
from the face value. Although factoring is often done
without recourse to the exporter, the specific arrangements
should be verified by the exporter. Factoring of foreign
accounts receivable is less common than factoring of
domestic receivables.
Forfaiting is the selling, at a discount, of longer term
accounts receivable or promissory notes of the foreign
buyer. These instruments may also carry the guarantee of
the foreign government. Both U.S. and European forfaiting
houses, which purchase the instruments at a discount from
the exporter, are active in the U.S. market. Because
forfaiting may be done either with or without recourse to
the exporter, the specific arrangements should be verified
by the exporter.
Confirming is a financial service in which an independent
company confirms an export order in the seller's country
and makes payment for the goods in the currency of that
country. Among the items eligible for confirmation (and
thereby eligible for credit terms) are the goods
themselves; inland, air, and ocean transportation costs;
forwarding fees; custom brokerage fees; and duties. For the
exporter, confirming means that the entire export
transaction from plant to end user can be fully coordinated
and paid for over time. Although confirming is common in
Europe, it is still in its infancy in the United States.
Export intermediaries
In addition to acting as export representatives, many
export intermediaries, such as ETCs and EMCs, can help
finance export sales. Some of these companies may provide
short-term financing or may simply purchase the goods to be
exported directly from the manufacturer, thus eliminating
any risks associated with the export transaction as well as
the need for financing. Some of the larger companies may
make countertrade arrangements that substitute for
financing in some cases.
Buyers and suppliers as sources of financing
Foreign buyers may make down payments that reduce the need
for financing from other sources. In addition, buyers may
make progress payments as the goods are completed, which
also reduce other financing requirements. Letters of
credit that allow for progress payments upon inspection by
the buyer's agent or receipt of a statement of the exporter
that a certain percentage of the product has been completed
are not uncommon.
In addition, suppliers may be willing to offer terms to the
exporter if they are comfortable that they will receive
payment. Suppliers may be willing to accept assignment of a
part of the proceeds of a letter of credit or a partial
transfer of a transferable letter of credit. However, some
banks allow only a single transfer or assignment of a
letter of credit. Therefore, the exporter should
investigate the policy of the bank that will be advising or
confirming the letter of credit.
GOVERNMENT ASSISTANCE PROGRAMS
Several federal government agencies, as well as a number of
state and local ones, offer programs to assist exporters
with their financing needs. Some are guarantee programs
that require the participation of an approved lender;
others provide loans or grants to the exporter or a foreign
government.
Government programs generally aim to improve exporters'
access to credit rather than to subsidize the cost at
below-market levels. With few exceptions, banks are allowed
to charge market interest rates and fees; part of those
fees is paid to the government agencies to cover the
agencies' administrative costs and default risks.
Government guarantee and insurance programs are used by
commercial banks to reduce the risk associated with loans
to exporters. Lenders concerned with an exporter's ability
to perform under the terms of sale, and with an exporter's
ability to be paid, often use government programs to reduce
the risks that would otherwise prevent them from providing
financing.
In overview, the Eximbank is the federal government's
general trade finance agency, offering numerous programs to
address a broad range of needs. Credit insurance provided
through its affiliate, the FCIA, protects against default
on exports sold under open account terms and drafts and
letters of credit that are not the obligation of a U.S.
entity. (Excluded are drafts that have been accepted by a
U.S. bank or corporation and letters of credit confirmed by
a U.S. bank.) Other guarantee and loan programs extend
project finance and medium-term credit for durable goods.
Other agencies fill various market niches. USDA offers a
variety of programs to foster agricultural exports. The TDP
(see chapter 7) provides grant financing for project
planning activities conducted by U.S. firms and thereby
seeks to give a U.S. "imprint" on project feasibility
studies and design. SBA offers programs to address the
needs of smaller exporters. OPIC provides specialized
assistance to U.S. firms through its performance bond and
contractor insurance programs. AID provides grants to
developing nations that can be used to purchase U.S. goods
and services.
Although the Department of Commerce does not offer any
financing programs of its own, export counseling is
available through its district offices. In addition,
current articles on export finance programs are
periodically published in Business America.
The following descriptions provide a basic overview.
EXPORT-IMPORT BANK OF THE UNITED STATES
Eximbank is an independent U.S. government agency with the
primary purpose of facilitating the export of U.S. goods
and services. Eximbank meets this objective by providing
loans, guarantees, and insurance coverage to U.S. exporters
and foreign buyers, normally on market-related credit
terms.
Eximbank's insurance and guarantee programs (see table
14-1) are structured to encourage private financial
institutions to fund U.S. exports by reducing the
commercial risks (such as buyer insolvency and failure to
pay) and political risks (such as war and currency
inconvertibility) exporters face. The financing made
available under Eximbank's guarantees and insurance is
generally on market terms, and most of the commercial and
political risks are borne by Eximbank.
