Term Financing for Foreign Buyers

Introduction

The cross-border sales of high value capital goods poses special challenges. Overseas buyers seldom have the cash on hand to pay for these major purchases. Few exporters can handle the risks of default or the cash flow pressures caused by these long-term contracts. Ever since the massive international loan defaults in the 1980’s, commercial banks have dramatically cut back lending to foreign buyers. The level of commercial and political risks of lending large sums for extended periods in overseas markets has become unacceptable to most North American banks.

One viable solution to these challenges for buyers, exporters, and lending banks is the Buyer Credit Program of the Export-Import Bank of the United States. The program backs bank loans to overseas buyers with guarantees from the U.S. Government. All the key parties to the trade transaction benefit through this program. The exporter wins because they’re paid cash on delivery and acceptance of the product or service. The foreign buyer wins because they get extended credit terms at markets rates or better. And the lender wins because Ex-Im Bank guarantees, backed by the U.S. Government, mean full repayment of the loan and a reasonable return on funds loaned.

Example

Agrotech is an agricultural equipment manufacturer in Salinas. They received a request from Beltran y Bolenas, a lettuce grower in Guanajuato, Mexico for the purchase of two vacuum tube coolers. The coolers are used to cool down lettuce to prepare for shipment by truck. The cost for the machines was $425,000 each. Beltran y Bolenas was prepared to pay a cash down payment of 15% but needed to have at least two-year financing to handle the full $727,500 financing required.

Agrotech could not provide the two year financing directly to their buyer and asked TEFO for advice and recommendations. We contacted Beltran y Bolenas and evaluated their credit capacity and determined they did not have the credit strength to handle the financing. However, a local agricultural distributor, related to the buyer, had the credit strength and was willing to provide guarantee support.

Ex-Im Bank approved the credit and provided their guarantee for the transaction. TEFO packaged the credit transaction then received competitive bids from eight regional banks and two international banks. TEFO recommended that Beltran y Bolenas select an excellent offering from one aggressive lender. The loan was signed, and Agrotech was paid after shipment and installation of the coolers in Guanajuato.

Prerequisites

The Borrower: The borrower should be a foreign importer, the importer's bank or other government institution authorized by the import country, which are acknowledged by Ex-Im Bank. The borrower should have a sound credit record, and have the capability to repay the principal, the accrued interest and loan fees and charges as agreed in the repayment schedule. Subject to the credit policy of Ex-Im Bank, the borrower is required to provide a repayment guarantee, and in some cases, a sovereign guarantee of the import country if necessary.The Country: Ex-Im Bank is open for business in most countries but may be limited or unable to offer financing in certain countries and under certain terms or conditions. EX-IM Bank determines whether export credit insurance is necessary according to the political and commercial risk assessments.
The Exporter: The exporter should be an independent legal entity with the authority to implement the commercial sales contract.
Goods and Services: U.S. capital equipment and services. Military or defense items are generally not eligible nor are sales to military buyers.
The Guarantor: If required, the guarantor should be a bank or a government agency that guarantees the borrower’s obligations if the borrower fails to make repayment.
Commercial Contract: The commercial contract should be examined and approved by EX-IM Bank and includes:

No minimum or maximum limit to the size of the export sale.
The down payment should not be lower than 15% of the total contract value
The U.S. content of the export goods should constitute more than 50% of the total contract value.

Repayment terms up to five years are generally available for exports of capital equipment and services. Terms up to 10 years may be available for transportation equipment and exports to large-scale projects.

Advantages To Exporter

Exporters can facilitate buyer financing as an attractive component in their sales package.

Exporters can match financing packages offered by other competitors.
Financing provided to the buyer is without recourse to the exporter.
The exporter receives cash upon shipment of the goods or services.
The exporter is relieved of the collections process.
Lender and Ex-Im Bank bear risk of commercial and political risks.
Lender and Ex-Im Bank bear the risk of currency and interest rate fluctuations.

Disadvantages To Exporter

Exporter has a credit exposure if supplier has not fulfilled contractual obligations to the buyer.
Credit is not directly tied to exporter’s bid.
Buyer can select any another U.S. supplier up until time product is shipped.

Advantages to Importer

The importer obtains favorable extended credit terms at fixed or variable rates.
The importer obtains a predictable repayment schedule that does not directly affect their existing banking arrangements.
The importer obtains financing over and above existing local bank and credit facilities.
The importer obtains attractive interest rates especially in developing countries.
Importer can choose to structure the loan in any one of several approved currencies.
The fixed interest rate option will never fluctuate over the life of the loan.
Variable interest rates are available.
Amortization payments are equal, allowing the importer to know their funding costs and budget accordingly.
The loan is secured by a registered lien over the exported goods.
The loan amount is only restricted by credit capacity of importer.

