Discussion on how export credit insurers and Exim Banks have expanded their product offering in times of COVID-19 epidemic
Table of Contents
1.1 Working capital guarantee program.. 3
1.4 Supply chain guarantee program.. 6
1.5 Bridge financing program.. 7
1.0 Discussion on how export credit insurers and Exim Banks have expanded their product offering in times of COVID-19 epidemic
The COVID-19 Pandemic has had a profound effect on most aspects of business operations. One of the areas of business operations that have been adversely affected by COVID-19 includes the export-import business. In response to the adverse effects occasioned by COVID-19, Export Credit Insurers and Exim Banks have focused on implementing product expansions. The United States’ EXIM Bank has been focused on expanding its product offering. This section discusses how the EXIM Bank has expanded its product offering.
1.1 Working capital guarantee program
One of the temporary relief programs that EXIM Bank has integrated includes the working capital guarantee program. According to Senanayake (2010, p. 7), borrowing against account receivable and inventory creates an opportunity for businesses to turn assets representing future cash flow into present cash flow. Financial institutions tend to be hesitant in allowing exporters to use their export-related assets as collateral. As a result, the export-businesses experience working capital challenges. In response to the working capital challenge, the EXIM Bank’s rationale in introduced the working capital guarantee program as a way of providing the exporters access to a dependable source of finance (Ketkar & Ratha, 2009, p.4).
The financing problem is compounded by the risks associated with conducting international business. As such, exporters face a challenge in accessing the working capital necessary to deliver their export orders. The EXIM Bank’s decision to expand its working capital guarantee program was informed by advice from the Designated Authority on the growing demand for greater working capital financing capability in order to address the increasing liquidity challenge faced by the exporters (Boggs, 2020, p.1). By expanding its working capital guarantee program, EXIM Bank has remarkably improved its capacity in facilitating loans from commercial lenders. The provision of loans to credit worthy businesses is facilitated through designated lenders. By expanding its working capital guarantee program, the EXIM Bank has been able to provide working capital financing to exporters facing a financing challenge under the traditional financing system. Subsequently, the working capital guarantee program is playing a fundamental rule in unlocking the cash flow problem faced by export-import businesses (Exim Bank, 2020, p.1).
Sercu (2011, p.23) asserts that by increasing working capital cash flow, exporter’s access loans enable them to cover diverse costs that enhance their capability to fulfill their export orders. Kishore, Patra, and Ray (2011) opine that an export-import loan guarantee can be used in combination letters of credit hence acting as advance payment guarantees, performance, or bid bonds. These instruments are in most cases demanded by foreign clients in the process of awarding international projects. The introduction of a working capital loan guarantee program by the US EXIM Bank has therefore increased the Bank’s capability to offer loans to businesses. The loan subsequently acts as security hence providing the foreign clients’ assurance in entering into a business transaction with the export-import firm.
The working capital guarantee program has played a vital role in helping the export-import businesses enhance their liquidity through two main ways. First, the firms in the export business can incorporate their export-related assets into their borrowing process. Secondly, under the working capital guarantee program, exporters can access a higher advance rate compared to conventional financing. The EXIM Bank provides that if an exporter intends to access credit finance against its account receivable amounting to $100,000, the exporter can access and advance of up to 75% of the total account receivable. This represents a considerably high advance rate (EXIM Bank, 2020a, p.3). The working capital guarantee program is thus playing a vital role in preserving the competitiveness of firms in export-import business in the face of the cash flow problem occasioned by the COVID-19 pandemic.
1.2 Pre-Export Finance
The Exim-Bank of the US has further introduced pre-export finance as one of the products in helping exporters cope with the challenge posed by COVID-19. According to Wang, and Ronci (2005, p.45), pre-export finance refers to a financial instrument in which a financier advances a credit service to an enterprise based on the performance of its historic orders from buyers. The firm subsequently uses the advanced credit facility/loan in producing and supplying goods to the specific buyer. Most large-scale manufacturers in the US, for example, aircraft manufacturers partially relay on advance payments in ensuring that their production is sustained. Nevertheless, in view of the challenge posed by the COVID-19 crisis, the firms’ clients may not be capable of financing pre-export payments because of the temporary liquidity challenge posed by the crisis. Such an occurrence may threaten the operation of US manufacturers (Exim Bank, 2020).
To caution, the manufacturers from such incidences, the Exim Bank of the United States has considered it appropriate to temporarily expand its pre-export payment polity. The expansion is particularly in respect to the one-year term in areas which the bank did not previously provide long-term financing, for example, turbines manufacturing. The expansion of the applicable period to over one year will mean that the exporters will have an opportunity to continue foreign trade prior to the full economic recovery.
Under the expanded pre-export payment policy, the manufactures can access more than one disbursement. Traditionally, accessing another financial disbursement was only possible if the manufacturer delivered the initial order (Exim Bank, 2020b, p.1). Prior to the COVID-19 crisis, most large scale manufacturers were capable of making the required pre-export payments. However, the COVID-19 has resulted in a decline in the manufacturers’ financial capability. The Exim Bank’s expansion of the pre-export payment policy has enabled exporters to access long-term asset financing. Borrowers have the opportunity of expanding the applicable period beyond the initial year depending on prevailing economic conditions (Exim Bank, 2020b, p.1).
