Export Working Capital Financing

1. Export working capital (EWC) financing allows exporters to purchase the goods and services
they need to support their export sales.
2. EWC facilities extended by commercial lenders provide a means for small and medium-sized
enterprises (SMEs) that lack sufficient internal liquidity to process and acquire goods and
services to fulfill export orders and extend open account terms to their foreign buyers.
3. EWC financing also helps exporters of consigned goods have access to financing and credit
while waiting for payment from the foreign distributor.
4. EWC financing, which is generally secured by personal guarantees, assets, or high-value
accounts receivable, helps to ease and stabilize the cash flow problems of exporters while
they fulfill export sales and grow competitively in the global market.

EWC funds are commonly used to finance three different areas:

a) Materials
b) Labor
c) Inventory

But they can also be used to finance receivables generated from export sales and/or standby
letters of credit used as performance bonds or payment guarantees to foreign buyers.

Characteristic of an Export Working Capital Facility

Applicability – used to purchased raw materials, supplies and equipment to fulfill a large export
sales order or many small export sales order

Risk – significant risk of non-payment for exporter unless proper risk mitigation measures are used

Pros – allow fulfillment of export sales order

- Allows export to offer open account terms or sell consignment to remain competitive

Cons – generally available only to SMEs with access to strong personal guarantees, assets, or high-
value receivables

- Additional coat associated with risk mitigation measures

Where and How to Obtain an Export Working Capital Facility

Many commercial banks and lenders offer facilities for export activities. To qualify, exporters
generally need:

a) To be in business profitably for at least 12 months (not necessarily exporting),

b) To demonstrate a need for transaction-based financing, and
 c) To provide documents to demonstrate that a viable transaction exists.

 Note that personal guarantees, collateral assets, or high-value accounts receivable are generally
required for SMEs to obtain commercial EWC facilities. The lender may place a lien on the
exporter’s assets, such as inventory and accounts receivable, to ensure repayment of the loan.
 In addition, all export sale proceeds will usually be collected and applied to the principal and
interest by the lender before the balance is passed on to the exporter. Fees and interest rates
are usually negotiable between the lender and the exporter.

Two types of EWC facilities:

1. Short -term Loans

2. Revolving Lines of Credit

Short-term Loans

» Short-term loans, which are appropriate for large and periodic export orders, are typically
used if the outflows and inflows of funds are predictable over time. Short-term loans can be
arranged for 3, 6, 9, or 12 months, and the interest rates are usually fixed over the
requested tenors.

Revolving Lines of Credit

» Revolving lines of credit, however, are appropriate for a series of small export orders
because they are designed to cover temporary funding needs that cannot always be
anticipated. Revolving lines of credit have a very flexible structure so that exporters can
draw funds against their current account at any time and up to a specified limit.

Why a Government Guarantee may be Needed

» The U.S. Small Business Administration and the U.S. Export-Import Bank offer programs that
guarantee EWC facilities on behalf of U.S. exporters to commercial lenders which make the
actual loans. These programs allow U.S. exporters to obtain needed credit facilities from
participating lenders when commercial financing is otherwise not available or when their
borrowing capacity needs to be increased.
» Advance rates offered by commercial banks on export inventory and foreign accounts
receivables are not always sufficient to meet the needs of exporters. In addition, some
lenders do not lend to exporters without a government guarantee due to repayment risks
associated with export sales.
Why Risk Mitigation may be Needed

While EWC financing certainly makes it possible for exporters to offer open account terms
or sell on consignment in today’s highly competitive global markets, the use of such financing itself
does not necessarily eliminate the risk of non-payment by foreign customers.

Some forms of risk mitigation may be needed in order to offer open account or consignment
terms more confidently and to obtain EWC financing. For example, a lender may require an
exporter to obtain export credit insurance on its foreign receivables as a condition of providing
working capital and financing for exports.

OPEN ACCOUNT

 An open account transaction means that the goods are shipped and delivered before
payment is due, usually in 30 to 90 days.
 Obviously, this is the most advantageous option to the importer in cash flow and cost terms,
but it is consequently the highest risk option for an exporter. Because of the intense
competition for export markets, foreign buyers often press exporters for open account
terms.