Disadvantages to the Importer

Financing is offered in several major hard currencies; borrower may face foreign exchange risk if reselling goods in local currency.
Ex-Im Bank may require local bank guarantee or other credit support if importer does not meet credit standards.
Ex-Im Bank guarantee approvals add more time delays to the loan process.
Because of the size and complexity of the transactions, the financing often requires external legal assistance.
The borrower normally bears the financing costs, including set-up costs, Margin, management and commitment fees, Legal fees, Guarantee premium to an export credit agency, if applicable, Letter of credit charges, if applicable.

Advantages to Lender

Enables lenders to provide Medium-term and long-term financing to overseas buyers.
Lender obtains 100% of commercial and political risk coverage.
Lender can offer buyer flexible financing options and repayment terms.
Size of the transaction is not restricted by Ex-Im Bank.

Procedure

TEFO makes a direct application to Ex-Im Bank for a loan guarantee for the Buyer.
Ex-Im Bank approves the application.
A loan agreement is signed between Ex-Im Bank and the buyer.
Ex-Im Bank determines if credit guarantee is required.
When the Ex-Im Bank approval process is completed, our specialist packages the deal.
TEFO contacts selected lenders and investors that have interest in these types of loans.
TEFO selects the bank with the most advantageous medium term loan offering.
The loan documents are signed.
A down payment, not less than 15% of the commercial contract, is made by buyer.
The exporter delivers goods to the buyer as stipulated in the commercial contract.
Ex-Im Bank disburses the loan proceeds to exporter after the delivery of the goods.
The buyer repays Ex-Im Bank on a semi-annual basis.

Financing Costs

Loan interest at current competitive market interest rates based on Lender’s cost of funds.
Letter of Interest Application Processing Fee – $100.
Preliminary Commitment Application Processing Fee – 0.1 of 1% of the financed amount.
Commitment Fee – 0.125% per annum on the undisbursed balance of the loan.
Ex-Im Bank Exposure Fee – Varies, depending upon tenor, country risk, and buyer credit risk.
All reasonable out-of-pocket costs for the loan, including legal fees.

TEFO is supported by:

