1

CHAPTER XXXIV FINANCING CHAPTER XXXIV FINANCING EXPORTSEXPORTS

Buyer's Financing of Exports International Factoring Forfaiting U.S. Government's Export Financing

U.S. Export-Import Bank U.S. Small Business Administration Overseas Private Investment Corporation

(OPIC)

2

Factors for Exporter’s Factors for Exporter’s Financing NeedsFinancing Needs

Major Considerations for Export Financing:• Company's own financial resources• Need for financing the purchase of export

products• Need for financing to make the sale• Risk involved in export financing• Cost of financing• Length of time that financing is required

3

Buyer's Financing of Buyer's Financing of ExportsExports

Cash In AdvanceIrrevocable Letter of Credit

4

Cash in AdvanceCash in Advance

Buyer pays for goods in advance prior to shipment of goods

Today's international market is buyer's market

Will substantially limit exportability of the products.

5

Irrevocable Letter of CreditIrrevocable Letter of CreditExporter utilizes an L/C opened in his favor

by Importer’s bank in financing his exports  a. Red Clause L/C Irrevocable L/C with an advance payment

clause. Used to be written in red ink. Exporter receives payments in advance

against a clean draft, or a receipt prior to the shipment

Advance payments can be used for a deposit with exporter’s supplier or operating needs of the exporter

6

Irrevocable Letter of CreditIrrevocable Letter of Credit

b. Transferable L/C Exporter who has received a transferable L/C

can transfer it through his bank to his supplier of the products for an amount less than that of the original L/C.• Transferable L/C: An L/C with a clause, “This

credit is transferable.” Exporter applies with his bank for a transfer

of his original L/C received from a foreign buyer.

• Exporter's bank sends a transferred L/C to exporter's supplier.

7

Irrevocable Letter of CreditIrrevocable Letter of Credit

b. Transferable L/C (continued) Supplier completes exportation and presents

shipping documents to the bank which transferred the L/C.

Exporter substitutes his invoice for that of the supplier. The balance between two invoices becomes the profit of the exporter. The transfer is irrevocable.

8

Irrevocable Letter of CreditIrrevocable Letter of Credit

c. Assignment of Proceeds of an L/C Beneficiary has a right to assign the

proceeds to a third party (assignee or designated payee), usually a supplier of products to the exporter.

To purchase the products for export, exporter requests his bank to assign the proceeds of the letter of credit to his supplier.

Exporter's bank sends an assignment of proceeds letter to exporter's supplier.

9

Irrevocable Letter of CreditIrrevocable Letter of Creditc. Assignment of Proceeds of an L/C

(continued) Supplier delivers the goods to exporter who,

then, ships the goods and presents shipping documents to his bank for negotiation.

Exporter's bank pays exporter’s supplier (assignee) from the money obtained from the negotiation of the shipping documents under the Letter of Credit.

Supplier bears the risk of being unpaid, if the exporter fails to perform under the letter of credit. The assignment is irrevocable.

10

Irrevocable Letter of CreditIrrevocable Letter of Credit

d. Back-to-Back L/C A Back-to-Back L/C is an irrevocable L/C

opened in favor of the supplier of the exporter who pledges his buyer's letter of credit as a collateral.

The beneficiary of the first L/C(master L/C) pledges it to his bank so that the bank can open the second L/C (back-to--back) in favor of the exporter's supplier.

Unlike a transferable L/C, there are two separate L/Cs involved in a back-to-back L/C transaction.

11

Irrevocable Letter of CreditIrrevocable Letter of Credit

d. Back-to-Back L/C (continued) The bank issuing the second L/C (back-to-

back) will remain bound for payment even if the first L/C(master) defaults.

That's why many U.S. banks are reluctant to open a back-to-back L/C solely based on the master L/C alone.

12

International FactoringInternational Factoring

Exporter sells his export accounts receivable to a factor (factoring company) in exchange for immediate cash.

Exporter transfer the credit risk of the foreign buyer to the factor. However, exporter is responsible for product disputes.

13

International FactoringInternational Factoring Sequencea. An exporter approaches a U.S. factor

b. A member or an allied company in foreign country establishes a line of credit for an importer and guarantees the risk to the U.S. factor

c. Based on the guarantee, the U.S. factor buys the export receivables without recourse to the exporter.

d. The factor becomes a principal and collects receivables at his own risk.

