CHAPTER XXXIV FINANCING EXPORTS 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)

Factors for Exporter’s Financing 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

Buyer's Financing of Exports Cash In Advance Irrevocable Letter of Credit

Cash 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.

Irrevocable Letter of Credit Exporter 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

Irrevocable 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.

Irrevocable 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.

Irrevocable 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.

Irrevocable Letter of Credit c. 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.

Irrevocable 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.

Irrevocable 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.

International 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.

International Factoring Sequence An exporter approaches a U.S. factor 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 Based on the guarantee, the U.S. factor buys the export receivables without recourse to the exporter. The factor becomes a principal and collects receivables at his own risk.  

International Factoring Fees  Usually more expensive than traditional bank services, but much more convenient and faster. 1.25% to 1.75% of the invoice amount.   International Factoring Network Factors Chain International (FCI), an association of over 250 international factors in 68 countries.

Forfaiting 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

Forfaiting Sequence 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

Forfaiting 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

Forfaiting Interest and Fees International Forfaiters Network 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.

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

Export-Import Bank of the 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

Export-Import Bank of the U.S. Working Capital Guarantee Program Loan Guarantee for Foreign Buyers Program Direct Loan to Foreign Buyers Program Finance Lease Guarantee Program

Working Capital Guarantee Program 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

Working Capital Guarantee Program 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

Working Capital Guarantee Program 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

Working Capital Guarantee Program 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.

Working Capital Guarantee Program 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.

Working Capital Guarantee Program 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

Loan Guarantee for Foreign Buyers 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

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

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 requirement No minimum or maximum limit but generally loan amounts over $10 million Repayment term: Varies. Usually longer than 7 years Guarantor 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)

Small Business Administration (SBA) Export Working Capital Program International Trade Loan Program Export Express Loan Program

Small Business Administration (SBA) All banks are generally eligible to participate in SBA’s guaranteed loan program. 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

Export Working Capital Program 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.

Export Working Capital Program Eligibility: 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

Export Working Capital Program Terms of loan: Revolving line of credit for 12 months with two times of annual renewals, maximum 3 years Use of Loan Proceeds: To finance working capital needs associated with export transactions, such as Pre-export financing of labor and materials Purchasing products or services for export Financing the foreign accounts receivable Financing a standby letter of credit used as a bid bond or a performance bond Supporting an indirect export

Export Working Capital Program Proceeds may not be used to Support the borrower’s domestic sales Acquire fixed assets or capital goods Acquire, equip, or rent commercial space overseas Finance the following except to the extent it is directly related to the financed transaction Professional export marketing advice or service, Foreign business travel, Participating in trade shows or Support staff in overseas

Export Working Capital Program 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

International Trade Loan Program 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 million Balance sheet oriented loan for a long term  

International Trade Loan Program 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

International Trade Loan Program Use of proceeds: For Working capital Acquiring, constructing, improving or expanding facilities or equipment in the U.S. Refinancing of debt structured with unreasonable terms and conditions Maturities: Up to 10 years for working capital portion of ITL Up to 10 years on equipment (If useful life is longer than 10 years, maximum 15 years) Up to 25 years for real estate

International Trade Loan Program 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.

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: $500,000 Guaranty on SBA Express loan of up to $350,000 is 90% Guaranty for loans over $350,000 up to $500,000 is 75%  

Export Express Loan Program Loan proceeds may be used for most business purposes that will enhance a firm’s export development. Participating in a foreign trade show Financing standby letter of credit Financing specific export orders Financing 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

Overseas Private Investment 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 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) Financing Medium-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

Overseas Private Investment 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

Overseas Private Investment 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 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.