Many exporters rely on asset-based lending to finance their operations. Borrowing against inventory and accounts receivable allows businesses to accelerate cash flows and fulfill orders. But exporters face obstacles when it comes to asset-based loans. Banks can be hesitant to allow businesses to borrow against export-related assets, making accessing working capital difficult.
Exporters can overcome such liquidity challenges through a relationship with EXIM. Two types of EXIM support—export credit insurance and working capital guarantees—equip American businesses to expand their borrowing bases and export sales. The benefits are significant, and the nuts and bolts are simpler than one might think.
Export Credit Insurance
Export credit insurance safeguards foreign accounts receivable, providing coverage against buyer nonpayment due to commercial and political risk. If a foreign buyer fails to pay its invoice, EXIM pays insured exporters a percentage of the amount owed (up to 95 percent).
What are the benefits for exporters in a liquidity crunch? Banks otherwise unwilling or unable to lend against foreign receivables will often do so if they are insured by an EXIM policy. The foreign collection risk to the lender is mitigated by the full faith and credit of the U.S. government. Insured exporters can often assign the proceeds of an export credit insurance policy to their lenders, who will amend existing lines of credit to include foreign receivables backed by EXIM. As a result, exporters can turn the same collateral into greater borrowing power.
Working Capital Loan Guarantees
Working capital loan guarantees equip exporters to unlock cash flow and take on new business abroad. EXIM doesn’t replace an exporter’s bank; it works with their existing lender, which can underwrite and issue loans against export-related assets, backed by a 90 percent guarantee from EXIM on the borrower’s repayment. The guarantee provides the lender with protection and unlocks working capital for the exporter. Companies can then use the loan to cover the costs of labor, materials, overhead and other expenses required to fulfill an export sale.
A loan guaranteed by EXIM can grow an exporter’s borrowing base in two ways:
- The ability to include export-related assets into the borrowing base
An EXIM guarantee allows U.S. businesses to borrow against assets that lenders would otherwise not accept as collateral, including foreign accounts receivable, export-related inventory and work-in-process inventory.
- Higher Advance Rates Than Conventional Financing
An advance rate is the percentage of the value of collateral a lender is willing to extend for a loan. For example, if a business wants to borrow against accounts receivable valued at $100,000, and the advance rate offered by the lender is 75%, the business can borrow $75,000 ($100,000 x 75%).
Higher advance rates available through an EXIM working capital loan guarantee mean the same set of collateral generates more cash flow today. With an EXIM guarantee, American businesses can borrow against their foreign receivables at advance rates of up to 90%.