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).
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.
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.
Many ECAs have online tools to help calculate the premium. However, these are indicative rates; the ECA will determine the final pricing.
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.
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.
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.
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?
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
OECD Agreement on export credits:http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?doclanguage=en&cote=tad/pg(2016)