Export Finance: A Guide for Importers

Part 1: FAQs and Definitions

What is Export Finance?

Export Finance is a form of financing which is tied to a specific contract between an exporter and an importer. It’s typically used to finance the procurement of capital equipment and/or services. Specific products are available to suppliers and buyers, with maturities ranging from short (usually <1 year) to medium (5-7 years) and long term (7 years or more).

What are ECAs and what role can they play in export finance?

An Export Credit Agency (ECA) is a government institution or a private company operating on behalf of a government. They finance the export of goods and services from their home country to a buyer in a host country. Products offered by ECAs include export credit insurance, financial guarantees (of loans and bonds), and in some cases direct loans. ECAs assume the commercial and political risks of non-payment under export contracts. ECAs complement the private commercial banking and credit insurance markets, offering an additional liquidity source for counterparties, usually with longer terms and lower costs.

So what will it cost me?

Most countries’ ECAs work within a regulated environment where they are obliged to comply with a set of OECD guidelines, called the Arrangement on Officially Supported Export Credits (“The Arrangement”). The arrangement provides guidance to member countries, allowing exporters compete on the basis of the quality of their goods and services, not as a result of concessional government-supported financing.

The Arrangement sets out:

  • Minimum benchmarks on premiums. These vary from country to country in line with political risk classifications and the commercial buyer risk category of the borrower (The full list of criteria can be found on page 12 of the OECD guidelines);
  • Some ECAs may also provide fixed long-term interest support, with minimum interest rates defined as the Commercial Interest Reference Rate (CIRR). The CIRR depends on the currency of the transaction, and is adjusted by the OECD on a monthly basis;
  • ECAs usually cover up to 85% of an eligible contract value; in other words, at least 15% of the contract value cannot benefit from ECA support;
  • The maximum repayment tenor for both standard exports, as well as for specified industries through special sector understandings;
  • An allowance for the financing of a percentage of local costs associated with the exported items;
  • Compliance obligations associated with the equator principles’ social and environmental standards.

Many ECAs have online tools to help calculate the premium. However, these are indicative rates; the ECA will determine the final pricing.

How do I know how much I can finance?

The amount that is eligible for ECA support depends on a number of factors (such as contract structure, volume of value creation in the exporting country, availability of re-insurance and so on). The amount of financing is linked to the country of origin of the exported goods and services. How eligible procurement is calculated varies from country to country. It is essential to understand how the home country’s ECA determines eligible value. ECAs typically lend up to 85% of eligible home country content. Some ECAs are more flexible.

There are tools available online to help you generate estimates of how much you might be able to finance on any given contract. For instance, CC Solutions in the USA are advisory experts specialising in ECA-backed business: you can see their tool for a quick estimate by clicking here.

What are the advantages of export finance?

Export finance can potentially offer importers many advantages:

  • The tenors might be longer, and interest rates lower, than what is available in the domestic market;
  • ECA financing is very stable and reliable, as ECAs are dedicated to dealing in challenging risk environments;
  • As most of the risk is taken on by the ECA, the export finance lender may be able to leverage its counterparty limits available for the importer. ECA finance can therefore be regarded as an additional, highly secure source of financing;
  • ECA financing mitigates commercial and political risks, such as non-payment bankruptcy, political instability, currency inconvertibility and so on.

What about disadvantages?

  • The financed procurement must comply with the export-country specific eligibility criteria and the OECD framework (as applicable);
  • While ECAs and banks are well versed in arranging export finance, the process may feel bureaucratic and burdensome. Successful transactions coordinate among finance, procurement, and logistics teams;
  • Some ECAs may be off-cover for certain markets/jurisdictions, and the private market may be a better source of cover in such instances.

What are the eligibility criteria for export finance?

  • Most ECAs have national content criteria, and will only support exports that they deem beneficial to their economy and, if applicable, in accordance with the OECD Agreement. In practice, the exact criteria vary from country to country;
  • ECAs finance a portion of home country content plus a varying amount of foreign content of the purchase order amount;
  • The project must be deemed to be creating sufficient national value;
  • The importer must be able to find alternative means of payment for at least 15% of the contract value, called the down-payment. Buyers can use equity or finance the down-payment, the latter on a subordinated basis to the ECA;
  • Local parts of the contract may only be supported up to a 30% of eligible procurement.

What kind of medium / long term cover do ECAs offer?

The two main facilities offered by ECAs are Buyer credit and Supplier credit cover.

1. Buyer credit

This is the financing where the buyer is the counterparty to the ECA. The ECA will either provide a guarantee to a bank, or a direct loan to finance the purchase of goods and/or services exported by companies in the ECA’s country. Support can be made available for corporate, sovereign, bank or project finance risk.

Buyer credit financing can disburse under letter of credit, direct, or reimbursement methods.

The following diagram is an example of a buyer credit structure:

The following diagram is an example of a supplier credit structure (working capital guarantee):

2. Supplier credit

In a supplier credit structure, an exporter is the counterparty to the ECA. Transactions are limited to short and medium-term tenors. They can be either single buyer transactions (for either a single export transaction, or for continuous exports to a single buyer), or multi-buyer policies to insure an exporter’s pool of buyers. The primary types of supplier credits are export credit insurance, working capital guaranteed loans, and surety-type bonds.

Supplier credits aim to give attractive financing to the supplier to allow him/her to extend payment terms with the foreign buyer. There are a range of different products that come under the “supplier credit” umbrella, and it’s best to consult your ECA or bank to find out what’s available.

Export credit insurance covers non-payment risk of foreign receivables (percent cover ranges from 90-100%, depending on the agency). With foreign buyer payment risk mitigated, suppliers can offer extended payment terms to their buyers.

A working capital guaranteed loan is made by lenders to suppliers to provide working capital in support of export sales. Since these loans are guaranteed by the ECA, the interest rate is typically lower, and the facility amount is greater than with an uncovered working capital loan. When a supplier also buys export credit insurance, the policy can be pledged to the working capital lender to further enhance loan terms and conditions.

Some ECAs also provide banks with guarantees to issue bonds. This includes bid, performance, quality, assurance, and related instruments. These bonds support suppliers’ sales into overseas market.

Part 2: Decision tree – is export finance an option?

Here are some questions you should ask yourself, to work out if export finance is an option for you. Only proceed to the next stage if the answer to each of these questions is “Yes”

  • Do you have an export contract?

  • Is it eligible for ECA support?

  • Are the terms favourable for you?

  • Are you able to make the down payment (usually 15% of the contract value)?

  • Is the premium rate affordable? What other costs are there?

  • Have you identified the legal costs? Are they manageable?

  • Have you considered the environmental and social impacts of your project?

  • Go for it!

Part 3: Suggestions for further reading

British Exporters’ Association guide to export finance:

http://www.bexa.co.uk/bexa-guide-on-export-credit-insurance/

(this is aimed at exporters in the UK, but has some useful information for borrowers too)

CC Solutions’ website (“Learn” tab contains explanations, resources, and indicative calculator):

www.cc-solutions.net