Export Transactions Financing
Export finance is frequently a critical component of a successful transaction. Contract negotiation and closing are crucial, but your organization must be paid at the end of the day. Exporters, therefore, want to get paid as soon as possible, but importers want to wait until they have received or resold the items before receiving money. Because of the fierce competition for export markets, your ability to provide favorable payment terms is often a deciding factor in making a sale. You should be informed of the many financing choices available to you so that you can select the one that is best suitable for both the buyer and your business. Government aid in export finance for small and medium-sized firms can expand your company's alternatives in many circumstances. You should think about the following things before making a financial decision:
• The need for money in order to complete the deal.
In certain circumstances, attractive payment terms make a product more competitive: A buyer who would have chosen to buy from someone else could instead choose your goods because of the shorter or more secure credit terms. On the other side, if the rival provides better conditions on a similar product, a sale might be lost.
• The length of time it will take to fund the product.
The needed loan term decides how long you will have to wait for payment from the buyer and influences your decision on how to fund the transaction.
• The price of several financing alternatives.
Interest rates and fees fluctuate, and an exporter may be expected to cover some or all of the financing expenses. You must understand how those costs effect pricing and profit before sending a pro forma invoice to the buyer.
• The risks associated with the financing of the transaction.
The more risky the transaction, the more difficult and expensive it will be to finance. The buyer's country's political and economic stability might also be a concern. The lender may need the most secure methods of payment—a letter of credit (perhaps verified), export credit insurance, or a guarantee—to offer finance for either accounts receivable or the manufacturing or acquisition of the goods for sale.
• The need for pre- and post-shipment working capital.
Production for an abnormally big order or a rise in orders might put a strain on your working capital in unanticipated ways. Even during normal times, an exporter's growth might be hampered by a lack of operating capital. However, both the public and private sectors can provide aid. In this article, we'll go through a few of such resources.
There are number of resources available to help you decide which funding sources are best for you:
- Your banker
- Your local United States Commercial Service office
- Your local United States Small Business Association office • The Export-Import Bank
- Your state export promotion or export financing agency
Providing Credit to International Buyers
Exporters are frequently pressed by foreign purchasers for lengthier payment terms. Although it is true that liberal financing improves export competitiveness, it is critical to carefully consider the credit or financing you give to international consumers. Furthermore, outside of the United States, the seller's grant of credit to the buyer is more typical. Sellers in the United States who are hesitant to give credit risk losing the sale to their competitors.
The standard commercial terms in your business for globally sold items might be a valuable reference for calculating the suitable credit period.
The benefits of such conditions are widely expected by buyers. Normal commercial terms (with a few exceptions) vary from 30 to 180 days for off-the-shelf items such as consumer goods, chemicals and other raw materials, agricultural commodities, and replacement parts and components. Because overseas purchasers are sometimes hesitant to have the credit term begin before they have received the items, you may need to allow for lengthier shipment periods than in domestic trading. Longer payback durations may be required for custom-made or high-value capital equipment. Credit conditions granted to a buyer tend to set a precedent for future purchases, thus any credit terms considered for first-time purchasers should be carefully scrutinized.
When it comes to exporting, your organization should adhere to the same stringent credit guidelines that it applies to local clients. The cost incurred through the use of working capital or through interest and fees is an important reason for controlling the credit period. You should include such charges in the selling price if the buyer is not accountable for them. Longer credit durations may raise the chance of default, therefore your organization should be aware of this. As a result, you'll have to use your judgment to strike a balance between cost and safety while remaining competitive. Customers are regularly charged interest on credit lengths of a year or more; however, short-term borrowing is less usually charged interest (up to 180 days). Most exporters don't charge interest on short-term financing unless the consumer doesn't pay by the due date.
Exporters frequently place a high importance on receiving payment as soon as possible. One technique to achieve this aim is to convert export receivables to cash at a discount with a bank. Another option is to increase working capital. A third option is to arrange for third-party financing, which is appropriate when the purchase comprises capital goods and the payback duration is a year or more.
For example, a bank may issue a direct loan to the product buyer, and you could be paid instantly from the loan proceeds while the bank collects interest while waiting for payment. When obtaining funding is problematic, a fourth option is to participate in countertrade, which entails accepting products, services, or other trade instruments as partial or full payment for the product. As a result, countertrade allows the consumer to earn money in order to pay for the purchase.
Some alternatives may entail paying interest, fees, or other charges. Other alternatives are only practical for large transactions. If the buyer defaults, your organization must also evaluate if it will be liable financially.
Collaboration with Commercial Banks.
The same commercial bank services that are used to fund domestic activities, such as revolving lines of credit for working capital, are frequently utilized to fund export sales until payment is received. Banks seldom provide funding purely on the basis of a single order; instead, they seek to create a long-term commercial relationship.
