Medium- and Long-term Financing/Ex-Im Bank Programs
|Unit 8.1-Medium- and Long-term Financing
Ex-Im Bank Programs
Medium- and long-term financing options are the most limited of all of the financing options available. There are many public sector providers, but most rely on the guarantees of the Ex-Im Bank in the United States. The main difference is pricing and the risk level these public sector providers are willing to take as opposed to regular or non-export related bank financing. The definition of medium-term financing can vary by global market. Medium-term and long-term financing are used to finance capital goods and services that have a useful life beyond one year. This type of financing is often used for large transactions involving goods and services from heavy machinery to nuclear power plants. The philosophy behind this type of financing is to benefit the exporter by providing financing options for a buyer. The buyer taking advantage of this option would do so because the transaction cannot be financed in the local market. Having this option available allows the buyer to get an installment loan or lease while the seller receives immediate cash to complete the sale. The risk is with the buyer if his/her company is unable to perform against the loan or lease. The Ex-Im Bank guarantees give comfort to the lender, whether it is a bank or private provider of the financing.
Buyer credits provide financing to an importer in the form of a loan where the proceeds from the loan go to pay the seller for the goods or services. This type of financing can be done in the form of a direct loan. Direct loans usually support large capital goods purchases including plant and equipment or turnkey projects. Buyer credits are generally on a non-recourse basis with the exporter depends upon the credit-worthiness of the buyer and the support of an Ex-Im Bank guarantee. Buyer credit programs benefit all the parties involved.
The exporter is paid in cash on delivery and acceptance of the product or service. The importer benefits by acquiring funding under favorable conditions that would normally not be available. The financing entity has the firm guarantee from Ex-Im Bank that there will be full payment to the financer should the buyer default. The Ex-Im Bank program benefits the lender because the program can be used for a one-time sale or for a series of shipments from one or more exporters to the same buyer with no first-loss deductible. The program provides coverage of 90% for private sector buyers, 100% for sovereign obligors, and 98% on bulk agricultural products. Financing under these policies can generally extend up to five years (up to seven years in exceptional cases) and for any amount. The program requires a 15% cash deposit from a buyer, and the seller must meet the normal content requirements.
Ex-Im Bank’s Loan Guarantee Program
Ex-Im Bank provides competitive financing for international buyers and assists an exporter by making available a sale that would not be possible without the program. The buyer must be credit-worthy and can be from either the private or public sector. The guarantee is extended to cover purchases of US goods and services. The buyer can obtain competitive financing when financing is otherwise not available for longer terms.
The benefits enable foreign buyers to get competitive term financing from a US source that would not be available from a local source in their country. The guarantee covers 100% of commercial and political risks. There are several financing options and repayment terms. The major factor that benefits both a buyer and the seller is that there are no transaction size limits and both medium-term and long-term financing are available.
The credit standards required to qualify can vary depending on the size of the transaction. A buyer must meet these standards in order to qualify, but the use of guarantors or other credit enhancements can be used in order to qualify.
Eligibility requirements involve more than just the credit quality of the buyer. Financing is available for refurbished equipment, software, certain local costs, banking and legal fees. Military or defense items are generally not eligible nor are sales to military buyers (with certain exceptions). There are limitations on foreign content that must be evaluated against each project. The goods must be shipped from the United States to an international buyer that is covered under Ex-Im Bank’s country limitation schedule. Prior to approval Ex-Im Bank will evaluate the economic and environmental impact of the project.
Ex-Im Bank’s Finance Lease Guarantee Program
Ex-Im Bank supports competitive medium-term financing structured as finance leases under similar conditions as the loan guarantee programs. Only finance leases as defined by the International Accounting Standards qualify. Finance leases are defined as the substantial transfer of all risks and benefits of ownership to the lessee with full amortization and no residual value at the end of the lease.
Ex-Im Bank’s Direct Loan Program
Ex-Im Bank assists exporters by providing fixed-rate loans to creditworthy international buyers under similar conditions as the loan guarantee programs.