FAQ on export financing and securing payment

Why does it make sense as an exporter to finance buyers abroad?

Particularly in developing and emerging countries, it is challenging for your customers to raise the purchase price in foreign currency or to obtain local financing with suitable credit terms.

The provision of tailor-made financing concepts is therefore an important factor for the success of your export business.
Financing concepts are therefore an important factor.

Product + financing = more turnover

How to secure payments and finance foreign buyers?

In the short-term area, letters of credit and payment guarantees are the most common instruments for hedging payment risks. Letters of credit with a term of payment, so-called "deferred payment letters of credit", have a security function for you and a financing function for your buyers.

Deferred payment letters of credit can be refinanced through the sale of receivables.

It is advisable to have letters of credit (and payment guarantees) confirmed for sales to emerging and developing countries. Confirmations for payment terms above 360 days are often difficult to find.

If your customer needs longer-term financing, then direct supplier credit, i.e. sales in instalments, is often unavoidable. The risks associated with this for you can be minimised with export credit guarantees (for emerging and developing countries e.g. in Germany via Hermes Cover, in Austria via OeKB and in Switzerland via SERV. In EU and other OECD countries private credit insurers such as Coface, Euler Hermes or Atradius are usually the right choice).

Receivables secured in this way can be easily refinanced by selling them.

For larger projects, usually starting from Euro 5.000.000,-, the so-called buyer credit is a suitable instrument. Here a bank finances your foreign customer directly and secures this financing with an export credit guarantee (Hermes cover) or credit insurance. This form of financing is linked to your delivery transaction. In combination with a Hermes Cover the financing must be structured in accordance with the rules of the so-called OECD Consensus. With private credit insurance the flexibility is often greater.

 

When are which forms of financing suitable?

The following table is only a rough guide. The selection depends on many factors,
among others the financing period, the value of the contract, the creditworthiness of the country and the importer.

Please ask, we we would be glad to support.

financing period

Short-term

Mid-term

1 - 3 years

Long-term

> 3 years

Products
Documentary collections ***
Letter of Credit (L/C) *** ***
Supplier credit (covered / uncovered, with / without forfaiting) *** *** ***
"Commercial Loan" or L /C follow-up financing *** *** *
Non-Recourse Export-Financing *** *** ***
Buyer credit (covered or uncovered) * ***

* is conditionally suitable, *** is well suited

What risks must be taken into account when exporting?

Exports are associated with special risks. There are differences in the economic and political spheres,
language and culture, but also in the legal systems. In general, a distinction can be made between economic and political
risks:

Economic risks

  • Credit risk of the private debtor or guarantor (e.g. bankruptcy, insolvency proceedings or unsuccessful foreclosure)
  • Non-payment, default of payment, cessation of payments
  • Purchasing risk
  • FX risk

Political risks

  • Non-payment by public debtors or guarantors
  • Impossibility of payment by private debtors due to:
    • Legislative or official measures
    • warlike events and unrest
    • government bans
    • Conversion and transfer prohibitions
    • Moratoria, embargoes, expropriations

You manage these risks by structuring your delivery and payment conditions. Prepayment would of course be ideal, but is unfortunately less and less enforceable. But you can also insure the risks
with various bank products, the export credit guarantees of the Federal Government (Hermes covers) and export credit insurances of private providers for payment terms or supplier credits.

What are letters of credit good for?

Letter of Credit

In the context of export financing, a letter of credit is an agency agreement with the obligation of a bank
to make payment to the exporter within a certain period of time in accordance with the
instructions of the importer on presentation of certain documents. An irrevocable letter of credit can take
two forms.

a. non-confirmed letter of credit

Advantages for you as an exporter

  • With the letter of credit, you have a payment claim against the foreign bank and no longer against the importer. This means that even if the importer cannot or does not want to pay, you get your money from the bank abroad. At least if it can, wants and is allowed to pay. You retain the credit risk of the foreign bank and the political risks of the importing country. These do not apply to the confirmed letter of credit:

b. confirmed letter of credit

Advantages for you as an exporter

  • Maximum of security
  • You have a payment claim against a bank in Germany or Europe that is approved by the European Banking Supervision Authority.
  • No political risk

Disadvantage

  • The confirmation causes additional costs

What are Export Credit Guarantees?

Export credit guarantees, also known as export insurance or export risk insurance, cover the risks of default of trade receivables abroad.

In developing and emerging countries, an export credit guarantee (Hermes Cover in Germany) is regularly a mandatory prerequisite for financing (buyer credit) or the purchase of receivables from supplier credits (forfaiting). Despite the additional costs of insurance, the total costs of an insured credit are usually lower than the total costs that an importer would pay for an "uncovered", i.e. uninsured credit in his home country. In addition, longer credit periods are usually possible. In developing countries with rather unstable political and economic conditions, financing without export credit insurance
is often not possible at all.

Why is this so? A state export credit insurance (ECA) ultimately replaces the creditworthiness of the borrower (buyer abroad) as far as possible with the good creditworthiness of the export credit insurance. In this way, banks can grant much more attractive credit conditions for a loan with ECA cover because the default risk is very low and does not have to be backed by equity. Euler Hermes, the export credit insurance company of the Federal Government, for example, has an excellent AAA rating, namely that of the Federal Republic of Germany.

