Chapter 5

Trade Finance

The export credit agencies (ECAs) and other organizations described in this chapter provide support to trading businesses at every level of the transaction cycle, including early stages of the negotiating process. The numerous government sources of support available for financing, insuring, and providing technical assistance for the export of goods and services are the focus of this chapter. Specifically, ECAs, the most important government source of trade finance, provide three basic functions: First, they help exporters neutralize officially supported foreign credit competition; second, they assume risks beyond those that can be assumed by private lenders (e.g., discounting foreign receivables); and third, they provide financing to foreign buyers when private lenders cannot or will not finance those export sales.

Suppose you are a U.S.-based refrigeration equipment manufacturer with a foreign buyer located in Iraq. As your company has never done business with the Iraqi buyer, you have asked the company to obtain a letter of credit from an Iraqi bank, which they have done. At this point, you approach your U.S. bank to finance the working capital you will need to manufacture the equipment. However, the terms they have offered do not quite satisfy your needs. As such, you contact Ex-Im Bank to provide a short-term working capital guarantee, which will be backed by the foreign receivables provided to your company by the Iraqi buyer. After obtaining the short-term working capital guarantee from Ex-Im Bank on 90% of the receivables, your U.S. bank extends your company favorable credit terms, which allow the export deal to be realized.

Government-backed trade financing can range from preexport working capital needed to fill purchase orders and export-related capital equipment expenditures (as noted in the previous example) to short-term (less than 180 days) export receivable financing, to customer financing with terms of 10 years or more. The ability to secure financing can be an important marketing tool in winning international bids and contracts. Insurance products are available to protect investments for both borrowers and lenders. A variety of technical assistance services direct businesses searching for, and securing, foreign customers, contracts, and financing.

The Export-Import Bank of the United States (Ex-Im Bank) is one of the primary Washington-based sources for information and services within this industry. As such, it is described in detail in the first portion of each section of this chapter, followed by a listing of other useful products by organization. While Ex-Im Bank is a key resource for U.S.-based exporters, there are over 60 ECAs worldwide providing a similar array of financial products to exporters. Information on these ECAs can be found in Inside the World’s Export Credit Agencies and are also referenced in appendix K.

The following is a summary of key topics on export financing found on this chapter:

Trade Finance

Export-Import Bank of the United States (Ex-Im Bank)

Ex-Im Bank is an independent government agency chartered by Congress to facilitate the export financing of U.S. goods and services. By neutralizing the effects of export credit subsidies from other governments and absorbing credit risks the private sector will not accept, Ex-Im Bank enables U.S. firms to compete in overseas markets on the basis of price, performance, delivery, and service. Ex-Im Bank has been particularly instrumental in developing U.S. small business exports and offers a number of programs and services specifically designed to meet the needs of small- and medium-sized enterprises that require unique lending instruments.

By charging fees and interest on all loan-related transactions, Ex-Im Bank is self-sustaining and is able to cover operating costs and potential losses, while also producing billions of dollars of revenue for U.S. tax payers. Through its breadth of products, Ex-Im Bank is expected to play a particularly vital role in meeting President Barack Obama’s pledge to double exports by 2015.

Direct Loan Program

Ex-Im Bank offers fixed-rate loans directly to foreign buyers of U.S. capital equipment and services, and to exporters involved with large-scale projects in order to help U.S. exporters compete against foreign suppliers offering officially supported export credits and to fill in gaps in the availability of private export financing.

Ex-Im Bank extends fixed-rate loans to a company’s foreign customer that cover up to 85% of the value of all eligible goods and services in the U.S. supply contract or 100% of the U.S. content in all eligible goods and services in the U.S. contract, whichever is less. While there is no minimum or maximum limit to the size of the export sale that may be financed by the loan, Ex-Im Bank Direct Loans typically involve loan amounts over $10 million with repayment terms of 5 or more years.

Capital equipment, large-scale projects, and related services are eligible for direct loan financing. The borrower must be a creditworthy entity in a country eligible for Ex-Im Bank assistance.¹

Guarantees

Ex-Im Bank guarantees provide repayment protection for private sector loans to creditworthy buyers of U.S. exports. Ex-Im Bank also guarantees lease financing. Guarantees cover repayment risks on the foreign buyer’s debt obligations. Ex-Im Bank guarantees that, in the event of default, it will repay the principal and interest on the loan. The foreign buyer is required to make at least 15% cash payment.

