Competitive advantage with export financing

17.8.2021 Debt & capital

Wise exporter protects payment risks

Buyer insolvency can be a problem in export trade. A wise exporter protects payment risks by carefully selecting the payment method, payment terms and financial instrument, as well as the transaction parties. It is important that the instrument used is recoverable in the market in question.

A reliable method of payment is, for example, a Letter of Credit opened by the buyer’s bank and confirmed by the exporter’s own domestic bank. Pure wire transfer is used only among parties known creditworthy. The buyer’s payment risk may also be protected by Export Credit Insurance.

Export Credit Insurance is provided by specialized private credit insurers and, in the countries of political risk, by governmental Export Credit Agencies such as Finnvera in Finland. The EU has decided to ban governmental Export Credit Agencies from export credit insurance in the OECD industrialised countries under normal conditions, as this is not considered to include market shortages. In international economic crises, exceptions have been granted to the ban.

Finnvera may also grant a guarantee to the bank on the exporter’s working capital credit for manufacturing time.

When, in a capital goods trade, the buyer most often requires a long payment period, the export company can turn the case to a competitive advantage by applying for an export credit guarantee from Finnvera, which is granted to the bank or bank syndicate issuing buyer credit for export trade. This is a competitive advantage because Finnvera’s guarantee has a high creditworthiness of the Finnish State and Finnvera is a partner valued by international banks – known for its rapid and flexible activities within the framework of international regulations.

Finnvera’s subsidiary, Finnish Export Credit Ltd, may provide financing for export credit and, where appropriate, interest equalisation, in which case the credit is fixed rate.

Finnvera’s guarantee margin for political risks arising from the buyer’s country is 100% and for commercial risks 50% – 100% depending on the project and the risk sharing it requires. In project financing, usually the starting point of negotiation is 50% and the 100% guarantee is available to a public buyer.

Finnvera guarantees also for domestic investment projects

Finnvera’s product portfolio also includes guarantees for domestic investment projects where our capital goods manufacturers compete with foreign suppliers, and which create exports. The ship guarantee has been in place for decades and financial guarantees for domestic projects for investment in exports (“Lex Äänekoski”) for some years. The instruments have contributed to maximising purchases at home and, I believe, also accelerating the realisation of projects with Finnvera as the cornerstone of debt financing.

Practically every industrialized country and growing number of emerging economies has an export warranty facility that promotes their country’s exports by issuing Export Credit Guarantees. Since our corporate finance system is quite functional, investment in our industry has not made much use of export guarantees funding from “Finnveras” in other countries. Knowledge of these systems has also been quite low in Finland up to now.

It would be worthwhile to increase the use of export credit guarantee financing, as the system provides a competitive financing option for investment projects.

The author Topi Vesteri is the founder and CEO of Agency Advisors and Services Ltd, advicing his clients on ECA and Agency financing as well as all other forms of financing.

Topi was in charge of running Finland’s officially supported export credit and guarantee schemes for almost 17 years since 1999. Topi served as Berne Union’s (Int’l Union of Credit and Political Risk Insurers) President in 2015-2018 and Vice President in 2002-2003 as well as Chairman of the Union’s Medium- & Long Term Committee in 2009-2011.

Topi Vesteri / Agency Advisors and Services Ltd works in co-operation with CAG and his expertise is available for our clients.

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