Collins, Gary W.

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Export Financing

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Maryland Journal of International LawVolume 4 | Issue 1 Article 29Export FinancingGary W. CollinsFollow this and additional works at: http://digitalcommons.law.umaryland.edu/mjilPart of the International Trade CommonsThis Conference is brought to you for free and open access by DigitalCommons@UM Carey Law. It has been accepted for inclusion in MarylandJournal of International Law by an authorized administrator of DigitalCommons@UM Carey Law. For more information, please contactsmccarty@law.umaryland.edu.Recommended CitationGary W. Collins, Export Financing, 4 Md. J. Int'l L. 160 (1978).Available at: http://digitalcommons.law.umaryland.edu/mjil/vol4/iss1/29THE INTERNATIONAL TRADE LAw JOURNALEXPORT FINANCINGGary W. Collins*INTRODUCTIONIn any discussion of Caribbean Basin trade or trade with any worldarea, there must invariably be considered the role of the bank. While thereare in excess of 10,000 commercial banks in the United States, less than300 are significantly involved in any international activities. Of thisgroup, less than half make a significant contribution in the area of tradedevelopment, the remainder being essentially concerned with travelservices and local customer needs. The majority of "international banks"develop in major trade areas with significant port facilities such as thoseof Baltimore.No bank becomes involved in this business with initial intentions ofsolving the world's financial problems. Instead, it is out of a need tosatisfy local customer demands for personal services; buying and sellingcurrency, travellers checks, money transfers, and so forth. Simultane-ously, the bank fulfills the need to handle some very basic transactionservices with regard to exports or imports. A bank may choose to resignitself to this level of involvement (and many do) or it may actively solicitand develop the export-import business of its area. Consequently, thebank will offer a broader range of services including letters of credit,collections and foreign exchange trading.Banks, not being charitable organizations, must eventually look tothe profitability of all their endeavors. Such goals prompt going beyondthe above services (generally necessary but not excessively profitable) tothat which banking is all about, i.e., lending money. In internationalbanking this begins with the safest risk possible - financing togovernments and banks in economically and politically stable countries.If successful, the banker will move on to more risky loans to LDCs,foreign corporations, and the subject of our meeting, export financing.After eighteen years, this is the point to which the Maryland NationalBank has progressed.ASPECTS OF EXPORT FINANCINGWhen an exporter approaches his local bank, he will generally haveneed of several of the services offered by its international department, notthe least of which will be advisory discussions. If the company has just* Assistant Vice-President, International Operations, Maryland NationalBank, Baltimore, Maryland.CONFERENCE PROCEEDINGSbegun exporting, the need for marketing assistance and trade leadinformation will be paramount. Potential buyers or agents of a particularproduct can be located through worldwide relationships with other banks.Other country or regional information such as trading environment,future outlook, history, normal credit terms and payment experience willbe of importance and can be provided by the bank from the personaltravel experience of its area representatives. Through its network ofcorrespondents, the local bank can obtain credit information on anexporter's potential customers and can provide input so that a rationalcredit decision can be reached. The bank will make an exporter aware ofthe alternative payment mechanisms available to him (cash in advance,letter of credit, collection, open account), suggest the necessary protec-tions and discuss details of the services as necessary.It would appear that the above involves early developmental stagesfor an exporter and, once in the business, experience eliminates the needfor such personal assistance. In point-of-fact the more knowledgeable anexporter becomes the more he realizes there is to learn. The only change isin the increased complexity of the needs and their increased frequency.No matter the size of a company or its degree of internationalinvolvement, financing of one sort or another will amost certainly be anecessity. The needs may be short-term for normal working capital needs(i.e., to buy raw materials, manufacturing cost, etc.) to cover normal buyercredit terms, or for extended periods to cover a buyer's inability to paywithin a reasonable period (i.e., sale of capital goods). In providing exportfinancing, a bank has a number of tools at its disposal and manyvariations to the basic process of lending money. Each is best suited to aparticular situation or type of exporter and must be "custom-fit" to thesituation. These have varying degrees of safety for the bank and theexporter with various levels of exporter risk retention.THE EXPORT-IMPORT BANKPerhaps the most secure transactions available are those involvingU.S. government affiliates such as Eximbank. This organization waschartered by Congress to develop methods of promoting U.S. exports. Ithas done this through programs of credit insurance, guarantees anddirect loans. Transactions handled by Eximbank are, for the most part,medium-term in nature and for amounts in excess of $500,000. Thisgenerally limits their involvement to sales of "big ticket" capital itemssuch as construction equipment and cranes, and most often only todeveloping nations. Eximbank has a variety of programs which promoteexports each of which is briefly set forth:THE INTERNATIONAL TRADE LAW JOURNAL1. Medium-term guarantee programs. Eximbank will provide tofinancial institutions, such as banks, a guarantee covering political andcommercial risks for the purchase, without recourse, of notes for asupplier's sale in a foreign market of a U.S. product. Such guarantee willprovide coverage for up to ninety percent of the amount being financedand can range from 181 days to five years. A bank can then finance thetransaction at its lending rate with little risk.2. Direct loans, participation credits and financial guarantees.Eximbank joins with