Medium-term credit insurance provided by the Export-Import Bank of the United States (EXIM) is a form of export credit insurance, which, in its simplest form, is an insurance policy for a business’ foreign accounts receivable. EXIM backed medium-term credit insurance allows U.S. businesses to sell their capital-intensive goods and services internationally. Specifically, it allows enterprises to obtain up to seven years of coverage or up to $10 million dollars of insurance for international sales to a single-buyer.
Medium-term financing mechanisms such as medium-term credit insurance can allow a business to better manage the risk of foreign buyer nonpayment, increase a business’ cash flow, and give a business the confidence it needs to enter international markets knowing that they will be able to secure financing, and offer competitive credit terms to foreign buyers. This is especially useful in countries where financing can often be expensive or where national suppliers are heavily subsidized by their government, making U.S. goods and services less competitive.
EXIM offers medium-term financing for U.S. businesses, both small and large, seeking to export capital-intensive goods and services. One business that has equipped itself to expand internationally and that has succeeded year after year is Air Tractor, Inc., a U.S. manufacturer of agricultural and fire-fighting aircraft, based in Olney, Texas.
Air Tractor exported a very small portion of sales until the mid-1990s. They had begun to saturate the U.S. market, and were looking to increase their total sales. To start, they began exporting to developed countries where the financial sector was relatively developed including Australia, Canada and Spain. Initially, Air Tractor worked with its international dealers on a cash-in-advanced basis or used letters of credit.
As it expanded internationally, Air Tractor increasingly had to compete based on credit terms, a difficult feat when doing business on a cash-in-advanced basis or using letters of credit, especially when Air Tractor’s agricultural aircraft had long production cycles. This pressure to be more competitive was further exacerbated due to Air Tractor’s expansion into emerging markets that did not have a developed banking system like Canada, Spain or Australia. In the emerging markets in Latin and Central America, there were no local banks interested in financing Air Tractor’s aircraft. The local banking systems in these regions consist primarily of asset-based lenders that were uncomfortable financing the purchase of capital goods.
In the late 90’s when trying for find financing for exports, Air Tractor found that most U.S. banks were not interested in financing agricultural aircraft internationally either. For a commercial bank, the company learned, the profit margin for financing small agricultural aircraft was too small and too risky. However, with the help of Wells Fargo Bank--formerly Norwest Bank-- Air Tractor was referred to EXIM.
EXIM was able to equip Air Tractor with the finance tools to expand successfully into emerging and underdeveloped markets. Today, with the support of EXIM, Air Tractor roughly finances 20-25% of sales on an annual basis using medium-term credit insurance and has increased their overall exports from 10% to 50% annually. Using credit insurance, Air Tractor is guaranteed 100% repayment should a customer overseas default due to commercial or political risk. Thanks to EXIM, Air Tractor has been able to confidently enter new markets and increase their exports year in and year out, even when the U.S. economy declined following the 2008 financial crisis.
With EXIM financing, Air Tractor hasn’t had to worry about the financing or foreign buyer nonpayment, but now can focus on doing business. When Air Tractor decides to enter a new market, it requires a significant amount of market research, including information about potential legal problems, importation rules, and commercial and political risks that could affect operations. However, the one thing Air Tractor doesn’t have to worry about is obtaining the financing necessary to win international sales. With the availability of EXIM export credit insurance, Air Tractor doesn’t have to worry that their preliminary research and hard work will be a waste of time and resources. This allows Air Tractor to focus on the productivity and quality of their product as opposed to financing foreign buyers or being undercut by foreign competitors.
Since using credit insurance, Air Tractor has also been able to take advantage of EXIM’s Export Working Capital Guarantee Program, which helps with Air Tractor’s cash flow and longer inventory lead times. Using the export working capital guarantee program, Air Tractor’s bank is guaranteed repayment if Air Tractor is unable to collect on export receivables. With this EXIM support, Air Tractor’s bank will loan it pre-export working capital, the money required to expand into new markets. Working capital from an EXIM guarantee further allows Air Tractor to improve its overall operations by evening out their cash flow.
Since being introduced to EXIM, Air Tractor has received 200 plus medium-term credit insurance policies, and EXIM has never had a loss on an Air Tractor transaction. Learn more about EXIM financing by downloading the Small Business Guide, or request a consultation with a Trade Finance Specialist today.
