U.S. companies that manufacture capital equipment are constantly seeking new markets to expand their marginal revenues and spread their fixed costs over a larger base of production. The global reputation enjoyed by U.S.-made equipment makes export markets a logical way to do this. Most companies realize very quickly, however, that to be competitive in these markets they must be willing to offer some sort of extended-term financing.

 

Structured trade finance is a tool to provide extended term financing to the foreign buyer while the U.S. manufacturer is paid without recourse at time of shipment. This means the manufacturer does not have to carry a large receivable on their balance sheet for an extended period or retain the commercial and political risk of non-payment associated with a foreign buyer to get the order.

 

As the name implies, this program includes a very structured approach with a significant amount of information on the buyer and documentation required for the transaction. The good news is there are parties outside the manufacturer that are responsible for gathering this information, packaging the loan and handling the documentation, underwriting the buyer and providing the non-payment risk protection, and paying the exporter and carrying the foreign buyer obligation. These players are known respectively as the packager, the insurer or guarantee agency, and the funding source. They handle the entire process from start to finish and allow the manufacturer to do what they do best: manufacture equipment.

 

The costs associated with the financing are born by the foreign buyer, contingent on closing, and can be financed as part of the loan. The buyer must make a down payment equal to at least 15% of the contract price and sign a promissory note for the balance. The note is repaid over the term of the loan, which is normally five years. Loan payments are semi-annual with the first installment typically due six months after shipment. This allows the foreign buyer to get the equipment installed and cash flowing before they have to start servicing the debt.

 

Interest rates for these types of loan can be fixed or floating. Fixed-rate loans are priced at a spread over comparable-term U.S. Treasury securities. Floating rate loans are priced on a spread over six month U.S. dollar Libor. The spread is fixed for the term of the loan, but the Libor based resets at each semi-annual payment date to the then current Libor rate. The current rate is as quoted in the Wall Street Journal or another specified public source.

 

These loans are very attractive to foreign buyers because of the small down payment requirement, the extended term, the cash-flow friendly repayment schedule, and the low interest rate. They are very attractive to the U.S. manufacturer because they can help them sell equipment, and the structure represents essentially a cash sale for them.

 

Although there is a private insurance market for covering the non-payment risk of the foreign buyer over the term of the loan, most of these loans are insured or guaranteed by the U.S. Export-Import Bank. This is what makes them attractive to the funding source, which is normally a U.S. bank. The loan principal and interest are insured or guaranteed 100% by the full faith and credit of the U.S. government. The funding bank essentially creates a U.S. government security with an enhanced yield. This is a win-win program for manufacturer, their foreign buyer, and the funding bank.