In the current economic climate, companies are exploring new options to expand their sales. Facing decreased domestic demand for products, services and technologies, US companies may find that foreign purchasers are attractive sales targets but may also be more concerned about the buyers’ ability to pay.

During this global credit crunch, with declining demand in many sectors, it is essential for companies to consider utilizing export finance tools such as those offered by the federal agency known as the Export-Import Bank of the United States (Ex-Im Bank) and some private sector financing solutions such as export credit insurance. Trade finance products will protect against payment defaults by foreign buyers, reduce the need for substantial up-front cash payments (making US products, services or technologies more affordable), and provide critical working capital and liquidity to exporting companies. As noted below, Ex-Im Bank has recently taken several actions to meet the challenges of the global financial crisis which make its financing more readily available for companies, particularly those trying to sell into China and Korea.

Background on the Export-Import Bank

The Export-Import Bank of the United States is celebrating its 75th anniversary this year, having financed US exports around the world since President Franklin Delano Roosevelt established the Bank in 1934 during the Great Depression when credit was similarly squeezed. Congress established Ex-Im Bank as an independent US government agency in 1945 and since its formation the Bank has helped finance more than $450 billion in US exports. Ex-Im Bank has around 400 employees, mainly in Washington, DC, including credit analysts, country experts, business development officers, and experts in specific industry sectors and world regions. There are staff members who are familiar with every industrial sector and who have helped US companies secure financing to close deals in nearly every industry. 

Among the Ex-Im Bank solutions that may be available to US companies are working capital loan guarantees (pre-export financing) where a company needs help in fulfilling an export contract, and buyer financing options that include direct loans to foreign buyers, loan guarantees, and export credit insurance. The private sector also offers export credit insurance options that may have more favorable pricing and which impose fewer restrictions as to the required amounts of US content.

Ex-Im Bank offers working capital loan guarantees for creditworthy US companies that need to pay for raw materials, equipment, supplies, labor, and overhead to produce goods and/or provide services for export and to purchase finished products for export as well.  There are no minimum and maximum transaction amounts and Ex-Im Bank will typically guarantee 90 percent of the bank loan, including principal and interest, making the loan far more attractive to US commercial bankers. (Note that the Small Business Administration has a similar program but with some additional restrictions.)

In terms of buyer financing, Ex-Im Bank loans, loan guarantees and credit insurance are options to consider and typically carry no minimum or maximum limits as to the size of export sales that a company can finance. In the most common transactions, a commercial bank based in the US submits an application for a loan guarantee on behalf of a foreign borrower for the benefit of a US exporter that is shipping goods, providing services, or producing technologies for export. Usually, the loan guarantee will cover 100 percent of the principal and interest remaining after the buyer makes a 15 percent cash down payment. The repayment terms vary based on the borrower’s financial condition, industry and country conditions, and certain international agreements among governments. The lender sets the interest rate and Ex-Im Bank adds an up-front fee to cover some of its exposure. Essentially, the exporter is paid by the commercial lender as soon at it has shipped its products, provided its services, or transmitted its technology (in the case of software).

In the case of export credit insurance, there are Ex-Im Bank and private sector options and there are many qualified insurance brokers who specialize in this kind of insurance (Ex-Im Bank’s Web site maintains a list of current active brokers by state). Short-term insurance (usually less than 180 days) permits an exporter of primarily US-made products, services or technologies to extend competitive credit terms (open account, net 90 days, for example) while minimizing risks. Export credit insurance insures shipments (including where letters of credit are used) and usually covers 95 percent of commercial losses due to insolvency, bankruptcy and default and political losses due to war, revolution, cancellation of an import or export license, and currency inconvertibility. The insurance premium that an applicant/exporter pays will vary by the risk of the foreign buyer and the amount of the export. 

New Developments at the Export-Import Bank

Rising to the challenges faced by US exporters and our trading partners, Ex-Im Bank’s leadership and staff have been working to identify possible modifications of the agency’s policies that could help exporters weather these conditions. Since a critical part of the agency’s mission is to support US small businesses (around 85 percent of annual transactions of the Bank are for small businesses), Ex-Im Bank has tweaked the export credit insurance program in part in order to make it more accessible and affordable. In early October, 2008, the agency instituted a 15 percent premium rate reduction on two types of insurance: short-term small business multibuyer policies and short-term small business environmental multibuyer policies. These types of policies are available to financially viable small businesses and can protect an exporter's entire portfolio of foreign buyer credit risks on total annual shipments of $5 million or less. It is worth noting that the agency has existing initiatives to support the export of medical equipment and environmentally beneficial products, services, and technologies. There is also a longstanding effort to stimulate exports to Sub-Saharan Africa.

Another recent development worth noting is that in early December, 2008, Treasury Secretary Hank Paulson announced that our government, in conjunction with the Chinese government, had agreed to increase the availability of trade finance between the two nations by $38 billion, relying in part on the US Ex-Im Bank making available an additional $12 billion in short, medium, and long-term trade finance for US exporters trying to sell into China. Additionally, after learning last fall from banks and brokers that due to instability in the Korean market, there was a significant gap in commercial capacity to support letters of credit issued by 11 Korean financial institutions, Ex-Im Bank created in November new internal authority to approve requests for up to $2.9 billion in insurance cover involving letters of credit issued by those institutions. Separately, Ex-Im Bank has also modified its working capital loan guarantee product, which is of particular use to small business exporters, including making such loans available for the first time to companies that produce goods or services that are sold to US companies and are subsequently exported. Previously, a working capital loan guarantee could only help a company that was directly exporting.

Conclusion

If your company needs assistance in exploring possible trade finance solutions involving public sector or private sector financing to support your exports, please feel free to contact Arent Fox LLP. In addition to export finance advice, our attorneys are able to counsel you on regulatory issues that arise in the context of exporting and to provide legal guidance on contracts with foreign purchasers of goods, services, and technologies. Our attorneys also routinely advise US companies on how best to protect their intellectual property abroad and assist clients in securing patent and trademark protection.

Dan H. Renberg
renberg.dan@arentfox.com
202.857.6386

Dan Renberg is a partner in the Washington, DC office of the Arent Fox LLP law firm, where he specializes in federal government relations and advising companies on export finance strategies.  Mr. Renberg served on the Board of Directors of the Export-Import Bank of the United States from 1999-2003 after his nomination by President Clinton.