Trade finance can accurately be described as the “final frontier” of international business. Virtually all financial institutions can process trade transactions; however, providing an exporter with working capital for a foreign transaction, can be somewhat more challenging.
The challenge is more of a perception issue than reality. Extending credit to foreign entities is rightfully a frightening exercise for any bank to undertake. Typical of any type of loan, a bank agrees to extend credit to its customer with specific terms and conditions of repayment. The loan is granted upon an approval process that reasonably assures the bank of repayment. If additional collateral is required, the bank may ask for a guarantee or consignor. This same principal can be applied to loans that support export trade finance.
What is the Export-Import Bank?
The Export-Import Bank of the United States (Ex-Im Bank) was created in 1934 to aid in financing and to facilitate U.S. exports. The Bank acts as an intermediary—a guarantor or consignor—to enhance the bank’s lending position.
Ex-Im Bank is not a grant agency. It is a government held corporation, managed by a Board of Directors, consisting of a Chair, Vice Chair and three additional Board Members. Members serve for staggered terms and are chosen and serve at the discretion of the President of the United States.
How does the Ex-Im Bank work?
Before Ex-Im Bank approves a deal, it must have a reasonable assurance of repayment. What Ex-Im Bank does is provide guarantees for working capital loans for U.S. exporters, guarantees the repayment of loans, makes loans to foreign purchases of U.S. goods and services, and provides credit insurance against non-payment by foreign buyers for political or commercial risk.
For most U.S. companies, exports are the key to continued growth and profitability. The ability to compete and succeed in a global marketplace often depend upon the exporter and their bank’s willingness to provide creative financing in an expeditious manner.
How can the Ex-Im Bank help?
U.S. exporters are often at a disadvantage when foreign competitors are subsidized by their local governments. U.S. exporters may also be requested to provide foreign buyers with financing when private financing is unavailable.
The Ex-Im Bank can help in both cases if the product/service is a least 50 percent US content. The Ex-Im Bank’s two primary goals are to increase the export of goods and services among developing nations, and to expand the number of U.S. small business using Ex-Im Programs.
What programs are available?
- Working Capital Guarantees cover 90 percent of the principal and interest on commercial loans to creditworthy small and medium — sized companies that need funds to buy or produce US goods or services for export.
- Preliminary Commitment is a letter from Ex-Im Bank outlining the terms and conditions under which it will provide a guarantee. This guarantee can be used to obtain the best financing terms from a private lender. The lender also may apply directly for a final authorization. Guarantees may be for a single transaction or a revolving line of credit. Guarantees may be for a single transaction or a revolving line of credit.
- Guaranteed loans generally have maturities of twelve months and are renewable. Certain Lenders, experienced in the program (and have attended the required in — house Ex-Im Bank training) have been given delegated authority, which enables them to commit Ex-Im Bank’s guarantee.
- The Working Capital Guarantee Program may submit a complete write—up of the exporter and transaction and be given a 10—day turnaround on their application. Since most of the work has already been done, Ex-Im can make its decision sooner. Guarantees of commercial loans to foreign buyers of U.S. goods or services cover 100 percent of principal and interest against both political and commercial risks of nonpayment. Medium – term guarantees cover the sale of capital items such as trucks and construction equipment, scientific apparatus, food processing machinery, medical equipment, or project – related services — including architectural, industrial design and engineering services. Long term guarantees are also available for major projects, large capital goods and/or project related services. Credit guarantee facilities also can be used to extend medium — term credit to buyers of U.S. capital goods and services through banks in certain foreign markets.
- Export Credit Insurance policies protect against both the political and commercial risks of a foreign buyer defaulting on payment. Policies may be obtained for single or repetitive export sales and for leases. Short-term policies generally cover 100 percent of the principal for political risks and 90 – 95 percent for commercial risks, as well as a specified amount of interest. They are used to support the sale of consumer goods, raw materials, and spare parts on terms of up to 180 days, and bulk agricultural commodities, consumer durables and capital goods on terms of up to 360 days. Capital goods may be insured for up to five years, depending upon the contract value, under the medium – term policy which covers 100 percent of principal and interest on the financed portion. Insurance policies may also be assigned to lenders which allow exporters to finance their foreign receivable. Ex-Im Bank along with private insurance agents and brokers offer exports insurance programs.
- Direct Loans provide foreign buyers with competitive, fixed — rate financing for their purchases from the United States. Ex-Im Bank’s loans, guarantees and medium — term insurance covers 85 percent of the contract price (100 percent of the financed portion). The foreign buyer is required to make a 15 percent cash payment. The fees’ charges by Ex-Im Bank for its programs are based on the risk assessment of the foreign buyer or guarantor, the buyer’s country, and the term of the credit. Ex-Im Bank prefers to work with exporters and their bank, rather than directly with exporter.
Ex-Im programs are constantly changing, and new programs are added to accommodate our growing export market. Ex-Im Bank and The Small Business Administration offers programs like those described for the small and start – up exporter.
If you’d like to learn more, please reach out to me, Ralph Bocchino, Commercial Loan Officer, International Trade specialist, by email at rbocchino@valley.com or by phone (315) 406-7628.
