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.