Answers from Experts

We all experience open account credit terms. When you get your electric bill, it is for the period that has just finished. So the electric company is giving you 15 or 30 days to pay for that service which has already been rendered. That's a credit example of open account credit terms.

For an exporter, what this means is that they are shipping their product for which they've received a purchase order. They are issuing a commercial invoice to that foreign buyer which states the due date they expect to receive payment for those products which have already been shipped.

Open account credit terms means that they (the exporter) are giving their buyer time to pay for their products which have already been sent to them and possibly even received by them.

Well, let's understand that cash is king. If an exporter can get cash-in-advance, that, of course, is a wonderful thing. However, many buyers are asking for terms, especially if they are distributors where they need to on-sell your product to their end user in their country before they will have the cash to pay you.

By extending open account credit terms to your foreign customers, an exporter will invariably increase their sales. It's a great way to penetrate new markets by offering brand new buyers open account credit, as opposed to requiring cash-in-advance.

One thing I always talk about, especially with smaller exporters, is the possibility of getting some cash in advance with the order so that they can get some cash flow in the door, and then giving the buyer open account credit on the balance of that order.

Export Credit Insurance has three key benefits. The first one is that it is going to allow you to extend open account credit terms to your foreign buyers, which is going to in-turn increase your sales to that customer. Many times an exporter just wants to get cash in advance, or arrange for a costly letter of credit, but these are not very attractive to foreign customers as they are looking for time to pay the invoices. So by extending open account credit terms to your foreign customers, they will purchase more products from you. So it is a very valuable sales tool to increase sales with your existing customers, and especially for attracting new customers in those markets or even new markets.

Of course the second benefit is that EXIM Bank, your credit insurance policy, is going to protect you against nonpayment by those foreign customers. EXIM Bank offers several  different types of insurance policies; we have policies that are geared specifically for small businesses, policies that can insure an entire portfolio, a policy that insures a negotiated portfolio, and even a policy that will cover a single buyer (whether they are single or multiple shipments to that one buyer).

And finally, the third benefit is that your insured foreign receivables will be able to be used by your commercial bank in your borrowing base. To clarify, most banks exclude foreign receivables from a borrowing base because they can’t collect on them, they’re too risky so they carve them right out, which takes away a big chunk of assets that an exporter can borrow against. Once they are insured, especially by EXIM Bank which has the full faith and credit of the U.S. government, the bank will be much more willing to add those foreign receivables to the exporter’s borrowing base.

In addition to open account credit terms, EXIM Bank can insure the exporter against nonpayment on unconfirmed letters of credit. This includes a sight letter of credit or a deferred payment letters of credit. You may access this coverage under either the single-buyer or multi-buyer policy; for letters of credit, both policies provide coverage at 95% for commercial and political risks. Insurance premiums are generally less for bank risk than for open account sales to private-sector buyers.

Letters of credit are secure payment terms, as the trade documents flow through commercial banks, which attach fees for the buyer and seller to process the documents and pay the exporter. Letters of credit may be “confirmed” by the exporters’ bank, taking the nonpayment risk away from the exporter. However, if the letter of credit is unconfirmed, which means that the exporter has the risk of the buyers’ bank not paying, EXIM can insure that risk. Of course, another option would be to forego the letter of credit completely and offer open account credit terms, also insurable by EXIM Bank. Also, you may consider requiring a small down-payment with the order and offer open account terms on the balance…this is a good way to get some cash in the door, get your buyer financially engaged in the transaction, and reduce your insurance payment since you are paying for insurance only on the outstanding, open account portion of the invoice (less the down-payment).

You can use EXIM Bank’s single-buyer export credit insurance policy. This covers single or multiple shipments to one buyer, for a specific dollar amount and during a specific period of time (12-month maximum) which you specify. The coverage is 90% for both commercial and political risks to a private buyer (95% for letters of credit) with no deductible. And the insurance premiums are published on www.exim.gov, so you can quote pricing to the buyer as soon as the order arrives and build the insurance cost into your invoice.

EXIM Bank offers a political-only export credit insurance policy which protects you at 90% or 95% for specified political risks, depending on the policy type selected. Sovereign buyers (those which have the Central Bank or Ministry of Finance guarantee) are covered at 100%. Remember though, that valid claims will require that the buyer makes the local currency deposit within 3 months after the due date.

Under EXIM Bank’s credit insurance policies and guarantees, you may invoice in several hard currencies without our prior approval; these include Canadian dollars, British pound sterling, Japanese yen, French francs, German deutschemarks, Swiss francs, and of course, Euros. If you wish to invoice in a different currency, or a third country currency, you will need to get us to pre-approve it and endorse it to your policy.

The very first thing you should do is talk to your lender. The best advice is to talk to your lender early and often. Lenders are the ones who make the loan to you - EXIM Bank acts as the guarantor.

For pre-export working capital, your lender is going to take a look at your financial statements and your ability to get a loan. Most banks are interested on how best to mitigate their risk on the finance on foreign receivables, so that lender is going to come to EXIM Bank to ask us for a guarantee to protect themselves against default by the U.S. exporter on the loan that they have extended.

Once everything comes into place, the exporter gets the funds directly from the lender, and the lender is protected by EXIM Bank on the exporter's default should there be one.

The bank excludes them as collateral because they are uncollectable in the event that your buyer defaults. The solution is to obtain an EXIM Bank credit insurance policy. Once your foreign receivables are credit-insured by EXIM Bank, the receivable becomes a domestic one, and carries the full faith and credit of the US government. The proceeds (claim payments) of the insurance policy are assigned to your lender, so they know our claim payment comes to them. We have many types of insurance policies: single-buyer or multi-buyer, and special incentives for small businesses, women and minority-owned businesses and environmental exporters.

Many commercial banks which partner with EXIM Bank are willing to finance the buyer for you. The EXIM Bank regional office near you can tell you if your own lender is one of these banks. If not, they can help you locate a lender for your deal. Generally, the bank will do a credit check on the buyer to make sure they are creditworthy for the amount of the sale. The bank pays you in full at the time you ship the goods, and creates a promissory note between themselves and your buyer, under which the buyer pays the bank in semi-annual installments. The commercial bank is willing and able to do this only because EXIM Bank is protecting them against nonpayment by your buyer!

Many commercial banks which partner with EXIM Bank are willing to finance the buyer for you. Generally speaking, the bank will do a credit check on your buyer to make sure they are creditworthy for the amount of the sale. The bank cashes you out, and creates a promissory note between themselves and your buyer, under which the buyer pays the bank over the course of a few months or a few years (depending on the product and the dollar amount of the transaction). The commercial bank is willing and able to do this only because EXIM Bank is protecting them against nonpayment by your buyer! And the cost to you is – zero! The foreign buyer is technically taking out a loan from the commercial bank and so the buyer – not you – pays the principal, interest and any other fees to the lender.

EXIM Bank is the Export-Import bank of the United States. We are a fully sanctioned credit agency of the U.S. government. Our mission is to create and sustain U.S. jobs through exports. We support all U.S. based companies.

Historically, over 90% of EXIM Bank's transactions support small business exporters. One of the most important tools small businesses use is our credit insurance policies, which protect them against nonpayment when they extend open account credit sales to their foreign customers. We have at least two different policies that are specifically and solely for small business exporters.

These feature flexibility, such as being to include certain non-U.S. products, and also features insurance policies with no first loss deductible. Under one of our small business policies, EXIM Bank even purchase the credit information that we need in order to review the buyer's credit worthiness.