CHAPTER 14

FINANCING EXPORT TRANSATCTION


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 (see chapter 13) 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 (see chapter 7).

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.

Exporters should contact a Department of Commerce district office (see
appendix III) or their state economic development agency for more
information