1.3 Note purchase cover
An alternative product that the Exim Bank of the United States has considered integrating includes the note purchase cover, which guarantees debt on the basis of the trade debt papers. The rationale of this product is to enhance trade between exporters and their clients. Under this product, an exporter in possession of promissory notes or other tradable instruments as evidence of payment for products exported has the capability of raising finance by disposing of the notes (AFREXIMBANK, 2020, p.1). Thus, credit payment notes are subsequently transformed into a cash transaction. By purchasing the notes from the exporter, the bank is guaranteed the payment hence facilitating the export firm to continue with its export trade activities.
1.4 Supply chain guarantee program
According to Malaket (2014, p.108), the supplier finance program or reverse factoring has over the recent past become a common product in financing intentional business operations. The growth in the product’s popularity has been occasioned by the preference of conflict of working capital needs between firms and their suppliers. While firms intend to increase their account payable, the suppliers focus on reducing their cost of working capital and shortening the period applicable to their receivables. Traditionally, the Exim Bank of the United States provided the suppliers with an opportunity to sell the value of their debtors to financiers. The goal is to access early payment on the account receivables at a discounted rate. Through this approach, the Exim Bank of the US enables the suppliers’ access cash on the products supplied hence helping the suppliers maintain their liquidity (Boggs, 2020, p.1). As a result, the suppliers’ capacity to fulfill new client orders.
Initially, the program was based on restrictive terms. One of the terms entails the fact that 50% of the program specifically targeted the small businesses as stipulated under the Small Business Administration guidelines. Secondly, the program stipulated that 50% of the account receivables had to be comprised of US exports (Exim Bank of the United States, 2020b, p. 1). In view of the liquidity challenges occasioned by the COVID-19 pandemic, the Exim Bank of the US has considered it appropriate to expand the supply chain financing guarantee program by expanding the guarantee level and relaxing the criteria applicable in the accessing the product (Boggs, 2020, p.1).
One of the measures that the Exim Bank has considered includes temporarily waiving the 50% composition requirement under the US Small Business Administration guideline. Thus, under the temporary waiver, large exporters will also have an opportunity to access funds to finance their supply chain activities. The temporary waiver is expected to be in place until April 20, 2021 (Exim Bank of the United States, 2020b. p.1). It is projected that the expanded SCF program will reduce the suppliers’ credit risk. This will subsequently encourage financial institutions to provide supply chain financing to exporters.
1.5 Bridge financing program
To succeed in conducting a business transaction with US firms, international clients are required to have a considerably large amount of dollars in order to purchase US goods and services. However, the COVID-19 crisis has created significant financing difficulties amongst foreign purchasers, especially in accessing credit services from the financial markets. The economic distress is projected to persist for some time in the future. The prevalence of financing difficulties may have a negative impact on international clients’ capability to conduct foreign trade transactions. Following the temporary decline in the level of liquidity amongst exporters due to the COVID-19 crisis, the Exim Bank of the United States considered it appropriate to develop the bridge financing program that will provide short-term financing options to foreign purchasers (Boggs, 2020, p.1). The program is intended at facilitating the movement of US exports, especially within the private sector. The program targets both small businesses and industries in the export sector (Fact Sheet, 2020, p.1).
1. 6 Export Credit Insurance
In addition to the above products, the Exim Bank of the United States has integrated the concept of export credit insurance. The rationale of this approach is to indemnify exporters against the risk associated with non-payment in cross-border trade activities, for example, as a result of insolvency or default (Bernie Union, 2020, p.4). The export credit insurance program is applicable to short-term credit transactions, either with respect to a single or multiple buyers. The Exim Bank of the United States has integrated both the single and multi-buyer short term insurance program. Exim Bank’s incorporation of credit insurance is therefore expected to provide critical support to firms in the export business by fostering foreign investment and trade.
In summary, the expansion of the different products that Exim Bank offers will play a fundamental role in cautioning the export traders to continue with their operations despite the adverse effects posed by the COVID-19 crisis.
References
AFREXIMBANK. (2020). Working capital guarantee program. [Online]. Available from https://www.afreximbank.com/products-services/our-key-services/guarantees/working-capital-guarantee-programme-workap/
Berne Union. (2020). Export Credit Insurance; industry response to COVID-19. London: International Union of Credit Insurers.
Boggs, P. (2020). EXIM Bank in action; COVID-19 response and relief. [Online]. Available from
Exim Bank of the United States. (2020a). Fact sheet; EXIM temporarily expands the pre-export payment program. [Online]. Available from https://www.exim.gov/coronavirus-response/fact-sheet-exim-temporarily-expands-pre-export-payment-program (Accessed June 25, 2020)
Exim Bank. (2020b). Fact sheet. [Online]. Available from https://www.exim.gov/fact-sheet-exim-covid-19-assistance
https://www.squirepattonboggs.com/-/media/files/insights/publications/2020/04/exim-bank-in-action-covid-19-response-and-relief/exim-bank-in-action-covid-19-response-and-relief.pdf
Ketkar, S., & Ratha, D. (2009). Innovative financing for development. Washington, DC: World Bank.
Malaket, A. (2014). Financing trade and international supply chains; commerce across borders, finance across frontiers. Farnham, Surrey: Gower.
Senanayake, N. (2010). Structured finance and the 2007-2008 financial crisis causes consequences and implications. Hamburg: Hamburg Diplom.
Sercu, P. (2011). International finance; theory into practice. Princeton: Princeton University Press.
Wang, J., & Ronci, V. (2005). Access to trade finance in times of crisis. London: International Monetary Fund.