 

14

International FactoringInternational Factoring Feesa.  Usually more expensive than traditional

bank services, but much more convenient and faster.

b. 1.25% to 1.75% of the invoice amount.  International Factoring Networka. Factors Chain International (FCI), an

association of over 250 international factors in 68 countries.

15

ForfaitingForfaiting

From French term "forfait": Surrender or relinquish rights to something.

In Forfaiting, exporter surrenders importer’s promissory note covering his export receivable to a forfaiter for immediate cash.

Traditionally used for medium-long term financing for the sale of capital goods

Recently increasingly used for short-term financing

Between 3 months and 5 to 7 years

16

ForfaitingForfaitingSequence Importer agrees to pay exporter with

promissory note guaranteed by an acceptable bank in the form of 'aval‘• Aval: bank's unconditional, irrevocable guarantee

endorsed directly on the promissory note• Because of the bank's guarantee, the forfait eats

up the importer's line of credit by the corresponding amount.

Exporter contacts a forfaiter, who checks if the promissory note and guarantor bank are acceptable and issues an irrevocable commitment letter to exporter

17

ForfaitingForfaiting

Sequence (continued)

Exporter ships the goods and surrenders importer’s promissory note covering export receivables to forfaiter

The forfaiter discounts the importer's promissory notes and pays the exporter cash without recourse

18

ForfaitingForfaitingInterest and Fees

Interest rate is fixed based on LIBOR (London Inter-Bank Offered Rate)

Commitment fee is 1% or more. International Forfaiters Network

International Forfaiting Association (IFA):Founded in 1999, 140 members

Well-known International Forfaiters Morgan Grenfell Trade Finance LTD, U.K. West Merchant Bank, U.K. London Forfaiting American, Inc. British-American Forfaiting Company, Inc.

19

U.S. Government's Export U.S. Government's Export FinancingFinancing

Export-Import Bank of the U.S.Small Business Administration of the U.S. Overseas Private Investment Corporation

20

Export-Import Bank of the Export-Import Bank of the U.S.U.S.

To qualify for Ex-Im Bank loans Product or service must have at least 50%

U.S. content and non-military Loan must not affect the U.S. economy

adversely Applicant must have been in business for

at least 12 months and must have a positive net worth

21

Export-Import Bank of the Export-Import Bank of the U.S.U.S.

Working Capital Guarantee Program Working Capital Guarantee Program Loan Guarantee for Foreign Buyers Loan Guarantee for Foreign Buyers

ProgramProgramDirect Loan to Foreign Buyers Direct Loan to Foreign Buyers

ProgramProgramFinance Lease Guarantee ProgramFinance Lease Guarantee Program

22

Working Capital Guarantee Working Capital Guarantee ProgramProgram

Guarantees 90% of the bank loan including principal and interest made by commercial lenders to eligible U.S. exporters for eligible exports.

Eligible exporters: Must be located in the United States Must have at least a one-year operating history Must have a positive net worth

23

Working Capital Guarantee Working Capital Guarantee ProgramProgram

Eligible exports: Products must be shipped from the United States Products must have at least 50% U.S. content.

• If less than 50%, Ex-Im Bank guarantees up to the percentage of the U.S. content

Services must be performed by U.S.-based personnel

• Military or defense items are generally not eligible with certain exceptions

24

Working Capital Guarantee Working Capital Guarantee ProgramProgram

Use of Loan Proceeds: To purchase finished products for export To manufacture products for exports

and/or to provide services for export To cover standby LCs serving as bid

bonds or performance bonds or payment guarantees

To finance foreign receivables

25

Working Capital Guarantee Working Capital Guarantee ProgramProgram

Collateral: Collateral can be inventory of exportable

goods, export-related accounts receivable, and other supportive collaterals.

Loan balance should not exceed 90% of collateral value.

26

Working Capital Guarantee Working Capital Guarantee ProgramProgram

Repayment Terms: Term of loan generally does not exceed

one(1) year but can be up to three(3) years The loan can be either transaction-specific

or revolving.

27

Working Capital Guarantee Working Capital Guarantee ProgramProgram

Delegated Authority Lenders (DAP): Pre-qualified commercial lenders who can

commit Ex-Im Bank’s guarantee without prior Ex-im Bank approval.

Most of Ex-im Bank’s working capital guarantees are provided through these lenders

28

Loan Guarantee for Foreign Loan Guarantee for Foreign Buyers ProgramBuyers Program

Guarantees 100% of export loans made by U.S. or foreign lenders to foreign buyers of U.S. exports

Total amount covered does not exceed 85% of the U.S. export value.

