Transcript CHAPTER XXXIV FINANCING EXPORTS

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)
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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
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Buyer's Financing of Exports
Cash In Advance
Irrevocable Letter of Credit
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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.
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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
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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.
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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.
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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.
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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.
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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.
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Irrevocable Letter of Credit
d. Back-to-Back L/C (continued)
 The bank issuing the second L/C (back-toback) 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.
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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.
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International Factoring
 Sequence
a.
An exporter approaches a U.S. factor
b.
A member or an allied company in foreign country
establishes a line of credit for an importer and
guarantees the risk to the U.S. factor
c.
Based on the guarantee, the U.S. factor buys the
export receivables without recourse to the exporter.
d.
The factor becomes a principal and collects
receivables at his own risk.
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International Factoring
 Fees
a. Usually more expensive than traditional
bank services, but much more convenient
and faster.
b. 1.25% to 1.75% of the invoice amount.
 International Factoring Network
a. Factors Chain International (FCI), an
association of over 250 international
factors in 68 countries.
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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
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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
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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
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Forfaiting
 Interest and Fees
 Interest rate is fixed based on LIBOR (London
Inter-Bank Offered Rate)
 Commitment fee is 1% or more.
 International Forfaiters Network
 International Forfaiting Association (IFA):Founded
in 1999, 140 members
 Well-known International Forfaiters
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Morgan Grenfell Trade Finance LTD, U.K.
West Merchant Bank, U.K.
London Forfaiting American, Inc.
British-American Forfaiting Company, Inc.
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U.S. Government's Export
Financing
Export-Import Bank of the U.S.
Small Business Administration of the
U.S.
Overseas Private Investment
Corporation
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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
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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
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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
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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
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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
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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.
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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.
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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
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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
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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
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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
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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
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–
–
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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)
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Small Business Administration
(SBA)
Export Working Capital Program
International Trade Loan Program
Export Express Loan Program
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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
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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.
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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
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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
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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
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Professional export marketing advice or service,
Foreign business travel,
Participating in trade shows or
Support staff in overseas
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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
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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
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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
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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
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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.
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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%
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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
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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.
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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
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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
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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
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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.
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