If you need to finance short-term export sales, the natural first step is to contact the local commercial bank that your firm currently works with. If the bank has previously given your firm credit, it will be familiar with your financial situation, credit needs, payback history, and capacity to perform. The bank may be ready to increase the total ceiling on an existing working capital line of credit, broaden its scope to include export transactions, or authorize a second line tailored to export-related operations using discounting agreements. Alternatively, you might contact a commercial bank that has an overseas division.
This type of bank will be knowledgeable with exporting and will be able to provide foreign financial services such as documentary collections and letters of credit, as well as draft discounting. Maintaining a relationship with your bank while seeking a referral to a correspondent bank with an overseas section is a good middle ground.
You should meet with the bank's foreign section to discuss your export goals, banking options, and fees. Costs for modifying or confirming a letter of credit, fees for processing drafts, and the bank's expertise working with US government organizations that provide export finance support are all things to consider. In most cases, the bank professional who handles your account is not in the foreign department. As a result, establishing and maintaining a solid working connection with the foreign department is in your best interests.
Even if the overseas buyer fails to pay, you, the seller, are usually responsible for repaying the working capital loan. When deciding on an export working capital line of credit, the bank considers this possibility. However, if you use letters of credit, credit insurance, or working capital guarantees from Ex-Im Bank or the US Small Business Administration to improve the quality of your export receivables, you and the bank will gain.
When shipping capital goods, you may wish the commercial bank to issue medium-term loans to the overseas buyer directly to fund the transaction. In more stable markets, such loans are offered to well-established international purchasers. If your own bank is ready to employ Ex-Im Bank guarantees and insurance, you should be aware of them.
Using Banker's Acceptances and Discounting
Because a time draft secured by an irrevocable letter of credit certified by a U.S. bank carries a low risk of default, you might be prepared to keep it until it matures. Holding drafts, on the other hand, will deplete your working capital unless you have sufficient money to employ for other purposes.
If you have a creditworthy international buyer who has accepted or agreed to pay at a defined future date, your bank could be ready to buy or lend against time drafts. You may convert the time draft into cash right away with this arrangement. The amount you get will be less than the draft's face value. The difference, referred to as a discount, represents the bank's interest and costs for holding the draft until maturity. If the draft is not paid by the due date, the bank may demand you to refund it.
A third alternative is a banker's acceptance, in which a commercial bank agrees to accept the liability of paying a draft in exchange for a fee. The majority of banker's acceptances are for substantial sums of money. For the purposes of issuing banker's acceptances, only a few well-known banks are acknowledged in the market as "prime name" banks.
Export Intermediaries
Many export intermediaries, such as export trading businesses and export management organizations, can assist fund export sales in addition to operating as export agents. Export intermediates can either offer short-term finance or simply purchase the items to be exported straight from the manufacturer, removing both the risk of the export transaction and the requirement for financing for the producer.
Taking Advantage of Government Assistance Programs
Several federal, state, and municipal government bodies provide assistance to exporters with their funding needs. Some are guarantee schemes that require an approved lender's involvement, while others give loans or subsidies to the exporter or a foreign government.
Rather than subsidizing costs at below-market levels, government initiatives often try to boost exporters' access to financing. Banks are authorized to charge market interest rates and fees, with a few limitations, including those paid to government agencies to cover their administrative expenses and default risks. To decrease the risk associated with loans to exporters, commercial banks employ government guarantee and insurance schemes.
The Export-Import Bank of the U.S
The United States Export-Import Bank (Ex-Im Bank) is a government agency that facilitates the export of goods and services from the United States. Export credit insurance, loan guarantees, direct loans to exporters on market-related credit conditions, and loans to foreign purchasers are all provided by the Ex-Im Bank, which is the federal government's export credit agency.
Ex-Im Bank's insurance and loan guarantees are designed to encourage exporters and financial institutions to support U.S. exports by lowering the commercial and political risks of international trade (such as buyer insolvency and failure to pay) that could result in nonpayment of U.S. exporters by foreign buyers of their goods and services. The funding made available through Ex-Im Bank's guarantees and insurance is on market terms, and Ex-Im Bank bears the majority of the commercial and political risks.
The lending program of the Ex-Im Bank is intended to offset interest rate subsidies provided by foreign governments. U.S. finance can be competitive with that given by international exporters since the bank reacts with loan assistance.
Financing for pre-export
The working capital guarantee allows lenders to provide the funds that an exporter requires to acquire or manufacture a product for export, as well as to fund short-term accounts receivable. If an exporter defaults on a loan guaranteed under this scheme, Ex-Im Bank reimburses the lender for the guaranteed component of the loan—typically 90% of the loan—reducing the lender's overall risk. Ex-Im Bank can raise its guarantee coverage to 100 percent for approved loans to minority, woman-owned, or rural enterprises. The working capital guarantee can be utilized to support continuing export sales or to fulfill a one-time cash requirement resulting from an export transaction.