Foreign buyer must make a 15% cash down payment to exporter. Can either be borrowed from lender, or exporter, or come from buyer’s own funds

29

Loan Guarantee for Foreign Buyers Program

Eligible goods: Capital equipment, projects, and services Must meet Ex-Im Bank’s U.S. content requirement

Repayment terms: Up to 5 years for capital equipment and services

and up to 10 years for transportation equipment and large-scale projects

Any U.S. or foreign bank. Located in the U.S. or overseas

30

Direct Loan to Foreign Buyer Program

Direct loans to foreign buyers of U.S. capital goods, services, and large-scale projects

85% of U.S. export value with 15% buyer’s advance payment to U.S. exporter

Must meet the U.S. content requirementNo minimum or maximum limit but generally

loan amounts over $10 millionRepayment term: Varies. Usually longer than

7 yearsGuarantor of the loan, governmental or

private

Finance Lease Guarantee Program

• Medium-term finance lease guarantee to the lessor for international leasing of – U.S. capital equipment and related services. – Refurbished equipment, software, certain banking and legal

fees, and certain local costs and expenses.

• Lessor must have in place – a Medium-Term (MT) Master Guarantee Agreement-Finance

Lease signed by both parties

– Lease agreement approved by Ex-Im Bank• Only finance leases are eligible

– Flexible financing options and repayment terms,– Lessee must make cash payment of 15% of contract price – 100 percent of commercial and political risks. – Transaction size for this guarantee up to $10 million (financed

portion)31

32

Small Business Administration Small Business Administration (SBA)(SBA)

Export Working Capital ProgramExport Working Capital ProgramInternational Trade Loan ProgramInternational Trade Loan ProgramExport Express Loan ProgramExport Express Loan Program

Small Business Administration Small Business Administration (SBA)(SBA)

• All banks are generally eligible to participate in SBA’s guaranteed loan program.

• Preferred Lenders Program (PLP)Preferred Lenders Program (PLP)– SBA delegates the final credit decision and

most servicing and liquidation authority and responsibility to the PLP lenders

– Participants (banks with preferred lender status) of the Preferred Lender Program available from the SBA office

33

34

Export Working Capital Export Working Capital ProgramProgram

Guarantees Maximum 90% of a bank loan for up to $5 million to a small exporter

Maximum guaranty amount: $4.5 million. Indirect exporters to domestic buyers who

subsequently export also qualify for EWCP.

35

Export Working Capital Export Working Capital ProgramProgram

EligibilityEligibility:: Available for manufacturers, wholesalers,

export trading companies, and services exporters

Applicant must be a small business: e.g. Less than 500 employees for a manufacturer, less than 100 employees for a wholesaler

Must be in business for a full year at the time of application. Can be waived if sufficient export trade experience

36

Export Working Capital Export Working Capital ProgramProgram

Terms of loan: Terms of loan: Revolving line of credit for 12 months with two Revolving line of credit for 12 months with two

times of annual renewals, maximum 3 yearstimes of annual renewals, maximum 3 years

Use of Loan Proceeds:Use of Loan Proceeds: To finance working capital needs associated with To finance working capital needs associated with

export transactions, such asexport transactions, such as• Pre-export financing of labor and materialsPre-export financing of labor and materials• Purchasing products or services for exportPurchasing products or services for export• Financing the foreign accounts receivableFinancing the foreign accounts receivable• Financing a standby letter of credit used as a Financing a standby letter of credit used as a

bid bond or a performance bondbid bond or a performance bond• Supporting an indirect export Supporting an indirect export

37

Export Working Capital Export Working Capital ProgramProgram

Proceeds may not be used to Proceeds may not be used to Support the borrower’s domestic salesSupport the borrower’s domestic sales Acquire fixed assets or capital goodsAcquire fixed assets or capital goods Acquire, equip, or rent commercial space Acquire, equip, or rent commercial space

overseasoverseas Finance the following except to the extent it is Finance the following except to the extent it is

directly related to the financed transactiondirectly related to the financed transaction Professional export marketing advice or service, Professional export marketing advice or service, Foreign business travel, Foreign business travel, Participating in trade shows orParticipating in trade shows or Support staff in overseasSupport staff in overseas

