Confirmed letter of credit / indirect (confirmed) payment guarantee
Letters of credit and payment guarantees are widely used and good tools for hedging payment risks. In both cases, a bank of your customer abroad will settle your claims if your customer do not pay.
You still remain with the risk that your customer's bank can not, will not or is not allowed to pay. In this case, you would have to take legal action to enforce your claims against the foreign bank. This is no fun, especially in emerging and developing countries. With a confirmed letter of credit the credit and country risks of a foreign bank are also eliminated for you.
By confirming a letter of credit or a payment guarantee, you also eliminate the political risks in the importing country, the credit risk of the bank abroad and the risk of having to enforce your claims in an unknown jurisdiction. With the confirmation of a bank domiciled in Germany or Europe, the confirming bank assumes its own payment obligation towards you in the event that the bank does not pay abroad.
Tip: Arrange for the confirmation (or the possibility of confirmation) at the beginning of your export business and let us find you the right bank at an early stage.
You then know the costs and can integrate them into the calculation of your order if necessary. And you also know which banks in your buyer's country can be confirmed and can specify these banks to your buyer.
- Highest possible security
- You have a payment claim against a bank in Germany or Europe
- No credit risk in distant countries and jurisdictions
- No country risks in developing or emerging markets
- Increased efforts because the documents have to be created according to the letter of credit
- There are costs for the notification and payment as well as postage and expenses
- Additionally there are costs for the confirmation
Tip: pass on the costs - as far as possible - to your buyer and do not save on your safety.
Instead of an open confirmation, which is commissioned by the bank issuing the letter of credit (the bank of your customer), you can also have a letter of credit silently confirmed by your (or a) bank in Germany (or Europe). This means that your customer's bank does not know that the bank confirming the letter of credit assumes the payment risk. A silent confirmation is also called a purchase commitment.
However, in the case of silent confirmation, you normally have to bear the cost of the confirmation yourself.
Buyer credits are an attractive option for your customers in emerging and developing countries to finance capital goods in the medium to long term. Borrowers are directly your foreign buyers.
Banks often only issue buyer credits starting at a loan amount of EUR 5,000,000 and on a term of at least three years.
Buyer credits are secured by an export credit guarantee, for German exports from Euler Hermes on behalf of the Federal Republic of Germany. This is, why we also speak of covered buyer credits and Hermes cover.
For importers from EU and other OECD countries, financing can also be arranged - usually without Hermes cover. This is called international sales financing. We are also glad to inform you about these possibilities.
In the case of a buyer credit, the borrower and the payee are not identical. The loan is paid out directly to you as the exporter on a pro rata basis or according to the progress of construction (exception: advance payments already made and included in the loan amount can also be paid out to the importer). If the creditworthiness of the importer cannot be checked sufficiently, a bank in the borrower's country can be called in. Such a bank receives a favourable (refinancing) loan from a bank in Germany or Europe against the Hermes cover and concludes a separate loan agreement with the importer. In this case, the importer pays off his local loan with the foreign bank, which in turn pays off the buyer loan with the bank domiciled in Germany or Europe (so-called bank to bank loans).
The loan agreement underlying the buyer credit is oriented on the details of your export transaction. The transaction must be designed according to the so-called OECD consensus. This means, for example, that the importer has to make an initial and / or interim payment of at least 15% of the order value. A maximum of 85% of the contract value can be financed as buyer credit.
The interest and the costs of the Hermes Cover, as well as the handling fees ("Management Fee") and the provision interest ("Commitment Fee"), are to be borne by the borrower. This form of financing is very interesting for your buyers because the total costs are usually lower than locally, longer terms are possible and your buyers usually do not have to provide any real collateral.
As exporter, you are not the borrower. Thus, the legal relationship between you and the lending bank is limited to statements and obligations that are self-evident. You are responsible for ensuring that your business is properly completed and executed.
Tip: Join us at the beginning of your potential export business and let us find a suitable bank at an early stage.
- Elimination of the risk that the importer (customer) does not pay (no credit risk)
- No currency risk
- No country risk
- Immediate inflow of liquidity: Buyer credits are disbursed directly to you and intermediate and interim payments are possible.
- Banks are often only offer buyer credits as of a loan amout of at least Euro 5,000,000.-
- Hermes cover or the cover of another ECA (= Export Credit Agency) is mandatory. And without your participation it doesn't work.
Non-Recourse Export-Financing (Forfaiting) is the non-recourse purchase of medium and long-term receivables, for example, from a supplier credit or deffered payment l/c, by a bank or a specialized financial institution.
With contractually compliant delivery / performance for you as exporter payment claims arise against your customer abroad. These can be sold to a bank in Germany or Europe "à forfait", i.e. with all political and payment risks (that means, without recourse). In this way, the buyer of your receivables don't have any right of recourse in the event of non-payment; You are freed from all risks and immediately receive the purchase price. However, the receivables must exist, must be legally valid and free from third party rights at the time of forfaiting and throughout the agreed funding period. As an exporter, you are responsible for the legal existance of the receivables (verity risk), for the authenticity of the documents submitted and the fulfillment of the delivery contract. But that's not different to domestic business.
The costs of forfaiting are made up of the standard market refinancing costs and a risk premium (discount rate), which depends on the payment date and the creditworthiness of the debtor (importer) or guarantor (i.e. bank in the country of the importer) and the importing country.
The creditworthiness of the importer (debtor) and the debtor country also depends on whether the conclusion of credit insurance (e.g. Hermes cover or private credit insurance) is required in order for a claim to be forfaited. The anticipated forfaiting costs can be factored in the order value (buyer interest). From your view as exporter the forfaiting then, more or less, will be cost-neutral.
- Suitable for almost any size of order
- You'll improve your liquidity
- If you sell your receivables without recourse, then the buyer waives any recourse to you in the event of non payment or default
- You strengthen your balance sheet - liquid funds instead of receivables (and risk of default)
- Your receivables have to be legally existend to sell them and remain so in future. You, however, can conlude a forfaiting prior to shipment.
- Buying banks are seeking for prove that you already have experience in export finance and are drafting your contracts properly. Tip: don't be afraid. With an experienced consultant at your side even the first business will succeed
- Eine Hermesdeckung oder Industriekreditversicherung (Single Risk Cover) ist i.d.R. erforderlich (und in Ihrem eigenen Interesse)
Consulting and support
Not every exporter has daily routines in financing buyers abroad. Uncertainty, worries about mistakes or the lack of know-how and resources often are obstacles to closing a deal where financing is required.
How do I calculate the cost of financing - for my client and for me?
Which payment terms do I agree on in which case?
How does it work with the Hermes cover?
Who supports the negotiations of a financing with my client?
Which bank will support my project?
Good and valid questions - the answer: our specialized consultants! Every case and every need is different. Therefore, talk to us about your project and your needs. We will find the right solution for you. From people to people. Because even in the digital world, personal communication is irreplaceable.
- Our know-how and our market overview help to execute feasible business
- Your resources will remain to your core business
- Your costs remain flexible and variable
- Anything is possible, from the initial assessment to supporting your local sales on the ground at your customers,
- In person, by phone and by e-mail
- We do not know any