A guide to Eximbank programs - Export-Import Bank of the United States - includes related articles

Business America, Nov 5, 1990 by Rob Garverick

A Guide to Eximbank Programs

For many American producers of goods and services, exporting is an attractive method of increasing sales. Whether shipping goods to Toronto or Beijing, many American business officials are identifying and exploiting the profits of foreign sales. But as in every business activity, complications in exporting can discourage all but the most experienced business officials from participating.

Trade finance is often seen by potential exporters as a confusing barrier to overseas business. It has developed a reputation as a cumbersome, jargonistic convention of commercial bankers and government bureaucrats. However, a creative and aggressive financing arrangement can make or break an exporting opportunity. American businesses with competitive financing win exporting contracts; American businesses with substandard financing stay at home.

Two Examples. A typical scenario might involve National Amalgamate (NA), a multinational telecommunications corporation. Suppose NA recently bid on a $150 million rural communications project in Venezuela. Competitive bids were submitted by Japanese, West German, and French companies. The technology level of the equipment was similar among the bidders, so the contract would most likely be awarded on the basis of competitive financing.

NA reviewed several financing options. Its chief commercial bank in New York agreed to extend a market-rate loan to the Venezuelan buyers, but only with a guarantee of repayment. NA also approached the Export-Import Bank of the United States (Eximbank) in Washington, D.C., about a direct loan/guarantee financing option.

As another example on a smaller scale, suppose Buckeye Metal Works is a Midwestern machine tool producer with $2.3 million in domestic sales. During a vacation in Mexico, Joel Smith, Buckeye's president, met Carlos Lozano, the owner of a Chihuahua manufacturing plant, and struck a deal for a $50,000 sale. Upon returning, Joel announced the exporting opportunity to the company board and telephoned Carlos to negotiate the terms of sale.

Joel asked Carlos for a letter of credit to eliminate the risk of non-payment. However, Carlos did not want to tie up his company's credit lines and instead insisted on a 30-day open account transaction. After discussing the deal with his commercial banker, Joel agreed to Carlos' terms. Joel asked the commercial bank to discount the 30-day receivable, thereby allowing Buckeye to receive payment (minus the discount fee) up front. The bank agreed, but first required an insurance policy guaranteeing payment from Carlos.

These two very different companies share two things in common. For one, each is faced with a trade financing task. Second, each has the potential need for the programs of Eximbank or its agent, the Foreign Credit Insurance Association. This article examines Eximbank's guarantee and loan programs in depth.

A Definition of Trade Finance. In exporting, the financing needs of the seller and buyer almost always differ, and sometimes conflict. The seller desires a financing arrangement that will provide for quick payment and protection against default. The buyer, on the other hand, wants a competitive price and a payment mechanism that won't tie up his credit line. The method of trade finance must accommodate these differences.

What is trade finance? Trade finance arises from the export of goods and services, when the buyer and seller negotiate the amount, time, and terms of payment. Trade finance can be supplied by parties in the private and public sectors. In the simplest case, the exporter may receive cash in advance from the buyer. Or a bank may finance the sale, paying cash to the exporter and taking an IOU from the buyer. Eximbank uses guarantees to encourage commercial banks and exporters to supply funds for payment, or makes its own loans directly.

Operations of the Eximbank

Eximbank was chartered in 1934 as an independent agency of the U.S. government. Its initial task was to stimulate trade during the Great Depression. Over its 56-year history, Eximbank has provided trade financing assistance for new and experienced exporters, enabling them to market goods and services around the globe.

In recent years, Eximbank has recognized the need for trade financing assistance among small- and medium-sized U.S. businesses, and has redesigned its insurance, guarantee, and loan programs to make them more accessible to this sector. Through its programs, Eximbank has supported nearly $200 billion, including $50 billion in loans, in U.S. exports.

Eximbank's Objectives. The primary goal of Eximbank is to facilitate the financing of exported U.S. goods and services. Eximbank seeks to promote U.S. exports by eliminating any cost advantages gained by foreign competitors through subsidized financing sponsored by foreign governments and by overcoming any market imperfections that discriminate against export financing. Eximbank does not compete with private sector financing. Rather, Eximbank absorbs risks that the private sector will not accept. By neutralizing foreign government export-credit subsidies, Eximbank helps to eliminate competition based on financing, thereby enabling U.S. exporters to compete on the basis of quality, delivery and price.