As governments and quasi-government agencies continue to tighten their belts, cash buyers are becoming increasingly rare. Budgets are being squeezed and resources are being more finitely allocated. Buyers, whether located in Western Europe, Latin America, or South East Asia, are more frequently requesting extended payment terms as a precondition to plac- ing orders; some emerging markets are even demanding forms of barter and countertrade as a prerequisite to an order. Although most health related and medical equipment manufac- turers usually show an attractive profit margin, a large portion of these profits go directly to repaying the high cost of research and development. Few companies can afford to provide sufficient credit for extended payment plans. In response to such market pressures, many sup- pliers have learned that extended payment terms repre- sent a key marketing tool in closing a deal.

History Of Trade Finance

Tradesmen of the 19th century conducted business transactions based on an individual's word of honor. With the expansion of overseas trade in the 19th century this honor system proved to be impractical. Cultural and geographic distances increased the risk to the exporter, as in many cases, the underlying buyer was unknown to the exporter. Without a secure system to guarantee reimbursement in the event of non-payment or lost goods, exporters bore great risks.

The economic upheavals of the 1930s brought about the need for extended payment terms, as well as assurance that the supplier would be paid. A bank-issued letter of credit was the natural vehicle to provide such assurance that the buyer would pay. The demand for credit terms beyond 180 days came about in the buyers' market of the 1950s and 60s. Buyers demanded that suppliers provide extended payment terms. To bridge the gap between the demands of the buyers and the financing capabilities of suppliers, forfait finance was introduced. Forfaiting was developed in Switzerland and Vienna as a supplier-financing vehicle for the Soviet Union. Once proven in the difficult and unstable market of the Soviet Union, the system of forfait finance was easily applied to western markets.

The next set of economic changes to affect global trade was the "oil shock" of the 1970s. The devastating impact on non-OPEC nations created the need for new, longer-term financing techniques. U.S. government agencies, such as the Export-Import Bank and its foreign counterparts, as well the Overseas Private Investment Corporation (OPIC), received boosts to their budgets to support the demands of the global marketplace. Concomitantly, the private sector developed needed financing methods to supplement government programs. The syndicated bank credit and the creation of the Private Export Funding Corporation (PEFCO) were prominent examples of such private industry support.

The 1980s witnessed defaults and rescheduling in many Latin American nations. Again, new techniques were developed for the private sector to support exporters. Today, at the end of the 20th century, regional economic crises and the continuing problems in Southeast Asia, Korea, Japan, Russia, and Brazil have caused the private sector to withdraw its support, placing the Lion's share of the burden on governments to fund bailouts. The extended credit terms necessary for such government intervention has again widened the gap between the world's buyers and suppliers, who are often unable or unwilling to provide such terms.

Export And Trade Finance

Today, virtually all substantial exporting countries have institutional arrangements to protect exporters, as well as banks that provide funding support against the risks of exporting. The official export financing vehicle for the U.S. government is the Export-Import Bank, or Eximbank. The Eximbank provides a variety of financial supports, including direct loans, guarantees and insurance. Eximbank's programs can be utilized for working capital and pre-export financing to support the extra costs and risks of doing business overseas.

Although U.S. government export financing programs are quite extensive, with interests ranging from giant telecommunications projects to Boeing 747's, there are still many gaps in the government export finance spectrum that can be filled by the private sector. The Eximbank only covers a maximum of 85% of the U.S. contents of an export sale and certain military products are not eligible for coverage. Furthermore, the Eximbank is closed to some countries, due to economic or political considerations. To compound the situation, buyers are more frequently requiring 100% extended-term financing or leases. Other export financing "tools" include public and private sector risk insurance; commercial bank loans; bond offerings; private placements; and a host of methods and techniques which appropriately support the supplier's objective of minimizing the risk at minimal cost and still win the order.

Trade financing includes a broad range of short-term financing mechanisms that provide export support. The area of trade financing covers a variety of schemes, including insurance for contract frustration; unfair calling of letters of credit and exchange rate fluctuation. Another method is forfaiting (from 90 days to seven years), which is the non-recourse discounting of export receivables or promissory notes that supports supplier credits, often at no cost to the supplier. The many forms of bank financing structures cover the balance. There is also a throng of government and quasi-government agencies that pro- vide a variety of credit enhancements to support exports. These include the Agency for International Development (MD), the Overseas Private Investment Corporation(OPIC), the Trade Development Agency (IDA), the International Finance Corporation (IFC), the Asian Development Bank (ADB), the World Bank, as well as several multilateral financial institutions.

Leasing as a cross border financing vehicle is relatively new to export financing. Both corporations and governments are attracted to leasing because of its off- balance-sheet treatment. Lease payments are made from an operating expense account rather than from a capital acquisition account. Furthermore, rental payments can often be adjusted to fit the budget profile of the buyer. In order to conclude a commercial contract, leasing must be considered in the total con- text of alternatives available.

The most successful companies in the modern world of international business do not wait to react to the market's demand, but rather take a proactive approach to utilizing extended payment terms as well as other non-traditional marketing tools to secure orders. The combination of U.S. government resources and creative financial engineering in the private sector can provide the appropriate package to support virtually any product exported to most countries. Financing resources available in support of healthcare and medical equipment are equally as diverse. It is vitally important to provide your customers with the extended financing terms that they require. This will not only assist in securing the initial order, but it will also serve to build a strong long- term relationship with your buyer that precludes the competition.

Stephen Sohn is president of Schneider-Sohn & Associates, Inc. (SSAI), a international trade and finance consulting firm. Before establishing SSAI, he founded and was president and chief operating officer of Bankers Trust Trading Company. Mr. Sohn has a wealth of experience working with high-technology companies, particularly those in the aerospace, telecommunications, and medical equipment industries. Mr. Sohn's e-mail address is SSohnSSAI@aoLcom.

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