Eximbank's loan program, on the other hand, is structured
to neutralize interest rate subsidies offered by foreign
governments. By responding with its own subsidized loan
assistance, Eximbank enables U.S. financing to be
competitive on specific sales with that offered by foreign
exporters.
Preexport Financing
The Working Capital Guarantee program enables lenders to
provide financing an exporter may need to purchase or
produce a product for export as well as finance short-term
accounts receivable. If the exporter defaults on a loan
guaranteed under this program, Eximbank reimburses the
lender for the guaranteed portion _ generally, 90 percent
of the loan _ thereby reducing the lender's overall risk.
The Working Capital Guarantee program can be used either to
support ongoing export sales or to meet a temporary cash
flow demand arising from a single export transaction.
The loan principal can be up to 90 percent of the value of
the collateral put up by the exporter, a relatively
generous percentage. Eligible collateral includes foreign
receivables, exportable inventory purchased with the
proceeds of the loan, and goods in production. The term of
the guaranteed line of credit is generally one year, but a
longer period may be acceptable.
Postexport Financing
Eximbank offers commercial and political risk insurance
through its affiliate, the FCIA. The insurance protects
mostly short-term credit extended for the sale of consumer
goods, raw materials, commodities, spare parts, and other
items normally sold on terms of up to 180 days. Coverage
is also available for some bulk commodities sold on 360-day
terms and capital and quasi-capital goods sold on terms of
up to five years.
FCIA's insurance policies for exporters include the
New-to-Export Policy, Single-Buyer Policy, and Multi-Buyer
Policy. In addition, the Umbrella Policy enables an
administrator to handle most administrative duties for the
exporter. With prior written approval, exporters can assign
the rights to any proceeds to a lender as collateral for
financing.
FCIA's policies cover up to 100 percent of loans due to
specified political risks, such as war and expropriation,
and up to 95 percent due to loans from other commercial
risks, such as buyer default and insolvency. Exporters
generally must meet U.S. content requirements and, under
some policies, must insure all eligible foreign sales.
FCIA premiums reflect various risk factors, including
length of credit period, payment method, and the country of
the buyer. In keeping with insurance principles, FCIA seeks
a reasonable spread of risk among the different export
markets and avoids unduly concentrated credit exposure.
Several private companies also offer export credit
insurance covering political and commercial risks. Private
insurance is available for established exporters with a
proven track record, often at competitive premium rates,
although underwriting capacity in particular markets may be
limited. Coverage for contract repudiation and wrongful
calling of a bid or performance bond may also be available
in the private market. Contact an insurance broker for
more information.
To encourage exporters and lenders to make export loans to
creditworthy foreign buyers of U.S.-produced goods and
services, Eximbank offers its guarantee program. Eximbank
guarantees the repayment of medium-term (up to seven years
and less than $10 million) loans to foreign buyers of U.S.
goods and services. Lenders charge market rate interest on
the loan. A minimum 15 percent cash payment is required
from the buyer; the remaining 85 percent is financed.
Eximbank's guarantee covers 100 percent of the political
risk and 85 percent of the commercial risk of the principal
on medium-term loans. Coverage for the loan's interest is
also provided. Eximbank guarantees loans made in U.S.
dollars or any other freely convertible currency.
Eximbank offers fixed-rate financing for long-term sales
(repayment periods up to 10 years) for projects such as
telecommunications, power plants, and transportation. The
interest rates, which are set under international agreement
and regularly adjusted in step with market conditions,
reflect the per capita income of the importing country and
the repayment period of the loan. Eximbank loans to
developed countries are charged market interest rates;
loans to less developed countries may be slightly less. In
practice, Eximbank seldom lends to buyers in developed
countries. To qualify for an Eximbank loan, an exporter
must show evidence of foreign government-supported
competition. This qualification may be waived for small
businesses requesting loans of $2.5 million or less. Like
the guarantee program, Eximbank's loans require a 15
percent cash payment in advance.
For more information on Eximbank's programs contact the
Marketing and Program Division, Export-Import Bank, 811
Vermont Avenue N.W., Washington, DC 20571; telephone
202-566-8873. The toll-free hotline telephone number for
advice and assistance to small businesses interested in
exporting is 800-424-5201.
DEPARTMENT OF AGRICULTURE
The FAS of USDA administers several programs to help make
U.S. exporters competitive in international markets and
make U.S. products affordable to countries that have
greater need than they have ability to pay.
One effort to boost U.S. agricultural sales overseas is the
Export Credit Guarantee Program, which offers risk
protection for U.S. exporters against nonpayment of
foreign banks. The program guarantees payment for
commercial as well as noncommercial risks. Private U.S.
banking institutions provide the operating funds. The
guarantee program makes it easier for exporters to obtain
bank financing and to meet credit competition from other
exporting countries.
