In this article, we list the 5 basic ways to finance export sales: factoring, credit forfaiting, banker’s acceptance, EXIM banks.
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Factoring is used by exporters to discount sales invoices and cash in the credit before the due date.
With such transaction, the seller/exporter sells the credit to a specialized financial intermediary (generally, a bank or a credit firm) receiving the face value of the credit less a fee. As the credit becomes due, the factor receives the payment from the buyer/importer.
This financial instrument is used, mainly, for domestic business and is less common in foreign trade as the debtor risk evaluation is more challenging (unless the buyer is an international company or a firm with a solid risk profile). Most factors require a formal acceptance of the credit transfer (by the buyer) before discounting a credit (as the buyer becomes liable to the factor in case of payment issues).
This is not necessary for “undisclosed” factoring.
The illustration below shows how factoring works:
The transaction can be with or without recourse to the exporter, i.e. in the first case, the seller is charged back in case of buyer’s default, in the second case the intermediary takes over the payment risk.
Factoring transactions without right of recourse are more rare and expensive than transactions with a right of recourse (the price delta reflects the premium for the risk taken over by the factoring company).
Forfaiting is a financial transaction, in which an exporter transfers his rights to receive payment against delivery of goods or services to an importer, in exchange for an instant cash payment from a forfaiting company (a bank or an intermediary).
With this arrangement, an exporter may anticipate the cash in of credit with a later due date, without recourse to him or the forfaiter.
DIFFERENCE BETWEEN FACTORING AND FORFAITING
|Meaning||Factoring is an arrangement that converts a receivable into ready cash before the due date. Exporter sells the receivable to a factor.||Forfaiting implies a transaction in which the forfaiter purchases a credit claim from an exporter in exchange for a discounted cash payment.|
|Receivables maturity||Short-term receivables||Medium to long-term receivables|
|Goods||Ordinary goods||Capital goods of substantial value|
|Anticipated value||max 80%||Up to 100%|
|Type||With or without right of recourse||Always without recourse|
|Secondary market||Not possible||Yes|
BANKER’S ACCEPTANCE (BANKER’S DRAFT)
A bankers acceptance, or BA, is a time draft drawn on and accepted by a bank. Before acceptance, the draft is not an obligation of the bank; it is merely an order by the drawer to the bank to pay a specified sum of money on a specified date to a named person or to the bearer of the draft.
Upon acceptance, which occurs when an authorized bank employee stamps the draft “accepted” and signs it, the draft becomes a primary and unconditional liability of the bank. If the bank is well known and enjoys a good reputation, the accepted draft may be readily sold on the secondary market.
Acceptances arise most often in connection with international trade: imports and exports and trade between foreign countries.
An importer may request acceptance financing from its bank when, as is frequently the case in international trade, it does not have a close relationship with and cannot obtain financing from the exporter it is dealing with.
Once the importer and bank have completed an acceptance agreement, in which the bank agrees to accept drafts for the importer and the importer agrees to repay any drafts the bank accepts, the importer draws a time draft on the bank.
The bank accepts the draft and discounts it; that is, it gives the importer cash for the draft but gives it an amount less than the face value of the draft.
The importer uses the proceeds to pay the exporter. The bank may hold the acceptance in its portfolio or it may sell, or rediscount, it in the secondary market. In the former case, the bank is making a loan to the importer; in the latter case, it is in effect substituting its credit for that of the importer, enabling the importer to borrow in the money market.
On or before the maturity date, the importer pays the bank the face value of the acceptance. If the bank rediscounted the acceptance in the market, the bank pays the holder of the acceptance the face value on the maturity date.
Project financing is an instrument to finance investments in capital equipment or infrastructures of high value.
Under this schema, a bank finances the originator of the investment on the basis of the expected cash flow of the investment. This approach is used, typically, to build infrastructures like bridges, highways, private railways and similar works with an expected future income.
Project financing may be initiated either by the owner of the investment or by the supplier in charge of delivering the infrastructure.
The parties involved in a project financing schema are illustrated below:
WHAT ARE EXPORT IMPORT BANKS?
Exim (“Export-Import”) banks support local companies (generally small and medium-sized businesses) finance the export (or the import) of goods and services to (from) international markets.
Exim banks play a critical role in several countries and should be consulted by entrepreneurs willing to grow their sales and purchases internationally. Indeed, Exim banks are sometimes able to undertake risks that the private sector wouldn’t.
THE EXPORT-IMPORT BANK OF THE UNITED STATES
The Export-Import Bank is the official export credit agency of the United States. Ex-Im Bank helps American companies to turn export opportunities into sales and consequently sustain the US employment and production levels.
The US Ex-Im Bank is not in competition with the private banking sector, rather it complements it by providing export facilities that would not be otherwise available for some companies. It assumes credit and country risks that the private sector is unwilling to support.
The support given by the Ex-Im Bank can range from working capital guarantees (before the export) to credit insurance and/or loan guarantees up to actual loans (financing the buyer). The bank can support any transaction size.
EXIM BANKS IN THE WORLD
Most economies have similar agencies, to support the exporting activities of local businesses. We list here the main agencies, click on the link to be redirected to the official website of the Exim bank or agency.
- Australia: Export Finance and Insurance Corporation
- Belgium: Office National du Ducroire
- Bermuda: Sovereign Risk Insurance Ltd.
- Canada: Export Development Canada (EDC)
- China: China Exim Bank
- Czech Republic: Export Guarantee and Insurance Corporation
- Denmark: Eksport Kredit Fonden
- Finland: Finnvera Plc
- France: Compagnie Francaise d’Assurance pour le Commerce Exterieur
- Germany: Euler Hermes Kreditversicherungs-AG
- Greece: Export Credit Insurance Organization (ECIO)[OECD]
- Hong Kong: Hong Kong Export Credit Insurance Corporation
- Hungary: Hungarian Export Credit Insurance Ltd.
- India: Export-Import Bank of India
- Italy: Servizi Assicurativi del Commercio Estero
- Jamaica: National Export-Import Bank of Jamaica Ltd
- Japan: Nippon Export and Investment Insurance
- Korea: Korean Export Insurance Corp.
- Luxembourg: Office du Ducroire [OECD]
- Malaysia: Export-Import Bank of Malaysia Berhad
- Mexico: Banco Nacional de Comercio Exterior
- Netherlands: Atradius
- New Zealand: Export Credit Office [OECD]
- Norway: Garanti-Instituttet for Eksporkreditt
- Poland: Export Credit Insurance Corporation
- Portugal: Companhia de Seguro de Creditos, S.A.
- Romania: Eximbank Romania
- Singapore: ECICS Credit Insurance Ltd.
- Slovak Republic: Export-Import Bank of Slovak Republic
- Slovenia: Slovene Export Corporation Inc.
- South Africa: Credit Guarantee Insurance Corporation of Africa Limited
- Spain: Compania Espanola de Seguros de Credito a la Exportacion, S.A.
- Sri Lanka: Sri Lanka Export Credit Insurance Corporation
- Sweden: Exportkreditnamnden
- Sweden: Swedish Export Credit Corporation (SEK)
- Switzerland:Swiss Export Risk Guarantee
- Thailand: Export Import Bank of Thailand
- Turkey: Export Credit Bank of Turkey
- Ukraine: Export-Import Bank of Ukraine
- United Kingdom: Export Credits Guarantee Department
- United States: Export-Import Bank of the United States