financial institutions on an equal basis to provideloans to a foreign buyer to purchase U.S. goods or services. They also canprovide a financial guarantee to the participating bank covering its loan.This type of financing is generally long-term (over five years).3. Cooperative finance facilities. With respect to financing, Exim-bank participates with non-U.S. financial institutions by lending themfifty percent of a qualified sale to be used in connection with an equallending participation by the financial institution.Any or all of these programs may fit a particular company's needsbut this can only be determined in joint discussions by an exporter withEximbank and the local international bank. Because of the nature andvariety of transactions, rules for Eximbank's involvement are oftendifficult to define. They do, however, emphasize developing nations suchas many of those in the topic of discussion and are usually receptive to allreasonable possibilities. While the minimum amount requirements may,at first, seem prohibitive, they usually present little problem. It must beremembered that countries in early development are generally restrictiveon imports except in the area of large capital items necessary to thegrowth of a country. Such purchases generally fall within the Eximbankrange. Smaller transactions can be dealt with by one of the otherfinancing methods.THE OVERSEAS PRIVATE INVESTMENT CORPORATIONAND FOREIGN INVESTMENTIn the foreign investment area, OPIC was established as a wholly-owned U.S. government corporation to assume responsibility for privateinvestment incentive programs. OPIC's interpretation of its basicstatutory mandate is the encouragement of viable, private U.S. invest-ment plans which are mutually beneficial for the host developing countryand the United States. To accomplish these purposes, Congress providedthem with several program tools in many ways similar to those ofEximbank: 11. Information can be obtained from the author, International Operations,Maryland National Bank, Baltimore, Maryland.CONFERENCE PROCEEDINGS(1) Insurance of private U.S. investments in LDCs against the risksof inconvertibility, expropriation, war, revolution or insurrection;(2) Guarantees of private U.S. loans to projects in LDCs (usuallyfrom institutional lenders such as insurance companies, pension fundsand commercial banks) against commercial and political risks;(3) Direct dollar loans from the corporation's capital, repayable indollars or foreign currency loans, to assist in financing private projects inthese countries; and(4) Financing of investment surveys and feasibility studies todevelop projects in selected fields and countries, especially small businessand agribusiness opportunities.In either the direct loan or loan guarantee program, lending istransacted at normal commercial interest rates and on commercial terms.Such loans range from five to fifteen years. Financing of this sort isattractive to banks since normal credit terms are applied and a U.S.government guaranty is providing the security. The insurance programwill not make financing automatically available but it can be the "addedattraction" necessary to convince a bank to finance a particulartransaction.In the normal course of events, banks make accounts receivablefinancing available domestically and internationally to cover short-termneeds. This is very difficult financing to accomplish unless a company iswell-known to the bank. This includes not only its own reputation butalso that of its foreign buyers. Such lending is short-term, for an agreedupon percentage of receivables (usually fifty to seventy percent) andinvolves a rate most often two percent or more over prime. Because thistype of lending involves a substantial risk for the bank, FCIA (ForeignCredit Insurance Association) insurance is often required as an addedprotection. The FCIA consists of a group of insurance companies workingas the quasi-private arm of Eximbank to protect U.S. exporter insuranceagainst commercial and political risks. Exporters often wrongly assumethat such insurance automatically provides financing without risk. Whileit does protect the bank against essentially all buyer-risks, there arecertain instances of exporter fraud or negligence which negate thecoverage. Bank error in the handling of documentation and reporting cando likewise. A bank must therefore be very concerned with an exporter'sreputation and ability to perform; consequently, the normal corporatecredit decision is primary, with FCIA providing only the added incentive.Some banks have taken an extra step in the process of advancing onreceivables by establishing factoring organizations to actually buy anexporter's receivables. While this provides a vehicle to companies whoseTHE INTERNATIONAL TRADE LAw JOURNALfinancial situation does not allow for normal bank financing, it is arather costly service to obtain.The last method, I will describe involves the use of banker'sacceptances. A bankers acceptance is simply a draft issued by an exporterdemanding payment from his importer for merchandise sold on which isplaced a bank's guarantee of payment at some designated future date(normally less than 180 days). In most situations, this will take place as aresult of an exporter having received a letter of credit under which a claimis being made. An active market exists in these instruments, consideredto be "prime bank paper," and thus their salability. Banks will buy suchobligations from the holder, deducting interest at a market rate applicablefor the day. In many cases, this rate is less than prime and almost alwaysless than any other method available to a borrower.There are also many additional approaches a bank can take tolending for such purposes. For the most part, all must be tailoredprograms and are therefore resolved on an individual basis. It is up to thebanker to be familiar with the methods which have been described, aswell as the exporter's product field and the prevailing environment inother world areas.A bank's business is the lending of money and in the internationalarea this invariably represents some types of trade financing. Banks suchas ours are very much committed to development of their export incentiveprograms. It is necessary for them, because of the variety of market areas,to be flexible enough to offer programs which fit changing needs.

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