38

Export Working Capital Export Working Capital ProgramProgram

Collaterals: Only collateral located in the US. is accepted Export inventory Foreign accounts receivable Assignment of contract proceeds Bank letter of credit Personal guarantee of owners with 20

percent or more ownership

39

International Trade Loan International Trade Loan ProgramProgram

SBA guarantees maximum 90% of up to $5 million in combined working capital, fixed asset loans, and any other SBA loans

Maximum guaranty amount: $4.5 millionBalance sheet oriented loan for a long term

 

40

International Trade Loan International Trade Loan ProgramProgram

Eligibility:Eligibility: Applicant must be a small business Must establish

• that the loan will significantly expand existing export markets or develop new export markets by acquiring or upgrading production facilities or

• that applicant is currently adversely affected by import competition and the loan will alleviate adverse impact of import competition

41

International Trade Loan International Trade Loan ProgramProgram

Use of proceeds: ForUse of proceeds: ForWorking capitalWorking capitalAcquiring, constructing, improving or expanding Acquiring, constructing, improving or expanding

facilities or equipment in the U.S.facilities or equipment in the U.S.Refinancing of debt structured with unreasonable Refinancing of debt structured with unreasonable

terms and conditionsterms and conditions

Maturities:Maturities:Up to 10 years for working capital portion of ITLUp to 10 years for working capital portion of ITL Up to 10 years on equipment (If useful life is Up to 10 years on equipment (If useful life is

longer than 10 years, maximum 15 years)longer than 10 years, maximum 15 years) Up to 25 years for real estateUp to 25 years for real estate

42

International Trade Loan International Trade Loan ProgramProgram

Collateral: First lien position on items financed under

the ITL Personal guarantee or other guarantee, if

needed Only collaterals located in the U.S. are

acceptable.

43

Export Express Loan Program

Allows lenders to use their own loan analyses, procedures and documentation, and a streamlined loan review and approval procedures

Maximum loan amount: $500,000Guaranty on SBA Express loan of up to

$350,000 is 90%Guaranty for loans over $350,000 up to

$500,000 is 75% 

44

Export Express Loan ProgramExport Express Loan ProgramLoan proceeds may be used for most

business purposes that will enhance a firm’s export development.Participating in a foreign trade showFinancing standby letter of creditFinancing specific export ordersFinancing equipment or real estate

Has been in business operation for at least 12 months

Maturities: Up to 7 years for revolving working capital, 10-15 years for machinery and equipment

45

Overseas Private Investment Overseas Private Investment Corporation (OPIC)Corporation (OPIC)

Established as an agency of the U.S. Government in 1971 and acts as a development finance institution

Operates on a self-sustaining basis at no net cost to U.S. taxpayers  

To promote economic growth in developing countries by encouraging U.S. private investments in those countries

Considers an investment's impact on the U.S. economy, the environment and rights of workers in the host countries.

Overseas Private Investment Overseas Private Investment Corporation (OPIC)Corporation (OPIC)

Helps U.S. businesses successfully enter, grow, and compete in developing countries

Provides U.S. investors with (1)Financing, (2) Insurance, and (3) Investment funds

(1) FinancingMedium-to long-term funding through direct loans

and loan guarantees to eligible investment projects in developing countries

Financing project in countries where conventional financing is difficult or unavailable

Borrower should own at least 25% of overseas investment

46

47

Overseas Private Investment Overseas Private Investment Corporation (OPIC)Corporation (OPIC)

(2) Insurance (Political risk insurance) Insures U.S. investments overseas against

• Political risks such as civil strife, political violence, expropriation, and currency inconvertibility for both assets and business income

• Wrongful calling of bid, performance, and down payment bonds, and contract repudiation

• Covers possible loss or damage to Tangible assets, Value of investment, and Earnings of investment

• Can cover up to $250 million per project for up to 20 years

48

Overseas Private Investment Overseas Private Investment Corporation (OPIC)Corporation (OPIC)

(3) Investment Funds Mobilizes investment funds for emerging markets

by providing long-term debt capital (10 to 12 years) to private equity funds (1/3 of equity)

These OPIC-supported funds make direct equity and equity-related investments in new, expanding or privatizing emerging market companies

Typically managed by an affiliate of sponsors with a proven track record in direct equity investment and relevant regional or sectoral experience

Overseas Private Investment Overseas Private Investment Corporation (OPIC)Corporation (OPIC)

Criteria for OPIC-supported investment projects 1. Be environmentally and socially sustainable. 2. Respect human rights including workers

rights. 3. Have no negative impact on the U.S.

economy. 4. Encourage positive host country

development effects.

49