Key Points

1. The goods, along with all the necessary documents, are shipped directly to the importer
who agrees to pay the exporter's invoice at a future date, usually in 30 to 90 days
2. Exporter should be absolutely confident that the importer will accept shipment and pay at
agreed time and that the importing country is commercially and politically secure.
3. Open account terms may help win customers in competitive markets, if used with one or
more of the appropriate trade finance techniques that mitigate the risk of nonpayment.

Used when:

 Goods are shipped to the foreign branch or subsidiary of a multinational company

 High degree of trust between the persons
 The seller has significant faith in the buyer's ability and willingness to pay.

Questions for the Buyer:

 Can I convince the seller of my ability and willingness to pay on an open account terms?
 Is my marketing or distribution strength and reputation in my domestic market attractive
enough to the seller to justify open account terms?
Questions for the Seller:

 Are open account terms the only option available?

 Does the buyer have the ability and willingness to make payment?
 Will economic, political, and social instability in the buyer's country hinder the buyer's
ability to pay?

How to Offer Open Account Terms in Competitive Markets

 Open account terms may be offered in competitive markets with the use of one or more of
the following trade finance techniques:
 Export Working Capital Financing
 Government-Guaranteed Export Working Capital Programs
 Export Credit Insurance
 Export Factoring
 Forfaiting

EXPORT WORKING CAPITAL FINANCING

 To extend open account terms in the global market, the exporter who lacks sufficient
liquidity needs export working capital financing that covers the entire cash cycle from
purchase of raw materials through the ultimate collection of the sales proceeds.
 Export working capital facilities can be provided to support export sales in the form of a loan
or revolving line of credit.

Government-Guaranteed Export Working Capital Programs

 The Export-Import Bank of the United States and the U.S. Small Business Administration
offer programs that guarantee export working capital facilities to U.S. exporters.
 With these programs, U.S. exporters are able to obtain needed facilities from commercial
lenders when financing is otherwise not available or when their borrowing capacity needs to
be increased.

Export Credit Insurance

 Export credit insurance provides protection against commercial losses-default, insolvency,

bankruptcy, and political losses-war, nationalization, currency inconvertibility, etc. It allows
exporters to increase sales by offering liberal open account terms to new and existing
customers.
  Insurance also provides security for banks providing working capital and financing exports.

Export Factoring

 Factoring in international trade is the discounting of a short term receivable (up to 180
days). The exporter transfers title to its short-term foreign accounts receivable to a factoring
house for cash at a discount from the face value.
 It allows an exporter to ship on open account as the factor assumes the financial ability of
the importer to pay and handles collections on the receivables. The factoring house usually
works with consumer goods.

Forfaiting

 Forfaiting is a method of trade financing that allows the exporter to sell its medium-term
receivables (180 days to 7 years) to the forfaiter at a discount, in exchange for cash.
 With this method, the forfaiter assumes all the risks, enabling the exporter to extend open
account terms and incorporate the discount into the selling price.
 Forfaiters usually work with capital goods, commodities, and large projects.

EXPORT CREDIT INSURANCE

 Export credit insurance protects a seller from the risk of nonpayment by a foreign buyer.
The insurance usually covers commercial risks such as buyer insolvency, bankruptcy, or
default. It usually covers some political risks as well, including war, terrorism, riots,
revolution, currency inconvertibility, expropriation, and changes in import or export
regulations. Sellers are thus protected from things both within and outside the buyer's
control.

COVERAGE

 Export credit insurance can conveniently be classified as either short term or long term

For example, short-term export credit insurance might offer 90-95% coverage against a
buyer's payment default and would generally cover sales of such items as consumer goods,
materials, and services up to 180 days and small capital goods, consumer durables, and bulk
commodities up to 360 days.