Short-Term Working Capital Guarantees

These guarantees give U.S. exporters access to working capital loans from commercial financial institutions. By providing up to 90% repayment guarantees to lenders on secured short-term loans against inventory and foreign receivables, exporters obtain the necessary working capital to purchase inventory, build products, and extend short-term credit to overseas buyers. Typically, advance rates of 90% against eligible receivables and up to 75% of inventory (including work-in-progress) are allowed. On a case-by-case basis, Ex-Im Bank allows advances against inventory not supported by purchase orders in order to give extra flexibility to the exporter. This program provides the means for small- and medium-sized companies to pursue exports more aggressively.

Exporters have basic ways of obtaining a working capital guarantee: Either exporters can approach Ex-Im Bank directly and obtain a preliminary commitment, which can then be converted into a loan by finding a willing lender, or they can apply through a delegated authority lender, which in many cases is the exporter’s very own bank. The process is accelerated when the bank is a delegated authority lender (see the following).

Ex-Im Bank issues guarantees to creditworthy exporters. Lenders must be able to demonstrate ability to service loans to exporters and must also certify that the loan would not otherwise be made without the guarantee. Exporters must be based in the United States, and start-up and developmental stage entities should be ineligible. The terms of a loan are typically up to 12 months but may be longer. For multiple export transactions (i.e., revolving loans), terms can be extended up to 36 months.

Ex-Im Bank either charges a nonrefundable processing fee of $500 for each application for a preliminary commitment or charges a processing fee of $100 for a final commitment application. In addition to either initial charge is an up-front facility fee of 1.5% of the total loan amount, based on a one-year loan.²

Credit Guarantee Facility

This program offers a line of credit between United States and foreign banks. Foreign buyers can go to a local bank for approval and make purchase payments. A U.S. bank will receive the payments from the foreign bank and disburse the payment to the supplier. Ex-Im Bank guarantees the U.S. bank against the risk of payment default from the foreign bank. Repayment terms range from 2 to 5 years. Coverage is 100% of principal and interest for up to 85% of the U.S. export value.

Special Initiatives

Tied Aid Capital Projects Fund

This fund counters a foreign-aid donor’s use of trade distorting tied aid or concessionary credits (i.e., soft loans). This fund, or “war chest,” may be utilized on a case-by-case basis and will only be applied when U.S. exports are directly threatened by foreign tied aid. Ex-Im Bank will support sales that combine substantial follow-on market penetration with strong international competitive advantages for the U.S. firms. In order to qualify, applicants should have a planned horizon extended beyond the current sale; expect substantial follow-up on market penetration, financed in the future on commercial terms; and be willing to engage energetically in price competition against foreign exporters.

Ex-Im Bank is committed to upholding OECD rules on trade-related aid and supporting the reduction of trade-distorting tied aid. Ex-Im Bank’s tied-aid credit will be structured as low-rate interest loans for up to 100% of the export value, with a term of up to 25 years. The exact interest rate will depend on the concessionality (as defined by the OECD) of the foreign tied-aid credit encountered. The fees are strictly risk-based and are structured to reflect pertinent sovereign risks, the financing of 100% of export value and term exposure to risk.

Private Export Funding Corporation (PEFCO)

PEFCO is a consortium of private lenders that act as a supplemental lender to official export financing sources. PEFCO makes loans to public and private borrowers located outside of the U.S. who require medium- or long-term financing on purchases of U.S. goods and services. It also provides funding to exporters who have obtained a preliminary commitment for an Ex-Im Bank WCG, which other financial institutions are unwilling to fund. In all cases, the loans made by PEFCO must be covered by the comprehensive guarantee of repayment of principal and interest by Ex-Im Bank. PEFCO does not have a minimum loan amount, and loan terms can be fixed or floating, with loan periods in the 1 to 15 (18 years for environmental exports) year range.

To apply for financing, PEFCO is usually approached indirectly through a commercial bank. When contacted, PEFCO will either provide a fixed-rate quote or offer to establish a quote at a future time as selected by the borrower. If the offer is accepted, a credit agreement will be negotiated between the borrower, PEFCO, Ex-Im Bank, and any other lender or guarantor.

Small Business Administration (SBA)

Export Working Capital Program (EWCP)

The EWCP helps small businesses export their products and services through credit lines to expand their business exports. Proceeds are used to finance labor and materials needed for manufacturing, purchase goods or services, or finance foreign accounts receivable. The unique advantages of the EWCP program include simplified procedures (shorter application and fewer required documents) and quick turnaround times (generally 10 days or less).

