Cash buyers are becoming fewer and fewer as companies, governments and quasi-government agencies continue to "tighten their belts." Budgets are constantly squeezed and resources are continuing to be finitely allocated. Buyers, whether located in China, Western Europe, Latin America or South East Asia, are more and more requesting extended payment terms as a precondition to placing an order. Many emerging markets, including at times China, are even demanding forms of barter and countertrade as a prerequisite to an order. Often buyers and competitive pressures combine to demand credit terms for spare parts. On the other hand, many suppliers have learned that extended payment terms represent a key marketing tool in consummating a sale. Although most health related and medical device manufacturers usually have attractive profit margins, a large portion of these profits repay the high costs of research and development. Few companies can afford to take their customer's credit risk and provide sufficient funding for extended payment plans.

History of Trade Finance

In the often-cozy arrangements that existed in the 19th century, tradesmen concluded transactions based on an individual's word of honor. However, the honor code was impractical when selling overseas, where in many cases the underlying buyer was unknown and frequently came from a different culture. In those days exporters bore the risks and were faced with losses in the event of non-payment.

The economic upheavals of the 1930's brought about the need for extended payment terms but with the assurance the supplier would be paid. A bank issued letter of credit was the natural vehicle to provide the assurance the buyer would pay. The demand for extended credit terms beyond 180 days came about in the buyer's market of the 1950's and 60's. The buyers' demanded the suppliers provide their own extended payment terms. To fill the void between what the buyer demanded and what the seller was prepared to provide certain creative financial institutions created forfait finance. Forfaiting was developed in Switzerland and Vienna to be a supplier-financing vehicle to the Soviet Union. Once proven for that difficult market it was simply applied to support western buyers and sellers.

The next major change occurred in the 1970's with the "oil shock" which produced revolutionary economic changes affecting global trade. As all non-OPEC nations were adversely impacted, the need for new longer term financing techniques were demanded by all. U.S. Government agencies such as the Export-Import Bank (as well as its foreign counterparts), the Overseas Private Investment Corp. and others received boosts to their budgets to support the demands of the global marketplace. Concomitantly, the private sector developed needed financing methods to fill the gaps not supported by government programs. The syndicated bank credit was one of the key ingredients as well as the creation of the Private Export Funding Corporation (PEFCO).

The 1980's witnessed defaults and reschedulings by many Latin American nations. Again new techniques and creative schemes had to be developed so the private sector could still support exporters. Now, in the last days of the 20th century we again have regional economic crises and continued problems in South East Asia, Korea, Japan, Russia, China and Latin America. The private sector immediately pulls back and we again see demands by private and government buyers for extended payment terms. Today, and for the foreseeable future, we will continue to have gaps between the needs of the world's buyers and suppliers unable or unwilling to provide extended payment terms to these potential customers.

Export and Trade Finance

Virtually all-substantial exporting countries have institutional arrangements to protect exporters (as well as the banks that provide them with funding support) from the risks of exporting. Here in the United States, the government's official export financing vehicle is the US Export-Import Bank. The Ex-Im Bank provides a variety of financial supports including direct loans, guarantees and insurance. Quite often we can also use Eximbank's programs for working capital and pre-export financing to support the extra costs and risks of doing business overseas.

Although U.S. Government export finance programs are quite extensive, covering small business through giant telecommunications projects and Boeing 747's, there are still many gaps in the government export finance spectrum which can only be filled by the private sector. Financial engineering must be utilized to develop solutions that optimally combine Eximbank coverage with the private sector's capabilities. Firstly, Ex-Im only covers a maximum of 85% of the U.S. content of an export sale and then there are times that the Eximbank is closed to a particular country due to economic or political considerations. Compounding the situation is more and more, buyers are 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 risk at minimal cost and still win the order.

Trade financing includes a very broad area of short term financing mechanisms that supports exports. It covers a variety of schemes which includes insurance for contract frustration; unfair calling of letters of credit; and exchange rate fluctuation. Another of the methods is forfaiting (from 90 days to seven years), which is the non-recourse discounting of export receivables or promissory notes that supports supplier credits, usually at no cost to the supplier. The many forms of bank financing structures cover the balance. Whether Exim or the private sector, all restricts there support to those transactions which have the guarantee of the major Chinese State owned banks, such as the Bank of China and China Construction Bank. There are also a host of government and quasi-government agencies, which provide a variety of credit enhancements to support exports.

Leasing, as a cross border-financing vehicle, is relatively new to export financing. The attraction of leasing to corporations as well as to governments such as China, is leasing's off balance sheet treatment and lease payments are made from an operating expense account rather than a capital acquisition account. It has the added benefit of often being able to adjust the rental payments to the budget profile of the buyer. Leasing must be considered in the total context of alternatives available, in order to conclude a commercial contract.

Available financing resources in support of health related and medical devices are quite broad, although China does have limitations. As you can readily see the combination of U.S. Government resources and the creative financial engineering obtainable in the private sector, can provide the appropriate package to support almost any medical related product exported to most countries. It is vitally important to provide to your customer the extended payment term financing they require, in order to not only win the initial order but to have a long term strong relationship which precludes the competition. ` Companies which are the most successful in international business are those that do not wait to react to the market's demands but have taken a proactive approach in utilizing extended payment terms and other non-traditional marketing tools to secure the order.

Back To Top

Back To Articles and Speeches