Working capital guarantees provide favorable advance rates to exporters, allowing them to expand their borrowing capacity.
• Inventory up to 75 percent advance rate (including work-in-process, i.e., material delivered to manufacturing, engineering, design, or other services)
• Foreign receivables—up to a 90% advance rate is possible. Export-related accounts receivable and inventory (including work-in-process) associated to an export order get guaranteed working capital loans. (For letters of credit given as part of a guaranteed loan, Ex-Im Bank simply requires security equal to 25% of the letter of credit's value.)
Post-Export Financing
Export credit insurance is provided by the Ex-Im Bank to help mitigate the commercial and political risks that come with international trading. Ex-Im Bank reimburses the exporter if the buyer fails to pay according to the conditions of the policy. The primary federal program supporting short-term export finance is Ex-Im Bank insurance.
Ex-Im Bank insurance offerings for exporters include the Small Business policy, Single-Buyer policy, and Multi-Buyer policy. Ex-Im Bank's insurance normally covers up to 100% of defaults caused by specific political risks such as war and expropriation, as well as up to 98 percent of defaults caused by commercial risks such as buyer default and insolvency. Exporters must typically adhere to U.S. content rules and, in some cases, insure all qualifying international sales.
Export credit insurance, which covers political and commercial risks, is also available from a number of private firms. Private insurance is provided to established exporters with a track record, generally at competitive premium rates, albeit underwriting in certain markets may be limited. Ex-Im Bank gives a guarantee to encourage banks and other lenders to issue export loans to creditworthy overseas buyers of U.S. products and services under a separate program called the Bank Buyer Credit Policy. Capital projects, such as power plants and telecommunications infrastructure, are examples of heavy equipment and capital projects, and transportation facilities and equipment, Ex-Im Bank's guarantee can be used for either medium-term or long-term financing (1–5 years for payback following delivery or equipment installation) (up to 10 years for repayment).
Small Business Administration of the United States
Another government body that helps exporters in the United States is the Small Business Administration (SBA). SBA offers loan guarantees for export working capital and plant and equipment acquisitions, as well as money to enable small enterprises to begin or develop export activities, through its partnerships with national, regional, and community lenders.
The Export Working Capital Program (EWCP) of the Small Business Administration (SBA) will guarantee up to $1.5 million or 90% of the loan amount, whichever is smaller. These loans are used to fund export receivables and provide operating capital for export activities. They can also be used to underpin bid or performance bonds with standby letters of credit. Individual transactions or revolving lines of credit can be supported by the loans. Fixed or variable interest rates are negotiated between the borrower and the lender.
The Small Business Administration and the Export-Import Bank have combined their working capital programs to provide a uniform approach to the government's support of export finance. The EWCP has a one-page application form and little paperwork. The average turnaround time is 10 days or fewer. SBA can also provide a letter of prequalification.
If a larger loan guarantee is required, Ex-Im Bank offers a comparable service for multimillion-dollar loans.
SBA can guarantee up to $1.25 million in combined working capital and facilities and equipment loans (including land and buildings; construction of new facilities; renovation, improvement, or expansion of existing facilities; and purchase or reconditioning of machinery, equipment, and fixtures) through its International Trade Loan Program. Applicants must either:
• certify that loan proceeds will enable businesses to significantly expand existing export markets or establish new ones
• demonstrate that import competition has harmed them.
Export Express is a scheme that helps small firms get multipurpose loans faster. The Small Business Administration delegated to certified lenders the ability to approve SBA-guaranteed loans unilaterally. Lenders are free to use their own forms, and most applications are approved within a week. The maximum amount of money that may be borrowed through Export Express is $250,000. SBA guarantees 85 percent of loans up to $150,000, and 75 percent of loans beyond that amount.
U.S. Department of Agriculture
The Foreign Agricultural Service (FAS) of the United States Department of Agriculture (USDA) offers a number of programs to aid in the financing of agricultural exports from the United States.
Export credit guarantees for commercial financing of U.S. agricultural exports are administered by the USDA's Commodity Credit Corporation (CCC). The guarantees stimulate exports to nations where credit is required to sustain or grow US sales but where finance is not readily accessible without CCC guarantees.
GSM-102, the Export Credit Guarantee Program, provides credit periods of up to three years. GSM-102 underwrites loans issued to recognized foreign banks by the US private banking sector (or, less typically, by the US exporter); dollar-denominated, irrevocable letters of credit are used to pay for food and agricultural items sold to overseas customers.
The Supplier Credit Guarantee Program (SCGP) ensures short-term, open-account financing for exporters of US food goods. Under the SCGP's protection, U.S. exporters can provide longer loan terms or increase the amount of credit available to international customers without taking on additional financial risk. Foreign purchasers benefit because they may boost their purchasing power and profit margins, as well as enjoy considerable cash flow management advantages.