In the interest of their export economy, export-oriented countries offer state export credit insurance to cover both economic and political risks.

State export credit insurances are subject to an international set of rules, the so-called OECD Consensus. It was
created in order to prevent the state subsidy systems from undercutting each other.

The most important regulations concern:

The terms of payment:

  • at least 15 % down payment and interim payment
  • max. 85 % loan

The maximum loan tenor

  • usually 5 - 10 years,
  • in certain industries (e.g. renewable energies, ships, aircraft) also longer,
  • Loan tenors depend on project volume and industry sector

Den Beginn der Rückzahlung (sog. „Starting Point“), die Mindestzinssätze und die Sonderregelungen für

  • Project financing
  • Ship financing
  • Aircraft financing

State export credit insurers cover risks in foreign trade that the private insurance and banking market can
or wishes to assume only to a limited extent. They are particularly suitable for loans with longer maturities.
They are also needed when larger loan amounts have to be mobilised for buyers in developing and emerging countries.
ECA cover is provided on behalf of and for the account of the state budget.
In Germany they are the responsibility of the Ministry of Economic Affairs ("BMWi").

However, the management of ECA cover is usually the responsibility of a private insurance or
or auditing company. In Germany, the processing of all state export guarantees is entrusted to Euler
Hermes Aktiengesellschaft as a mandatary of the Federal Government, which is why the export guarantees
of the Federal Government are generally known as Hermes Cover.

What is a supplier credit?

Supplier credits are usually credits that suppliers grant their customers by granting them payment terms.
We also use the term supplier credit in this sense.

In export finance, however, the term supplier credit is sometimes used as a synonym for credits granted by banks to exporters.
As an exporter, you can use these credits to finance your expenses for export transactions during the production or delivery
period and the phase of a possible payment period to the foreign buyer. Such loans are provided by banks depending on
the exporter's creditworthiness.

Advantages for you as an exporter

  • Supplier credits support your sales.

Disadvantages:

  • The granting of supplier credits burdens your liquidity. 
  • As an exporter, you initially bear all risks from the supply transaction, e.g.
    • credit risk (risk that the importer does not pay)
    • currency risk
    • transfer risk
    • country risk

But of course you cover these risks with supplier credit cover and relieve your liquidity by selling your receivables.

Supplier credit + forfaiting = attractive financing solution

The challenge

In order to remain internationally competitive, exporters must also be able to offer their foreign customers attractive payment terms together with the product, i.e. the most tailor-made, long-term financing possible from a single source. Customers often demand financing terms of several years.

Most banks do not offer buyer credit for smaller orders (usually less than € 5 million).

Many SMEs would therefore like to offer their foreign customers a so-called supplier credit. On closer inspection, however, they often find that they have only limited own funds available for such lending.

We are therefore looking for a financing alternative that guarantees scope for further growth and does not block the existing credit lines for a longer period with a few orders.

What could an appropriate financing and hedging strategy for SMEs and MidCaps look like?

Non-recourse financing (forfaiting)

Forfaiting comprises the non-recourse sale of all receivables from the export transaction (installments agreed with the importer) to a bank or specialised forfaiting company; in the event of the importer failing to pay at a later date, no recourse can be taken to the exporter. And the exporter immediately receives the cash value of the discounted instalments. From the exporter's point of view, the supplier credit becomes a cash transaction. The exporter, however, remains responsible for the legal existence of the receivable and the proper execution of the supply transaction even after the sale of receivables.

For exports to developing countries and emerging markets, it is usually only the Federal Government's supplier credit cover (coverage of political and economic risks) that enables the sale of receivables and leads to attractive financing and forfaiting conditions. In EU and other OECD countries, private credit insurance (e.g. Coface, euler-Hermes, Atradius) is often the better alternative.

The exporter would be well advised to apply for supplier credit cover or credit insurance in parallel with the supply contract negotiations. Here it is important to ensure that a low deductible for the commercial risks is set from the outset. Ideally, the deductible should be < 10% of the financing value. In this way, the economic ownership of the receivables can actually be transferred from the exporter to the bank or forfaiting company later on ("true sale") and the exporter's balance sheet is relieved. It is also advisable to discuss the drafting of the contract on the basis of the applicable accounting standards with the auditor or tax advisor so that the latter recognizes the true sale.

On balance, a supplier credit with forfaiting is a very good solution for order volumes that are too low for buyer credits.

Advantages for you as an exporter

  • Granting of long-term payment terms
  • Immediate liquidity
  • Balance sheet relief in the case of a true sale
  • In the event of payment default, no recourse to the exporter, i.e. transfer of credit risks (payment, interest rate and currency risks) to the buying bank.

Disadvantages:

  • A supplier credit requires some activities of its own and requires a certain know-how (export contract including financing offer must be calculated and designed, requirements of insurers and the forfaiting bank / forfaiting company must be fulfilled). If required, we or our accredited consultants will be happy to assist you.

The prerequisite for a true sale is that the economic ownership of the claim is transferred to the bank. The prerequisite for this is that the bank assumes the default risk, i.e. the credit risk must predominantly pass to the buyer. This examination and assessment of the individual case is ultimately the responsibility of the auditor or tax consultant on the basis of the applicable accounting standards.

en_GBEnglish
de_DEGerman en_GBEnglish