Financing Exports - Financing Your Export Program

Financing Your Export Program

Often export prospects can be enhanced by financing the transaction. Among the factors to examine are:

credit availabilities to both customer and supplier
relative interest rates for different currencies and amounts
competitive pressures
the appetite of financial intermediaries (usually banks)

Discussions with potential financiers should start early in the marketing phase. Committed financing offers may be required at the time of submitting prices and technical information. In trade finance, normally your goal and that of your bank should be complementary.

Short-Term Financing

Letters of Credit

Letters of credit (or "documentary credits") are issued by a bank at the request of an importer, in favour of a supplier/exporter, for the purpose of financing the import of goods and/or services. By opening the documentary credit on behalf of the importer, the bank obligates itself to pay the exporter–provided the exporter complies strictly with the terms of the credit. This eliminates any risk to the exporter arising from the customer's failure to pay for the shipment. At the same time, the issuing bank provides financing (credit) to the importer. It pays the importer's obligations to the exporter after which it will, in turn, be repaid by the importer.

Collections

Collections consist of bills of exchange (or "drafts") which are defined in the Canadian Bill of Exchange Act as "an unconditional order in writing addressed by one person to another by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed determinable future time a certain sum in money to or to the order of a specific person or to the bearer".

Open Account Transactions

Selling on open account is arguably the easiest way to finance exports since this arrangement incurs minimal costs to the exporter and involves little paperwork. Goods are delivered to the customer, an invoice is issued and the customer pays within a stipulated period. Open account transactions are typical in domestic business. In international trade, however, they can be highly risky. The one area of international trade where they are common is in transactions between Canada and the United States. The exporting party must finance the transaction with its own funds until it receives payment from the purchaser.

Purchase of Foreign Receivables

An exporting firm can convert its foreign receivables into immediate cash by selling them to a bank or factoring house. The receivables are discounted by an amount deemed to cover financing charges and risks. The purchaser then assumes responsibility for the commercial and political risks underlying the transaction as well as for collecting payment from the foreign customer. Selling its foreign receivables provides the exporter with the advantage of immediate cash, credit risk protection and collection services. Such advantages are not free. The discount applied covers the costs of these services, reducing the revenues that find their way to the exporter.

Medium and Long-Term Financing

Medium-termed instruments are usually structured for repayment periods of up to five years. The repayment of long-term instruments can range between five to 16 years. Such instruments are usually issued by banks or financial institutions, often in support of large projects. In issuing such instruments, the financial institution assumes the risk of non-payment arising from the failure of the customer, the customer's bank or political instability in the customer's country. Among the longer term financing mechanisms, the following are the most used:

Forfeiting

Forfeiting or forfeit financing is a medium-term form of seller or supplier credit provided by a number of Canadian banks. The bank purchases medium-term (up to five, and in special cases, seven-year) promissory notes due to the Canadian exporter from a foreign customer. The value of the promissory notes is discounted at a fixed rate so that the exporter receives cash, after deduction of the interest charge or discount. Usually provided with a guarantee from the customer's bank, the promissory notes are discounted by the Canadian bank on a non-recourse basis to the exporter.

The Canadian exporting firm benefits from passing on the credit risk and currency exposure to the Canadian bank, turning a credit sale into a cash transaction, receiving fixed rate financing, incorporating the financial cost in the contract price and eliminating extensive documentation.

Buyer Credits

A buyer credit is a method of financing an export over the medium to longer term whereby funds are loaned directly to the foreign customer. These credits are usually suited to large financing of capital goods and to support turnkey projects. Buyer credits generally are on a non-recourse basis to the exporter as the importer enters into a direct financial relationship with the lending bank.

Export Leasing

Canadian chartered banks can provide export leasing services through subsidiaries. This form of trade financing is usually undertaken by exporters working in conjunction with a leasing company to gain a competitive edge. It can be used for exporting to countries where import restrictions prevent the customer from purchasing foreign equipment outright or where the tax regime favours leasing over outright purchase.

Export leasing is usually a medium to long-term means of financing. Depending on the mechanism used, the exporting firm receives cash for its transfer of title to the leasing company and the delivery of the capital equipment to the customer. The leasing company then collects regular payment from the leaseholder.

Project Financing

Project financing secures payment for a sale out of the cash fiow that the project is expected to generate when it comes into production. The assets of the project serve as collateral, and lenders also have recourse to the cash fiow created by the project.

Such loans are usually longer term, require extended gestation periods before completion and require innovative financing. Canadian charter banks, through their International Trade and Merchant Banking Divisions, are experienced in arranging project financing, particularly for the mining, energy, forestry, transportation, public utilities and engineering industries.