Applicants must qualify under SBA’s size standards and meet other eligibility criteria applicable to all SBA loans. In addition, applicants must have been in business for at least 12 months prior to filing an application. Business must be current on all payroll taxes and have a depository plan for the payment of future withholding taxes.

SBA can guarantee up to 90% of the principal and interest of a loan or $2 million, whichever is less. Borrowers may also have other current SBA guarantees, as long as the SBA’s total exposure does not exceed $1.5 million. If the borrower has also secured an international trade loan, the combined limit on SBA’s exposure may not exceed $1.5 million. For loans that exceed this amount, the exporter must solicit funding assistance from another source, such as the U.S. Export-Import Bank (Ex-Im Bank).

The maturity of an EWCP loan is typically one year. Borrowers can reapply for a new credit line when their existing line of credit expires. However, a new credit line may not be used to pay off an existing line of credit. Interest rates are set through negotiations between the applicant and the participating lender. For maturities of 12 months or less, SBA charges a nominal fee of 0.25% on the guaranteed portion of the loan. In addition, the normal fees permitted on all SBA loans may also be assessed on EWCP loans.

Collateral may include accounts receivable, inventories, assignments of contract proceeds, and bank letters of credit or appropriate personal guarantees. Only collateral that is located in the United States and its territories and possessions—or other assets under the jurisdiction of U.S. courts—is acceptable. The SBA also requires the personal guarantee from owners with 20% or more ownership.⁴

Export Express

SBA developed this program to make obtaining working capital easier for small businesses. Under the Export Express program, SBA has eliminated much of the paperwork typically associated with other working capital applications, and typical response time to applications is 36 hours. SBA will guarantee up to $500,000 on Export Express loans. This program offers financing in the form of either a term loan or a revolving line of credit. Proceeds can fund participation in a foreign trade show, finance standby letters of credit, translate company’s product literature for use in foreign markets, finance specific export orders, as well as finance expansions, equipment purchases, and inventory or real estate acquisitions, to name a few.

International Trade Loan (ITL) Program

The ITL Program provides long-term, primarily fixed, asset financing to help small businesses establish or expand international operations. Loans are made through lending institutions under SBA’s Guaranteed Loan Program. Proceeds from the loan may be used for working capital or for facilities and equipment, which includes purchase of land or buildings. Similar to other SBA programs, loan proceeds may not be used to pay off other debts. Lenders must take a first lien position (or first mortgage) on the items financed. Furthermore, SBA may require additional credit assurances, such as personal guarantees and subordinations.

Under this program, the SBA can guaranty up to 90% of an ITL up to a maximum of $4.5 million, less the amount of the guaranteed portion of other SBA loans outstanding to the borrower. The maximum share for working capital is $4 million. Maturities of loans may extend to the 25-year maximum period but are typically 10 years on the working capital portion of the ITL. Interest rates range from 2.25 to 2.75 percentage points above the prime rate, depending on the maturity of the loan.

Applicants for this loan must establish either that the loan proceeds will significantly expand their existing export markets or develop new ones or that the applicant’s sales and profitability are adversely affected by increased competition from foreign firms. In either case, the applicant may be asked to provide detailed narratives as well as financial statements. To apply for the ITL program, a small business exporter must apply to an SBA-participating lender. The lender will submit a completed Application for Business Loan (SBA Form 4) to the SBA.

U.S. Department of Agriculture (USDA)

Agricultural Export Credit Guarantee

The Commercial Export Credit Guarantee Programs (GSM-102 and GSM-103) of the Commodity Credit Corporation (CCC) are designed to expand U.S. agricultural exports by stimulating U.S. bank financing to foreign purchasers. Financing through these programs is available in cases where credit is necessary to increase or maintain U.S. exports to a foreign market and where private financial institutions would be unwilling to provide financing without CCC guarantees.

CCC covers the risk of a foreign bank’s failure to pay under a letter of credit for any reason. CCC requires that the foreign buyer’s bank issue an irrevocable letter of credit, in U.S. dollars, in favor of the exporter covering payment for the commodities. Payment of interest to the U.S. bank that finances the transaction can be covered either by the letter of credit or by a separate loan agreement between the U.S. bank and the foreign buyer’s bank. These guarantees cover 98% of the principal and a portion of the interest on loans extended by guaranteed U.S. banks. No coverage is available for ocean freight under the guarantee.

These products are offered in countries where these guarantees are required to secure financing and where there is enough foreign exchange to make the scheduled payments. Commodities are reviewed on a case-by-case basis to determine eligibility. The rate of interest is generally slightly above the prime lending rate or LIBOR.

