Medium- and long-term export finance – supplier credit

Documentary Letters of Credit and Documentary Collections are

methods of payment in international trade used with Bills of Exchange

for short-term credit (up to 6 months). But export finance is needed to

provide money for longer periods of credit – for large-scale engineering

and building projects, for machinery and installations supplied over sev-

eral years. The aim is still the same – to provide money for the exporters

and to get it back later from the importers – only the amounts of money

are greater and the periods of credit longer: 6 months to 2 years (me-

dium-term) and up to 5 years or even longer (long-term).

From this it can be seen that the size of the risk is often too great for

one bank to take on. This is why all the various techniques of export

finance such as forfeiting export insurance, leasing and lease purchase

have been developed. Also, financial institutions besides individual

banks are involved. For instance export insurance is provided by the Ex-

port Credits Guarantee Department (ECGD) in the UK for long-term

contracts and by the Dutch company NCM for contracts up to 2 years.

Some projects are syndicated by a consortium of banks and leasing is

provided by subsidiary finance companies of banks. The ECGD is a gov-

ernment department set up in 1919 on a commercial basis, to protect

exporters from buyer default and political risk. It has a database of over

200.000 credit ratings on importers around the world. The insurance is

in the form of guarantees to banks.

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These guarantees may be given either to the supplier or the buyer. If

the suppliers (exporters) have a credit guarantee they receive payment

from their bank as soon as they have shipped the goods, or handed over

the factory in working order, according to agreement. There is no risk for

them as long as they carry out the contract according to the terms of the

agreement. Their bank has a guarantee from the ECGD or NCM and

will not therefore have recourse to them.

When the ECGD or NCM provides a guarantee of buyer credit, the

bank also receives the money to pay the exporters. In addition it has

promissory notes or acceptance bills as collateral security from the buy-

er. If these are not paid when they mature/ the insurers (i.e. the ECGD

or NCM) pay. The main advantage of this from the suppliers’ point of

view is that they are freed from all recourse problems, as long as they

carry out the contract.

Leasing and lease purchase are methods of finance operated by fi-

nance company subsidiaries of banks, which work rather like buying a

car or house. Leasing is a form of renting while lease purchasing is a form

of buying. They are both used to finance major capital assets which have

a long life, such as factories and other business premises.

As soon as the plant is set up and in working order the exporters get

paid and the importers get immediate use of it. Part of the total price

comes from the importers and the rest is provided by the finance com-

pany. The importers agree to pay the balance in installments. The bank

may be in the importers’ country. If it is in the exporters’ country, the

operation is known as cross border leasing.

As with export insurance, the big advantage of leasing to the exporters

of leasing is that there is no recourse to them in the case of buyer default.

1. Are Documentary Letters of Credit a method of payment or a

method of finance?

2. Are Bills of Exchange a method of payment or a method of finance?

3. Does The Export Credit Guarantee Department provide export

insurance or guarantees?

4. Large projects are often too big to be financed by one bank, aren’t

they?

5. Who can be given the guarantees the supplier or the buyer?