Consulting » EXPORTING – FORFAITING – Making a drachma out of a crisis.

For companies that export goods and services, whether to foreign businesses or overseas governments, there is one overriding concern: getting paid. Shipping product which is rightly or wrongly thought of as “immoral” may get you into public relations difficulties and could perhaps lead to a run-in with the DTI or even the Foreign Office. (Some developing countries have had trouble buying high-tolerance large-bore piping from UK firms in the past decade.) But not getting paid is a more mundane, and much more common, pitfall than trading in what may, or may not be, supergun parts.

Even in Europe, which is thought of as a sophisticated and trustworthy market, UK firms report problems. According to the latest Institute of Export annual survey of services provided to exporters, 37% of British firms experienced delays in payment by EU-based customers (compared with 29% in 1999). Over the same period, North American and non-EU European buyers improved their record in on-time payments.

Fortunately, as more and smaller companies engage in global trading, export credit is becoming both better understood and more widely supported by finance houses. Even so, the IoE survey shows that just 38% of companies insure their export receivables, and only 9% demand advance payment.

At its most basic, export credit insurance is factoring: provided your bank receives suitable assurances from your overseas customer’s bank, or the importer is sufficiently well-known and trusted, it pays up the cost of the exported goods minus a commission based on the risks involved in the deal.

There are, of course, complexities. Factoring tends to be used for domestic sales, and may involve a recourse to the exporter if something goes wrong with an overseas deal. Forfaiting, a more common term in export circles, is usually (but not always) non-resource invoice financing (see box).

Forfaiting also tends to be used in longer-term transactions, and there are active markets in forfait instruments around the world. Since they include interest payments in specific currencies, they can also be employed as hedging products. A majority of UK companies deal in sterling when they export, but although this can offer a simple alternative to handling a forex risk, competitiveness and simplicity in pricing must suffer from a failure to accommodate local currencies.

This is where the risk management services of export financing come in. A forfait house – or, increasingly, a bank – can lay off country risks against one another, as well as use in-house expertise to assess the risks in any given export transaction, something a company may not be able to do. Typically, any given government will also operate an import/export department to fill the gaps where commercial credit insurers or credit guarantors cannot or will not operate – for example, on those long-term deals.

The third world contains the biggest dangers for exporters. But, increasingly, it’s also in the third world – where growth is fastest and goods are scarcest – that the most attractive new markets can be found. The Export Credit Guarantee Department (the UK government’s own imex guarantor), for example, lists Chile, China, India, Oman and Turkey as countries that many firms consider “too daunting” to trade with, despite all of them being ripe for UK exports.

The ECGD offers several packages to cover the cost of preparing overseas orders and to insure against defaults, largely to the biggest exporters or for specific kinds of order. “ECGD no longer provides direct credit insurance for exporters of raw materials, consumer goods or items which would normally attract cash or near-cash payment terms,” explains Robin Ogleby, a spokesman at the department. “But, by underwriting reasonable repayment risks for amounts and over periods which go beyond the capacity of the private sector, we can help UK exporters compete in important overseas markets, especially the developing world.”

The ECGD’s packages follow the typical export financing lines. The ECGD Export Insurance Policy (EXIP), for example, can cover all the main payment risks encountered when exporting on a cash basis. It can also be taken out in conjunction with an ECGD finance facility to protect payments for those elements of a financed contract for which loan funds are not available. Up to 95% of any such loss suffered may be covered.

ECGD buyer credits – which are essentially a guarantee to banks loaning importers the cash to buy UK goods – mean that companies can avoid loading up credit terms with a risk premium, keeping them competitive while maintaining cashflow during a deal.

Supplier Credit Financing (SCF) is an even simpler route. Here, a nominated bank might purchase bills of exchange or promissory notes from the buyer or the buyer’s bank. Once again, the exporter is able to receive payment from the bank in the UK as goods are shipped, and to offer the buyer a credit package of two to five years, or sometimes more. The SCF’s advantage is that, in most cases, finance can be made available without the ECGD reserving a right to take recourse to the exporter in the event of the buyer defaulting on payments to the bank when the exporter is in default under its contract.

Despite this breadth of approach, the ECGD is only a small player in the exporting game. “There are a number of companies in the private sector – NCM Credit Insurance, Euler Trade Indemnity and Coface LBF, for example – who can help,” says Ogleby. In fact, the ECGD sold off its short-term credit insurance arm to NCM in the mid-1990s, and now works with the company on more complex deals. For example, the two recently concluded an agreement whereby UK and Dutch companies that arrange joint export deals to third parties can get comprehensive cover for credit at a one-stop shop.

What is surprising is that so few companies are adopting a cautious attitude to export finance and credit insurance – and how few banks are offering specific trade finance advice. Although the number of companies using their own funds to finance exports has fallen from 1999 (the IoE survey showed 60% did so this year, as opposed to 72% last year), it remains a high figure; and 44% of companies don’t get any advice at all on trade finance from their bank. In an environment where businesses can come and go far faster than ever before – while at the same time being more open to overseas trade – UK businesses should consider their options and force their finance partners to offer advice that might just keep them in business.


Ruritania looks like an attractive emerging market. Its growing urban population needs heavy-duty water treatment machinery and there is no indigenous company to cater for that market. But to Water Products UK Ltd, which has been having a tough time exporting to its existing – and now, if you’ll pardon the expression, saturated – markets in Europe, Ruritania is an export destination to die for.

But when finance director Mike Scott starts investigating openings, there are severe problems. Ruritania’s government has banned foreign companies from selling directly to even state-owned enterprises like the water board. And the local distributor can’t afford to stump up the cash for the initial shipment of machinery that they’ve expressed an interest in buying. It needs two years to pay up, but doesn’t have the financial clout that would qualify it for credit insurance. (The figures across the world bear this out: depending on region, only between 20% and 50% of UK firms use credit insurance to cover their export deals.)

Worse still, with a dubious currency and 120% annual inflation, no FD in his right mind would ship to Ruritania on unsecured credit terms. However, a local bank with a reasonably sound track record has agreed to guarantee the distributor’s repayments.

So Scott goes to an export finance brokerage and cooks up a forfait deal to keep everyone happy. Firstly, the distributor sends promissory notes in exchange for the equipment, under guarantee from the local bank. Scott then sells the notes at a discount through his own forfaiter to banks in Europe looking for Ruritanian revenue streams.

All this means that the Ruritanians get their water equipment at payment terms which are suitable (and at interest rates better than locally available); Scott factors the forfaiting discount into the selling price, so WPUK Ltd gets the full price of its goods up front, risk-free; and the forfaiter gets a profit on the revenue stream from the distributor.

Everything, of course, hinges on the bank guarantee given to the distributor in the first place. But once the risk for the forfaiting and banking system is reduced in this way (although to a level which may still be unsuitable for an exporting company) there are financial options that at least make the whole deal possible.