WMMA®: The Cutting Edge Newsletter

The Cutting Edge — December 2003

Export Development

Extending Credit to Your Overseas Buyer

By Harold Zassenhaus, WMMA Export Director, (zemg@erols.com)

Don’t you dread that email from your potential buyer after he receives your quote? You know, the one that states “…and what terms can you offer?” Most members quickly reply “Cash upon acceptance of order” or “Letter of Credit due upon presentation of documents drawn on a US bank acceptable to us” and/or “We accept Visa or MasterCard.” For most members the sale is now in jeopardy and they know it.

How would you like reply “We can extend 60, 180 or 360 day terms and sometimes provide up to 5 years credit --- on open account --- how can we help?” Well now you can…. (Bet you never heard this one before). And this option can be extended with little/NO risk on your part. Actually, this option may even enhance your balance sheet because the US government backs the credit instrument. Even better, with a US backed commercial instrument, you can discount it at your bank and receive immediate payment.

The answer lies with The Export-Import Bank of the United States (EXIM). Through little known and often misinterpreted export insurance programs, EXIM, the official US government credit agency, provides exporters with a way to extend credit to your buyer for the purchase of US made goods. And with few exceptions the premiums are reasonable --- say in the case of Brazil from 6.5 – 8.5% of the export price, depending upon term and type of buyer. EXIM credit insurance becomes a great option and at least gives you a fighting chance.

The following is a summary of the types of insurance policies. To learn more, visit the EXIM website, www.exim.gov and click on “Products and Policies”. Or contact EXIM at (202) 565-3946.

Short –Term Insurance policies cover capital goods, components, spare parts and most services for up to 180 days and for special cases up to 360 days. The overseas customer can pay the premiums over the term of the credit. There are three types:

Single-Buyer Policy: provides credit protection for export sales to one specific buyer. It covers 90% of the shipment value for nonpayment by the buyer due to most commercial and political risks. There is a minimum premium due up front. This is great for the sporadic exporter or the experienced member who can’t afford the risk for any period of time.
Multi-Buyer Policy: provides credit protection for all sales to eligible international buyers to whom “open account” credit terms are extended. It covers nonpayment by the buyer due to commercial and political risk (either 100% political and 90% commercial or 95% for both). There is a first loss deductible. Members with international experience may receive “discretionary authority” allowing them to approve buyers for coverage without EXIM review.
Small Business Multi-Buyer Policy: Same as Multi-Buyer but with added coverage (95% commercial, 100% political risk), no first loss deductible and simplified premiums. To qualify, members must meet SBA’s “small business” definition, be in business profitably for at least one year and have less than $5 million in export credit sales.

Medium-Term Insurance: provides 100% commercial and 100% political risk insurance for US goods (or the US component thereof) for 1-5 years and, on occasion, for up to 7 years. Financing under this policy can be written for sales up to $10 million. A 15% down payment of the net contract value from the buyer is required. Premiums are individually determined using the “fee calculator” located at www.exim.gov.

One of the best things about EXIM short-term credit risk insurance policies are that they can be easily extended to your customer. For smaller transactions (up to $100,000) the buyer does NOT have to submit financial statements audited or otherwise. The following table is lifted from the EXIM website and demonstrates how easy it can be for your customer to receive credit terms.

Single Buyer Short Term Insurance Policy: Credit Standards for Non-Financial Institution Buyers/Obligors, $300,000 and Less

UP TO $50,000 $50,001-$100,000 $100,001-$300,000

1.
Credit Agency Report
OR
One (1) of either:
-Trade Reference
(Similar amount/terms)
-Applicant ’s Ledger
Experience
(Similar amount/terms) 1.
Credit Agency Report
AND
One (1) of either:
-Trade Reference
(Similar amount/terms)
-Applicant ’s Ledger
Experience
(Similar amount/terms) 1.
Credit Agency Report
AND
either a, b, or c:
a) Two (2) Trade References
(Similar amount/terms)
b) One (1)Trade Reference,
and the Applicant ’s Ledger
Experience
(Similar amount/terms)
c) Buyer’s signed financials for two most recent fiscal year-ends.
(EXIM’s total potential obligor exposure not greater than 50%of obligor’s tangible net worth at the end of the last fiscal year.)

2. In same general line of business for at least 3 years

3. No “Material Adverse Issues ” present.

Note: The buyer’s financial statements may be required if EXIM ’s total potential exposure on the buyer exceeds $300,000.

For last month’s article, “Business Guide to Federal Export Assistance,” click here.

Members, to learn more about the Export Development Committee activities, click here.

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