By contrast, medium-term export credit insurance would typically provide somewhat less
protection but for a longer period of time for instance, 85% coverage of the net contract
value sales of large capital on equipment, for up to 5 years.
FUNCTIONS OF EXPORT CREDIT INSURANCE

1. Reduces export risk of not being paid

2. Enhances an exporter's ability to obtain favorable export financing
3. Enables an exporter to offer competitive credit terms to an importer
4. Enables an exporter to penetrate high-risk foreign markets
5. Provides greater liquidity and flexibility of foreign accounts receivable

RISK COVERED COMMERCIAL RISKS

 Inability or unwillingness of a foreign buyer to pay due to commercial reasons:

a. Economic deterioration in the buyer's market
b. Fluctuations in demand
c. Unanticipated competition d. Technological changes
e. Buyer's insolvency, bankruptcy, default,
f. Natural disasters: floods, fires and earthquakes

RISK COVERED POLITICAL RISKS

a) War
b) Revolution and insurrection
c) Boycotts
d) Expropriation of buyer's business
e) Revocation of import or export licenses after/shipping
f) Foreign exchange control: Currency inconvertibility g. Shifts in tariffs

EXPORT CREDIT INSURANCE PROGRAM

1. Export-Import Bank of the United States (Ex-Im-Bank)

2. FCIA Management Company, Inc. (FCIA)
3. Euler Hermes American Credit Indemnity (AIC)
4. Coface North America
5. Lloyd's London

ADVANTAGE:

REDUCE FINANCIAL RISK

 The main function of export credit insurance is to reduce the financial risk to the exporter.
The risk can come from either commercial sources, such as an importer's bankruptcy, slow
 payment or default on the payment terms in the import/export contract, or from political
sources, such as war, political protests or revocation of the importer's license. The insurer
assesses the potential for both types of losses in the transaction before underwriting the
policy.

ACCESS TO WORKING CAPITAL

 An exporter that carries export credit insurance can gain access to overseas working capital.
The credit insurance policy shows lenders that the company is protected against potential
non payment by a customer and is a better credit risk for a substantial capital loan.
Companies that carry export credit insurance can also obtain standby letters of credit, in
which a bank can guarantee payment on the exporter's loans should the importer fail to
fulfill the import/export contract.

DISADVANTAGE:

EXCLUSIONS AND LIMITATIONS

 Exporters may find that export credit insurance is not available in all situations. Insurers may
not offer policies for specific types of goods or for shipments to specific countries or
businesses. When insurers do offer export credit insurance, the policy may not cover the
entire amount of the shipment. For instance, a company requesting a $1 million export
credit insurance policy may only be eligible for a $500,000 policy, less annual and per-loss
deductible payments.

DEFAULT AND BAD FAITH

 Exporters with export credit insurance may take advantage of their policies to get into
export contracts that carry both higher rewards and greater risks. These policies leave the
exporter vulnerable to default from the importer. The importer may also engage in "bad
faith" behavior, such as delaying payment or claiming that the exporter did not deliver the
goods as promised. Export credit insurance carriers will stop underwriting policies to
exporters who are found to engage routinely with risky importers.

Export credit insurance is a policy offered by both government export credit agencies and private
entities to businesses that want to protect assets from the credit risks of importers. These risks
include non-payment, currency issues and political unrest. Not knowing where an exporter is
sending their merchandise is a risk that can potentially bankrupt a company. This insurance
covers some of the possible losses.
EXPORT FACTORING

Factoring is a financial transaction whereby a business sells its accounts receivable(i.c., invoices) to
a third party (called a factor) at a discount in exchange for immediate money with which to finance
continued business.

Export factoring means purchase, funding, management and collection of short term accounts
receivable based on goods and services provided to foreign buyers.

WHY A FIRM USE FACTORING?

Factoring is used by a firm when the available cash balance held by the firm is insufficient
to meet current obligations and accommodate its other cash needs, such as new orders or
contracts.

Parties Involved In Factoring

 Supplier or Seller (Client) - sends goods and raises invoice

 Buyer or Debtor (Customer) – pays factor or direct to the seller
 Financial Intermediary (Factor) – pays seller

HOW DOES EXPORT FACTORING WORK?

1. The exporter signs an agreement with the export factor who selects an import factor
through an international correspondent factor network, who then investigates the foreign
buyer's credit standing.
2. Once credit is approved locally, the foreign buyer places orders for goods on open account.
3. The exporter then ships the goods and submits the invoice to the export factor, who then
passes it to the import factor who handles the local collection and payment of the accounts
receivable.
4. During all stages of the transaction, records are kept for the exporter's bookkeeping.

