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Trade Finance: Faster, Cheaper, Longer
How one can attract foreign debt financing with an advantage and establish an international credit history of one’s business.
Rather frequently, all the above processes are unpredictable for Ukrainian businesses and, what’s more, they tend to arise simultaneously, forcing businesses to take out good round sums from cash in turnover which they often just are unable to afford. What is the way out? Where can one borrow significant amount for a long period of time?
Following lengthy discussions and analyses, management often makes decision to go along the simple path of applying for bank loan or conclusion of leasing agreement. However, both options are rather costly, and the periods of financing, as a rule, are unacceptable for Ukrainian companies. In addition, the procedure for obtaining a loan is quite intricate and includes approval of the credit committee, verification of honesty of the business owner, availability of relevant collateral, audit…
If you intend to engage in a foreign economic transaction, how about taking a more high-profile glance at the options of debt financing and find out what else do they do abroad??! In the first place, go beyond Ukrainian information framework. You are right, we will discuss foreign trade financing.
To begin with, let’s define the terms. Foreign trade financing or export financing is the attraction of foreign capital against guarantees provided by a foreign export credit agency (ECA). In addition, they use the term “structural financing” describing this process from the perspective of its structure, that is the sequence of its stages. Nevertheless, in all cases, we deal with the financing of deliveries to Ukraine.
The chairs this morning …
As of today, this financial instrument appears to be the most advantageous for Ukrainian businesses both in terms of cost (which is by an order of magnitude smaller than domestic rates), and in light of maturities (which are distinguished by significant duration). In addition, successfully realized projects on attraction of foreign trade financing develop a positive international credit history for Ukrainian company, opening further perspectives of cooperation with foreign banks and export credit agencies.
“In our opinion, trade financing arrangements facilitate the increase of companies’ purchasing power and ensure their access to finance required to purchase goods or services from Thailand, raise competitive ability of our producers in other countries, decrease risk of default, and increase the borrowers’ working capital”, – told us our source in Export-Import Bank of Thailand.
There is no doubt that, to be able to properly present its merits to a foreign partner, domestic business will have to attract specialists in the area of credit analysis according to the international standards, who will prepare relevant project documents. However, acting knowingly, the borrower will carry out such procedure quickly and painlessly, and the resulting credit conclusion will also be instrumental for further presentation of the business with the objective of expansion of international trade relations.
“When determining the amount of insurance coverage, we focus primarily on analysis of the risks and carry out research of the foreign borrower’s creditability and its ability to repay the loan on time”, – said our source in OeKB, Austrian ECA.
Naturally, to be able to apply for trade financing, potential borrower must meet certain criteria. And you should not think it’s beyond your control, you should just have a clear understanding of your capabilities and the requirements of the foreign banks and insurers to the Ukrainian corporate borrowers. One should not underestimate own merits and surrender under the storm of allegations about insolvency of Ukraine as a country and Ukrainian business as a whole.
Thus, if you are prepared to the victories on the international scale, it is high time to take a detached view of your business and assess the degree of its transparency. Well, let it be at least semi-transparency. “When rating international creditability of a company or a group of companies, we concentrate on positive movements in revenues, volumes of assets, existence of related legal entities, history and structure of ownership, and on payment discipline. In addition, we pay attention to many other legal and marketing factors characterizing operations of the target in specific industry”, - points out Mrs. Antonina Mavrodii, Manager of IBcontacts Analytical Department and an ACCA member.
As such, if, after applying the above criteria, you come up with at least firm “4″ according to the old good 5-point scale, your should undoubtedly ponder over entry on the foreign financing market which will automatically raise your company to a new level of business.
“Our company can insure so called “supplier’
The money tomorrow evening …
When attracting short-term financing (for a period of up to one year) for the purpose of, say, procurement of raw materials, foreign supplier may give commodity credit and deferral of payment against guarantees of ECA. However, if the payment deferral period required is longer (five years and more), foreign exporter is unable to wait so long for its luck penny. At this point steps in foreign lending bank which in most cases is operating in the country of the producer’s incorporation.
The funds are disbursed to Ukrainian borrower (it may be either a Ukrainian bank, or the Ukrainian importer itself) against guarantees of ECA. In this case, the cost of financing is significantly lower which has its logical explanations. First, the funds are granted by foreign banks whose interest rates are lower apriori. Second, export credit agency insures the risks of the lenders, which also enables them to reduce annual interest rates.
The question is, what are the motives that drive ECAs to take part in such projects and take the risks? As we have already told in the previous issue of IBobserver (www.ibcontacts.com.ua)
Full version of the article featuring comments of such ECAs as K-sure and EKF is available in the third issue of IBobserver ( http://ibcontacts.com.ua/
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IBcontacts company specializes in trade relations development between Ukrainian industrial and trade companies and their foreign partners with the participation of export credit agencies, foreign banks and governmental agencies.
The company operates in the field of project and structured finance, credit insurance, financial analysis, due diligence, and market research. IBcontacts has its own established business network, which enables to implement multifaceted projects both in Ukraine and abroad.