Financing Export Transactions

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Export financing is often a key factor in a successful sale.  Contract negotiation and closure are important, but ultimately your company must get paid.  Exporters naturally want to get paid as quickly as possible, whereas importers usually prefer to delay payment until they have received or resold the goods. Because of the intense competition for export markets, being able to offer attractive payment terms is often necessary to make a sale.  You should be aware of the many financing options open to you so that you choose the most acceptable one to both the buyer and your company.  In many cases, government assistance in export financing for small and medium-sized businesses can increase your firm’s options.

                Extending Credit to Foreign Buyers

                Foreign buyers often press exporters for longer payment periods.  Although it is true that liberal financing is a means of enhancing export competitiveness, you need to carefully weigh the credit or financing that you extend to foreign customers.  Moreover, the extension of credit by the seller to the buyer is more common outside the United States.  U.S. sellers who are reluctant to extend credit may face the possibility of the loss of the sale to their competitors.

                A useful guide for determining the appropriate credit period is the normal commercial terms in your industry for internationally traded products.  Buyers generally expect to receive the benefits of such terms.  You may have to make allowances 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.  Once credit terms are extended to a buyer, they tend to be a precedent for future sales, so you should review with special care any credit terms extended to first-time buyers.

                When exporting, your company should follow the same careful credit principles it follows for domestic customers.  An important reason for controlling the credit period is the cost incurred through use of working capital or through interest and fees. If the buyer is not responsible for paying those costs, then you should factor them into the selling price.  Your company should also recognize that longer credit periods may increase the risk of default.   Thus, you must exercise judgment in balancing competitiveness against cost and safety.

                Obtaining cash immediately is usually a high priority with exporters.  Converting export receivables to cash at a discount with a bank is one way to do so. 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 third party financing.  A fourth possibility, when financing is difficult to obtain, is to engage in countertrade.  In a countertrade, you accept goods, services, or other instruments of trade in partial or whole payment for the product.  Countertrade, therefore, provides the customer with an opportunity to generate earnings to pay for the purchase.

                Working with Commercial Banks

                The same commercial bank services used to finance domestic activities, including revolving lines of credit for working capital, are often sought to finance export sales until payment is received. Banks do not regularly extend financing solely on the basis of an individual order; they prefer to establish an ongoing business relationship.

                A logical first step if you’re seeking to finance short-term export sales is to approach the local commercial bank that your company already does business with.  If the bank previously has extended credit to your company, it will be familiar with your financial standing, credit need, repayment record, and ability to perform.  The bank may be willing to raise the overall limit on an existing working capital line of credit, to expand its scope to cover export transactions, or to approve a separate line specifically adapted to export-related transactions that involve arrangements such as discounting.

                Alternatively, you may wish to approach a commercial bank with an international department.  Such a bank will be familiar with export business and will also be in a position to provide international banking services related to documentary collections and letters of credit, including the discounting of drafts.  An intermediate approach is to retain a relationship with your bank but seek a referral to a correspondent bank that has an international department.

                The responsibility for repaying a working capital loan ordinarily rests with you, the seller, even if the foreign buyer fails to pay.  The bank takes this contingency into account in deciding on an export working capital line of credit.  Both you and the bank will benefit, though, if you improve the quality of the export receivables by using letters of credit, credit insurance, or Export-Import Bank or Small Business Administration working capital guarantees.

                When shipping capital goods, you may want the commercial bank to make medium-term loans directly to the foreign buyer to finance the sale.  Such loans are available for well-established foreign buyers in more stable markets. However, where there is an element of risk, the bank may require a standby letter of credit, a recourse to the exporter in case of default, or similar repayment reinforcement.  You should be knowledgeable about loans from your own bank that are backed by Export-Import Bank guarantees and insurance—assuming that the commercial bank is willing to use them.

                Using Discounting and Banker’s Acceptances

                A time draft under an irrevocable letter of credit confirmed by a U.S. bank presents relatively little risk of default so you may be willing to hold such a draft until it matures.  Unless you have ample funds to use for other purposes, however, holding drafts will use up your working capital.

                As another course of action, your bank may be willing to buy or lend against time drafts if you have a creditworthy foreign buyer who has accepted or agree to pay at a specified future date.  Such an arrangement allows you to convert the time draft into immediate cash.  The amount you receive will be less than the face value of the draft.  The difference, called a discount, represents interest and fees that the bank charges for holding the draft until maturity.  The bank may also require you to reimburse it if the draft is unpaid at the due date.

                In a third option, known as a banker’s acceptance, a commercial bank may undertake to accept the obligation of paying a draft for a fee.  Banker’s acceptances are usually in large denominations.  Only a few well-known banks are accepted in the market as “prime name” banks for purposes of creating banker’s acceptances.

                Using Government Assistance Programs

                Several federal, state, and local government agencies 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 to 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, including those paid to the government agencies to cover the agencies’ administrative costs and default risks.  Commercial banks use government guarantee and insurance programs to reduce the risk associated with loans to exporters.

                                The Export-Import Bank of the United States

                The Export-Import Bank of the United States (Ex-Im Bank) is an independent U.S. government agency that facilitates the export of U.S. goods and services.  As the federal government’s export credit agency, Ex-Im Bank provides export credit insurance, loan guarantees to lenders, direct loans to exporters on market-related credit terms, and loans to foreign buyers.

                                Small Business Administration

                The Small Business Administration (SBA) also provides financial assistance to U.S. exporters.  SBA targets its assistance to small companies and strives to assist those businesses that otherwise might not be able to obtain export financing.  Applicants must qualify as small businesses under SBA’s size standards and meet other eligibility criteria.

                SBA’s Export Working Capital Program (EWCP) will guarantee loan amounts of up to $1.5 million or 90 percent of the loan amount, whichever is less.  These loans provide working capital for export transactions, finance export receivables, and can support standby letters of credit used as bid or performance bonds.  The loans can be set up to support individual transactions or as revolving lines of credit. Interest rates are negotiated between the borrower and the lender and may be fixed or variable. SBA’s other programs that may assist with export financing include the International Trade Loan Program and Export Express.

                                Department of Agriculture

                The Foreign Agriculture Service (FAS) of the U.S. Department of Agriculture (USDA) provides several programs to assist in the financing of exports of U.S. agricultural goods.

                The USDA’s Commodity Credit Corporation (CCC) administers export credit guarantees for commercial financing of U.S. agricultural exports.  The guarantees encourage exports to buyers in countries where credit is necessary to maintain or increase U.S. sales but where financing may not be available without CCC guarantees.  The USDA has other programs that may assist with export financing including the Export Credit Guarantee Program (GSM-102) and the Facility Guarantee Program (FGP).

                                Overseas Private Investment Corporation

                The Overseas Private Investment Corporation (OPIC) is a federal agency that facilitates U.S. foreign direct investment in developing nations and emerging market economies. OPIC is an independent, financially self-supporting corporation that is fully owned by the U.S. government.