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MEDIUM-TERM TRANSACTIONS

Medium-term transactions are those with extended payment terms that exceed 180 days and can go up to five to seven years in length. They usually involve capital equipment or large bulk commodity sales and generate cash flow over time.

The ability to obtain medium-term financing, preferably at competitive rates, is crucial to exporters of capital goods. Export Assist can help you arrange medium-term financing at competitive rates, whether it be promissory notes with credit enhancement (e.g., international credit insurance), international leasing or the global forfeit market. Our extensive experience offers the exporter immediate access to market knowledge, risk assessment, financing alternatives and transaction advice.

The exporter can use the following post-export medium-term financing tools to create a nonrecourse sale of the receivable in order to generate immediate working capital or funds to pay any outstanding pre-export working capital loan.

Medium-Term Promissory Notes
A medium-term promissory note is required when the exporter creates a commercial business transaction with the foreign buyer. It serves as the basis for extended payments with the exception of international leasing which requires a written lease agreement. The exporter, upon successful completion of the medium-term transaction, will then be in a position to sell, exchange, or discount on a nonrecourse basis the promissory note or lease agreement for working capital.

International Leasing Contracts
International leasing is an arrangement whereby the foreign buyer does not want to purchase the actual goods, but instead buys the use of the goods by signing a contract, in which the terms and monthly payment/rental amount is stated, with the leasing company that holds title to those goods. Leasing substitutes an actual investment with a simple rental relationship over a fixed period of time.

Such an arrangement benefits the exporter by enabling you to achieve or increase export sales and cash flow by selling equipment to the leasing company, and it benefits the buyer who wants to buy the goods but cannot due to cash flow constraints or foreign currency exchange restraints. Both parties also benefit in their relationship with the leasing company because the leasing company would not write the lease contract without a thorough assessment of the creditworthiness and the country risk of the buyer and the ability of the U.S. exporter to deliver.

Forfaiting
By forfaiting, the exporter surrenders possession of export receivables together with an acceptable debt instrument (e.g., bill of exchange, promissory note or other form of evidenced debt) signed by the foreign buyer to the forfait house in exchange for immediate cash. This is especially beneficial when dealing with customers from countries where protection against economic and political risk is difficult to obtain.

Although forfaiting may improve cash flow and reduce transaction risk to the exporter, it has the following limitations:

  • it is generally available for medium-term financing only
  • the exporter is responsible for obtaining a guarantee from the foreign buyer’s bank
  • the exporter is responsible for the quality and condition of the goods, the timeliness of delivery, and resolution of product and contract disputes
  • the foreign buyer’s bank line of credit is reduced by a corresponding amount because of the required bank guarantee
  • the foreign buyer must usually pay in U.S. dollars which can be difficult in certain countries; however, in some instances the foreign buyer can pay in local currency subject to its bank guarantee arrangements
  • the transaction size is generally limited to $250,000 or more, although this amount is continually being reduced as forfait house capacity increases for the acceptance of the number of notes and the improvement of technology lowers its cost of doing business.

 

 
   
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