Financing Sources for Export and International Sales

One of the biggest challenges exporters face is balancing the desire to make a sale with the need to get paid. Frequently this can be a source of contention between the sales department and the credit department. Sales will argue that the credit department is too conservative and is costing the company sales and profits. In turn, the credit department may assert that overeager salespeople are not aware of the risks associated with selling to a particular customer or in a particular country. The fact is, at times, both are right. In today's competitive marketplace, companies are often forced to become more willing to offer open account terms or risk losing the sale.

Buyers often balk when asked to tie up their bank credit lines by having letters of credit issued, not to mention the costs associated with using a letter of credit. Foreign buyers often ask for open account terms and expect extended dating beyond the domestic standard of net 30 days. Credit managers are aware that selling overseas entails additional risks regardless of the terms of sales, but collecting on a past due balance from a foreign buyer is frequently far more difficult than domestic collections.

Collections of foreign accounts receivable often average 60 to 90 days or longer. Depending on the volume of export sales, waiting an additional 30 to 90 days to get paid can cause serious cash flow problems for the exporter. In addition to the risk that a foreign customer simply will not pay as agreed, exporters face another risk known as "political" or "country" risk. This risk arises out of political or economic conditions that are largely beyond the control of the buyer, but can seriously impede or prevent payment from being made.

Certain forms of export financing provide solutions that can enable the seller to offer liberalized terms while simultaneously providing the exporter with increased risk protection. There are three major types of financing that can benefit exporters:

1. Pre-export working capital financing; 
2. Short-term post-export accounts receivable financing; and 
3. Medium-term capital goods financing

Some financial institutions are willing to make loans through the use of various risk reduction (or mitigation) alternatives. Much of this can be accomplished through the Export-Import Bank of the United States [the ExIm Bank] and private insurance carriers. With the additional risk mitigation provided by the following institutions, commercial banks are now able to make credit available to the exporter.

• Export-Import Bank of the United States The Export-Import Bank of the United States is a quasi-governmental agency that was created to assist exporters of U.S. goods in financing their overseas sales. It does so through a variety of loan guarantee and credit insurance programs. Ex-Im Bank works in tandem with commercial banks by extending this credit protection to a lender. 
• Small Business Administration (SBA) The Small Administration also provides some credit protection for commercial lenders, although their programs are not as comprehensive as Ex-Im Bank's. 
• Private Insurance Carriers There are a number of private insurance carriers that provide various types of insurance policies that may be used to mitigate foreign credit risk. They are frequently employed when Ex-Im Bank insurance is not available or desirable. 
• Overseas Private Insurance Corp. (OPIC) The Overseas Private Insurance Corp. (OPIC) is a U.S. Government agency that provides political risk insurance protection against the misappropriation of fixed assets held overseas by U.S. companies. 
• Private Export Funding Corp. (PEFCO) PEFCO is a consortium of private banks that have joined together for the purpose of acting as a lender of last resort when a commercial bank could not be found to provide export financing. Ex-Im Bank provides a 100% guarantee on all loans made by PEFCO. 

Generally, the loan guarantee programs run directly from Ex-Im Bank or the SBA to a commercial bank. The insurance programs generally provide risk protection to the exporter that in turn, can assign its rights in the policy or policies to a bank. The protection provided to the exporter or bank runs from 90% under the SBA Working Capital Guarantee Program to 100% under Ex-Im Bank's medium term loan or insurance programs. Under all these programs some restrictions apply, meaning not every transaction can be covered.

Edited by Michael C. Dennis.  Mr. Dennis is the author of "Credit and Collection Manager's Handbook." He can be reached via email at  mcdenis13@yahoo.com with comments or inquiries about consulting services.