FAS also helps carry out food aid programs that provide
emergency food donations and long-term concessional and
commercial financing for U.S. agricultural products. These
sales are intended to stimulate long-range improvements in
foreign economies and development of export markets for
U.S. farm products.
Firms may obtain additional information on these financial
programs by contacting General Sales Manager, Export
Credits, Foreign Agricultural Service, 14th Street and
Independence Avenue, S.W., Washington, DC 20250; telephone
202-447-3224.
OVERSEAS PRIVATE INVESTMENT CORPORATION
OPIC facilitates U.S. foreign direct investment in
developing nations and Eastern Europe. OPIC is an
independent, financially self-supporting corporation, fully
owned by the U.S. government.
OPIC encourages U.S. investment projects overseas by
offering political risk insurance, guaranties, and direct
loans. OPIC political risk insurance protects U.S.
investment ventures abroad against the risks of civil
strife and other violence, expropriation, and
inconvertibility of currency. In addition, OPIC can cover
business income loss due to political violence or
expropriation. Congress has authorized OPIC to support
selected equity investments under a pilot program.
OPIC also provides guaranties, limited to $50 million, that
protect against both commercial and political risk. OPIC's
direct lending is aimed exclusively toward U.S. small and
medium-sized companies investing in projects overseas. OPIC
direct loans do not exceed $6 million.
U.S. exporters and contractors operating abroad can benefit
from OPIC programs covering wrongful calling of
performance, bid, and down payment bonds and contract
repudiation. Under other programs, OPIC ensures against
expropriation of construction equipment temporarily located
abroad, spare parts warehoused abroad, and some
cross-border operating and capital loans.
OPIC also provides services to facilitate wider
participation by smaller U.S. businesses in overseas
investment, including investment missions, a computerized
data bank, and investor information services. For more
information on any of these programs contact OPIC's Public
Affairs Office, Overseas Private Investment Corporation,
1613 M Street N.W., Washington, DC 20537; telephone
800-424-6742 (202-457-7010 in the Washington metropolitan
area).
SMALL BUSINESS ADMINISTRATION
SBA also provides financial assistance programs for U.S.
exporters. Applicants must qualify as small businesses
under the SBA's size standards and meet other eligibility
criteria.
Under SBA's Export Revolving Line of Credit (ERLC) Loan
program, any number of withdrawals and repayments can be
made as long as the dollar limit of the line is not
exceeded and disbursements are made within the stated
maturity period (not more than 18 months). Proceeds can be
used only to finance labor and materials needed for
manufacturing, to purchase inventory to meet an export
order, and to penetrate or develop foreign markets.
Examples of eligible expenses for developing foreign
markets include professional export marketing advice or
services, foreign business travel, and trade show
participation. Under the ERLC program, funds may not be
used to purchase fixed assets.
However, under the International Trade Loan program, SBA
can guarantee up to $1 million for facilities and equipment
(including land and buildings; construction of new
facilities; renovation, improvement, or expansion of
existing facilities; and purchase or reconditioning of
machinery, equipment, and fixtures), plus $250,000 in
working capital. Applicants must establish either that (1)
loan proceeds will enable them to expand significantly
existing export markets or develop new ones or (2) they
have been adversely affected by import competition.
Although SBA loans are generally limited to $750,000,
larger loans can be financed by using a cooperative
agreement between SBA and Eximbank. This option may be
attractive to a company with an existing SBA loan or one
whose bank would prefer to work through a local SBA office,
since Eximbank is based in Washington, D.C.
Both the ERLC and the International Trade Loan programs are
guarantee programs that require the participation of an
eligible commercial bank. Most bankers are familiar with
SBA's guarantee programs.
In addition, other SBA programs may meet specific needs of
exporters. For example, SBA's contractor bond program may
help small exporters obtain bid or performance bonds if the
transaction is structured in accordance with SBA
requirements.
For more specific information on SBA's financial assistance
programs, policies, and requirements, contact the nearest
SBA field office or SBA's Office of Business Loans, Small
Business Administration, 409 3rd Street, S.W., Washington,
DC 20416; telephone 202-205-6570.
STATE AND LOCAL EXPORT FINANCE PROGRAMS
Several cities and states have funded and operational
export financing programs, including preshipment and
postshipment working capital loans and guarantees, accounts
receivable financing, and export insurance. To be eligible
for these programs, an export sale must generally be made
under a letter of credit or with credit insurance coverage.
A certain percentage of state or local content may also be
required. However, some programs may require only that
certain facilities, such as a state or local port, be used;
therefore, exporters may have several options.