EXPORT FACTORING TYPES

 Discount Factoring: the factor issues an advance of funds against the receivable up to the
point that the funds are provided from the importer. Cost is based on the amount and time
the facility is used.
 Collection Factoring: the factor pays the exporter (minus a charge) when receivables are at
maturity; it does not make a difference if the importer is able to pay. The cost is fixed (1 4%)
 and will depend on the country destination, volume of sales and paperwork involved. It is
usually double the cost of export credit insurance.

COSTS ASSOCIATED WITH EXPORT FACTORING

 Factoring fee: Includes costs charged by Import Factor or by Insurance Company for risk
protection up to 100% or 85% of the account receivable plus costs connected with
management and collection of assigned accounts receivable. It usually amounts to 0.6-1.1%
of the account receivable value.
 Interest: Interest is charged on advances provided for assigned accounts receivable based
on short term bank credit rates level.

LIMITATIONS OF EXPORT FACTORING

 Only exists in countries with laws that support the buying and selling of receivables.
 Generally does not work with foreign account receivables having greater than 180-day
terms.
 May be cost prohibitive for exporters with tight profit margins.

WHERE TO FIND A FACTOR?

 The international factoring business involves networks similar to the use of correspondents
in the banking industry.
 Factors Chain International (FCI) is the largest of these global networks and can be useful in
locating factors willing to finance your exports.
 International Factoring Association (IFA) an association of financial firms that offer
factoring services.

FORFAITING

Forfaiting is a means of financing that enables exporters to receive immediate cash by

selling their medium and long-term receivables-the amount an importer owes the exporter-at a
discount through an intermediary. The exporter eliminates risk by making the sale without
recourse. It has no liability regarding the importer's possible default on the receivables.

What is Forfaiting

The forfaiter is the individual or entity that purchases the receivables, and the importer then pays
the receivables amount to the forfaiter. A forfaiter is typically a bank or a financial firm that
specializes in export financing.
A forfaiter's purchase of the receivables expedites payment and cash flow for the exporter. The
importer's bank typically guarantees the amount.

The purchase also eliminates the credit risk involved in a credit sale to an importer. Forfaiting
facilitates the transaction for an importer that cannot afford to pay in full for goods upon de livery.
It is most commonly used in cases of large, international sales of commodities or ca pital goods
where the price exceeds $100,000.

How does Forfaiting Work?

The exporter approaches a forfaiter before finalizing a transaction's structure. Once the forfaiter
commits to the deal and sets the discount rate, the exporter can incorporate the discount into the
selling price. The exporter then accepts a commitment issued by the forfaiter, signs the contract
with the importer, and obtains, if required, a guarantee from the importer's bank that provides the
documents required to complete the forfaiting. The exporter delivers the goods to the importer and
delivers the documents to the forfaiter who verifies them and pays for them as agreed in the
commitment. Since this payment is without recourse, the exporter has no further interest in the
transaction and it is the forfaiter who must collect the future payments due from the importer.

Cost of Forfaiting

The cost of forfaiting is determined by the rate of discount based on the aggregate of the LIBOR
(London Inter Bank Offered Rate) rates for the tenor of the receivables and a margin reflect ing the
risk being sold. The degree of risk varies based on the importing country, the length of the loan, the
currency of transaction, and the repay ment structure the higher the risk, the higher the margin and
therefore the discount rate. However, forfaiting can be more cost-effective than traditional trade
finance tools because of many attractive benefits it offers to the exporter.

MAJOR ADVANTAGES OF FORFAITING

1. Volume: Can work on a one-shot deal, without requiring an ongoing volume of business.
2. Speed: Commitments can be issued within hours/ days depending on details and country.
3. Simplicity: Documentation is usually simple, concise, and straightforward.

Forfating Industry Profile

While the number of forfaiting transactions is growing worldwide, industry sources estimate that
only 2 percent of world trade is financed through forfaiting and that U.S. forfaiting transactions
account for only 3 percent of that volume. Forfaiting firms have opened around the world, but the
Europeans maintain a hold on the market, including in North America. While these firms remain few
in number in the United States, the innovative financing they provide should not be overlooked as a
viable means of export finance for U.S. exporters.

Where to Find a Forfaiter?

The Association of Trade & Forfaiting in the Americas, Inc. (ATFA) and the International Forfaiting
Association (IFA) may be useful in locating forfaiters willing to finance your exports. They are both
associations of financial institutions dedicated to promoting international rade finance through
forfaiting.