The Facility Guarantee Program (FGP) offers payment guarantees to help finance manufactured products and services exported from the United States in order to repair or construct agriculture-related facilities in emerging countries. The FGP is aimed to increase sales of U.S. agricultural goods and products to emerging markets by funding such facilities, where demand for such commodities and products may be limited due to insufficient storage, processing, or handling capabilities.
The FAS General Sales Manager (GSM) Online System (1.usa.gov/1umkzm1) allows exporters and banks in the United States to submit needed documents for the GSM-102, SCGP, and FGP electronically.
Exporters should contact the FAS Contract and Registration division at (202) 720-3224 or askgsm@fas.usda.gov for more information.
OPIC stands for Overseas Private Investment Corporation.
The Overseas Private Investment Corporation (OPIC) is a US government body that promotes US foreign direct investment in developing and emerging markets. OPIC is a wholly-owned subsidiary of the United States government that is financially self-sufficient.
By providing political risk insurance, all-risk guarantees, and direct loans, OPIC stimulates US investment initiatives overseas.
OPIC political risk insurance shields U.S. investment endeavors overseas against the risks of civil conflict and other forms of violence, expropriation, and currency inconvertibility. Furthermore, OPIC can compensate businesses for income lost as a result of political violence or expropriation.
OPIC can provide a total project support package of up to $400 million, including up to $250 million in project financing and up to $250 million in political risk insurance. The maximum amount of insurance and finance allowed for oil and gas projects with offshore, hard-currency earnings is $300 million per product. Although the beneficiary of OPIC transactions are U.S. investors, U.S. exporters can often profit from the development and outfitting of new facilities supported by OPIC. An OPIC program addressing incorrect bid calling and providing performance, early payment, or other assurances can directly benefit U.S. exporters and contractors working overseas. OPIC also covers against the confiscation of construction equipment and replacement components temporarily stored overseas through another scheme. Some cross-border operational and capital loans are also covered.
In addition, OPIC provides services to help smaller U.S. enterprises participate in foreign investment. Investment missions, a computerized data bank, and investor information services are among the services available. OPIC has launched a number of programs to help small firms in the United States invest in emerging markets across the world. The Small and Medium Enterprise Department and OPIC's Small Business Center were created expressly to meet the requirements of small and medium-sized businesses in the United States and to help them enter new markets. The Small Company Center offers a small business insurance "wrap" to organizations working on projects. OPIC's outreach to the small company community is bolstered through a relationship with the SBA.
Call OPIC's InfoLine at (202) 336-8799 or the FactsLine at (202) 336-8700 for additional information on any of these programs, or go to opic.gov.
Obtaining Funding from Multilateral Development Banks (Multilateral Development Banks).
Member states own multilateral development banks (MDBs), which are international financial entities. Their individual and collective goals are to help their developing member nations advance economically and socially.
The African Development Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, the Inter-American Development Bank, and the World Bank Group are all current MDBs.
These institutions fulfill their goals through assisting governments, government agencies, and other entities in their developing member nations with loans, technical assistance, grants, capital investment, and other forms of aid. The most common way for MDB sponsorship to manifest itself is through a project or research.
MDBs are increasingly supporting private-sector firms in developing nations for private-sector initiatives. This finance, which is acquired on the basis of the financial, economic, and social sustainability of the projects in issue, is being used by an increasing number of firms and project developers throughout the world.
MDBs have a long history of investing extensively in infrastructure and poverty alleviation initiatives. All banks back initiatives in the following areas:
- agriculture
- energy
- the environment
- finance
- industry
- transportation
- telecommunications
- health
- education
- urban development
- tourism
- microenterprises
- economic reform.
All of the banks provide funding for private projects.
MDBs also finance qualifying private companies in developing nations using loan, equity, and guarantee funding. These funds, which are available on commercial terms, can be obtained by private project sponsors without the need for a government guarantee.
There are several prospects for American businesses to expand their operations in the United States. Visit 1.usa.gov/1z8asqb for further information and a list of MDBs.
Examining Export Finance Programs at the State and Local Level
Export finance initiatives, including as pre- and post-shipment working capital loans and guarantees, accounts receivable financing, and export insurance, have been supported and operated by a number of cities and states. An export transaction must normally be conducted under a letter of credit or with credit insurance coverage to be eligible for these programs. There may also be a requirement for a particular amount of state or local material. Some programs, on the other hand, may simply need the use of specific infrastructure, such as a state or municipal port.
Matching funds from the SBA's State Trade and Export Promotion (STEP) Program may be available in your state, albeit it is not an export finance program. Grants can be used to attend foreign trade shows, for example.
Contact your local U.S. Commercial Service office or your state's economic development agency to learn more about these and other funding alternatives.
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