The Bank of Alameda

California Independent Bankers Association

California Centers for International Trade Development

Tradeport

InternetLC

© 2007 TradePort Export Finance Online: The Source for California Trade Finance - info@tefo.com
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TEFO Home About TEFO Management Team Products & Services Trade Glossary Import Finance Tutorial Export Finance Tutorial	Term Financing for Foreign Buyers Introduction The cross-border sales of high value capital goods poses special challenges. Overseas buyers seldom have the cash on hand to pay for these major purchases. Few exporters can handle the risks of default or the cash flow pressures caused by these long-term contracts. Ever since the massive international loan defaults in the 1980’s, commercial banks have dramatically cut back lending to foreign buyers. The level of commercial and political risks of lending large sums for extended periods in overseas markets has become unacceptable to most North American banks. One viable solution to these challenges for buyers, exporters, and lending banks is the Buyer Credit Program of the Export-Import Bank of the United States. The program backs bank loans to overseas buyers with guarantees from the U.S. Government. All the key parties to the trade transaction benefit through this program. The exporter wins because they’re paid cash on delivery and acceptance of the product or service. The foreign buyer wins because they get extended credit terms at markets rates or better. And the lender wins because Ex-Im Bank guarantees, backed by the U.S. Government, mean full repayment of the loan and a reasonable return on funds loaned. Example Agrotech is an agricultural equipment manufacturer in Salinas. They received a request from Beltran y Bolenas, a lettuce grower in Guanajuato, Mexico for the purchase of two vacuum tube coolers. The coolers are used to cool down lettuce to prepare for shipment by truck. The cost for the machines was $425,000 each. Beltran y Bolenas was prepared to pay a cash down payment of 15% but needed to have at least two-year financing to handle the full $727,500 financing required. Agrotech could not provide the two year financing directly to their buyer and asked TEFO for advice and recommendations. We contacted Beltran y Bolenas and evaluated their credit capacity and determined they did not have the credit strength to handle the financing. However, a local agricultural distributor, related to the buyer, had the credit strength and was willing to provide guarantee support. Ex-Im Bank approved the credit and provided their guarantee for the transaction. TEFO packaged the credit transaction then received competitive bids from eight regional banks and two international banks. TEFO recommended that Beltran y Bolenas select an excellent offering from one aggressive lender. The loan was signed, and Agrotech was paid after shipment and installation of the coolers in Guanajuato. Prerequisites The Borrower: The borrower should be a foreign importer, the importer's bank or other government institution authorized by the import country, which are acknowledged by Ex-Im Bank. The borrower should have a sound credit record, and have the capability to repay the principal, the accrued interest and loan fees and charges as agreed in the repayment schedule. Subject to the credit policy of Ex-Im Bank, the borrower is required to provide a repayment guarantee, and in some cases, a sovereign guarantee of the import country if necessary.The Country: Ex-Im Bank is open for business in most countries but may be limited or unable to offer financing in certain countries and under certain terms or conditions. EX-IM Bank determines whether export credit insurance is necessary according to the political and commercial risk assessments. The Exporter: The exporter should be an independent legal entity with the authority to implement the commercial sales contract. Goods and Services: U.S. capital equipment and services. Military or defense items are generally not eligible nor are sales to military buyers. The Guarantor: If required, the guarantor should be a bank or a government agency that guarantees the borrower’s obligations if the borrower fails to make repayment. Commercial Contract: The commercial contract should be examined and approved by EX-IM Bank and includes: No minimum or maximum limit to the size of the export sale. The down payment should not be lower than 15% of the total contract value The U.S. content of the export goods should constitute more than 50% of the total contract value. Repayment terms up to five years are generally available for exports of capital equipment and services. Terms up to 10 years may be available for transportation equipment and exports to large-scale projects. Advantages To Exporter Exporters can facilitate buyer financing as an attractive component in their sales package. Exporters can match financing packages offered by other competitors. Financing provided to the buyer is without recourse to the exporter. The exporter receives cash upon shipment of the goods or services. The exporter is relieved of the collections process. Lender and Ex-Im Bank bear risk of commercial and political risks. Lender and Ex-Im Bank bear the risk of currency and interest rate fluctuations. Disadvantages To Exporter Exporter has a credit exposure if supplier has not fulfilled contractual obligations to the buyer. Credit is not directly tied to exporter’s bid. Buyer can select any another U.S. supplier up until time product is shipped. Advantages to Importer The importer obtains favorable extended credit terms at fixed or variable rates. The importer obtains a predictable repayment schedule that does not directly affect their existing banking arrangements. The importer obtains financing over and above existing local bank and credit facilities. The importer obtains attractive interest rates especially in developing countries. Importer can choose to structure the loan in any one of several approved currencies. The fixed interest rate option will never fluctuate over the life of the loan. Variable interest rates are available. Amortization payments are equal, allowing the importer to know their funding costs and budget accordingly. The loan is secured by a registered lien over the exported goods. The loan amount is only restricted by credit capacity of importer. Disadvantages to the Importer Financing is offered in several major hard currencies; borrower may face foreign exchange risk if reselling goods in local currency. Ex-Im Bank may require local bank guarantee or other credit support if importer does not meet credit standards. Ex-Im Bank guarantee approvals add more time delays to the loan process. Because of the size and complexity of the transactions, the financing often requires external legal assistance. The borrower normally bears the financing costs, including set-up costs, Margin, management and commitment fees, Legal fees, Guarantee premium to an export credit agency, if applicable, Letter of credit charges, if applicable. Advantages to Lender Enables lenders to provide Medium-term and long-term financing to overseas buyers. Lender obtains 100% of commercial and political risk coverage. Lender can offer buyer flexible financing options and repayment terms. Size of the transaction is not restricted by Ex-Im Bank. Procedure TEFO makes a direct application to Ex-Im Bank for a loan guarantee for the Buyer. Ex-Im Bank approves the application. A loan agreement is signed between Ex-Im Bank and the buyer. Ex-Im Bank determines if credit guarantee is required. When the Ex-Im Bank approval process is completed, our specialist packages the deal. TEFO contacts selected lenders and investors that have interest in these types of loans. TEFO selects the bank with the most advantageous medium term loan offering. The loan documents are signed. A down payment, not less than 15% of the commercial contract, is made by buyer. The exporter delivers goods to the buyer as stipulated in the commercial contract. Ex-Im Bank disburses the loan proceeds to exporter after the delivery of the goods. The buyer repays Ex-Im Bank on a semi-annual basis. Financing Costs Loan interest at current competitive market interest rates based on Lender’s cost of funds. Letter of Interest Application Processing Fee – $100. Preliminary Commitment Application Processing Fee – 0.1 of 1% of the financed amount. Commitment Fee – 0.125% per annum on the undisbursed balance of the loan. Ex-Im Bank Exposure Fee – Varies, depending upon tenor, country risk, and buyer credit risk. All reasonable out-of-pocket costs for the loan, including legal fees. Copyright © 2004, 2005 Ted S. Eastman. None of the contents of this article may be reproduced or republished without the express permission of the author		TEFO is supported by: The Bank of Alameda California Independent Bankers Association California Centers for International Trade Development Tradeport InternetLC
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