Facility Guarantee Program (FGP)

The FGP, run by the CCC, provides payment guarantees to facilitate the financing of U.S. manufactured goods and services exported to improve or establish agriculture-related facilities in emerging markets. By supporting such facilities, the FGP is designed to enhance sales of U.S. agricultural commodities and products to emerging markets where the demand for such commodities and products may be constricted due to inadequate storage, processing, or handling capabilities for such products.

International Finance Corporation (IFC)

Global Trade Finance Program (GTFP)

Through the GTFP, IFC seeks to facilitate cross-border trade, where it might otherwise be constrained, and broaden access to credit for regional banks in emerging markets by issuing guarantees on the trade-related payment obligations of approved financial institutions in emerging markets (issuing banks) throughout the world. In providing such transaction-specific guarantees, the GTFP enables smaller issuing banks to establish partnerships with larger, international financial institutions, thus facilitating improved access to finance.

Inter-American Development Bank (IDB)

Trade Finance Facilitation Program (TFFP)

Maintaining its focus on the Latin America and Caribbean (LAC) region, IDB’s TFFP can provide credit guarantees to confirming banks, which seek insurance coverage on financial instruments from LAC issuing banks. While eligible issuing banks, usually working directly with the beneficiary, are limited to IDB borrowing member countries, confirming banks may be any international or regional bank demonstrating both adequate experience in trade financing and compliance with IDB standards. Tenors on individual transactions can be up to 3 years, with coverage up to 100% of an eligible transaction. Eligible transactions are typically limited to the export of products or services from borrowing IDB member countries to any country or imports to borrowing member countries from any IDB member country.

Other

State Development Funding Programs

U.S. firms can often access state programs to fill financing gaps not covered by federal and private entities or to complement federal funding options. Some state programs provide assistance through export counseling or technical assistance, while others offer financial support for international activities. Many state trade programs work with Ex-Im Bank to help exporters arrange financing. To learn more about state programs, contact a state international trade office (listed in appendix C) or the National Association of State Development Agencies (NASDA) for information regarding available state resources.

Trade Insurance

Export-Import Bank of the United States (Ex-Im Bank)

Ex-Im Bank provides export credit insurance to protect U.S. exporters against the risk of foreign buyer payment default. Ex-Im Bank insures a wide variety of U.S. exports to global markets, with special emphasis on stimulating small business transactions and expanding U.S. exports. Ex-Im Bank’s credit insurance policies protect against both the political and commercial risks of a foreign buyer defaulting on a credit obligation.

Besides protecting the exporter against nonpayment, Ex-Im Bank insurance also allows exporters to use international receivables to obtain financing. Because these receivables are insured, they can often be included in the borrowing base with a bank to obtain more attractive financing. In some cases, the insured receivables can be assigned to a bank or other financial institution making them functionally equivalent to an Ex-Im Bank loan guarantee. This is a particularly attractive option since export receivables can be very difficult to finance. In addition, export credit insurance also allows exporters to offer more attractive credit terms to overseas buyers. By not needing cash in advance or letters of credit for international transactions, exporters can offer better financing packages, which, ultimately, win more business.

Short-Term Credit Insurance

Ex-Im Bank’s credit insurance policy provides protection against both the political and commercial risks of a foreign buyer’s defaulting on a credit obligation. Policies are available for single or repetitive export sales to individual or multiple buyers. They generally cover 90% to 100% of the principal for specified political and commercial risks, as well as a specified amount of interest.

Medium-Term Insurance

Ex-Im Bank offers guarantees that cover political and commercial risk. The foreign buyer must make cash payment for 15% of the contract value to the supplier, which they can finance through a different source. Guarantees have full support from the U.S. government, and notes guaranteed by Ex-Im are transferable.

Any financing institution—U.S. bank, foreign bank, exporter’s financial supporter, or any capable party—can act as the lender. Buyers must be creditworthy and located in a country eligible for Ex-Im Bank assistance. This guarantee is available to private or nonsovereign public buyers.

The maximum cover available under medium-term policies is $10 million. Repayment terms range from 1 to 5 years (exceptionally 7 years) and are dependent on the value of the export contract, the item exported, the recipient country, and the market terms.⁶

Overseas Private Investment Corporation (OPIC)

Contractors and Exporters Program

OPIC offers a program for U.S. contractors and exporters that insures against

This insurance protects U.S. companies acting as contractors in international construction, sales, or service contracts, and U.S. exporters of heavy machinery, turbines, computers, medical equipment, and other goods. Typically, coverage is issued when the U.S. company has a contract with a foreign government buyer.