Updated on 05/05/2015

BusAd 175: Introduction to International Trade

Spring 2011

Course #3819

Apr 18 - Jun 8, 2011

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My BusAd classes:   BusAd-101 (General Business),  BusAd-170 (International Business),  BusAd-175 (International Trade) BusAd-178 (International Finance) 

Chapter Outlines, Sample Tests and Review Questions

Poorna Pal, MS MBA Ph.D. Glendale Community College Phone: (818)240-1000 x 5517 ppal@glendale.edu Office: SG-152 Office Hours: TTh: 3 - 5 PM (SG-152) or by appointment

Chapter 14:

Information and materials on this page are based on those provided by the author, Dr. Belay Seyoum

Chapter Outline

Background

	Exporters prefer to be paid on or before shipment of the goods, whereas buyers want to delay payment until they have sold the merchandise.
	To expand export sales, many governments offer a wide choice of financing programs.
	Such assistance increases the exporter's credit line needed for corporate and domestic transactions, neutralizes financing as a factor, and creates a level playing field with competitors in other countries who also benefit from similar financing programs.
	The OECD (Organization for Economic Cooperation and Development) has developed guidelines on export credits for its members.

Working Capital Guarantee Program

• This enables exporters to meet critical pre–export financing needs, such as inventory build up or marketing. Eximbank will guarantee 90 percent of the loan provided by a qualified lender. The guarantee has a maturity of twelve months and is renewable.

• The major features of the working capital guarantee program are as follows:

  1. Qualified Exports: Eligible exports must be shipped from the United States and have at least 50 percent U.S. content.

  2. Guarantee Coverage and Term of the Loan: In the event of default by the exporter, Eximbank will cover 90 percent of the principal of the loan and interest, up to the date of claim for payment, insofar as the lender has met all the terms and conditions of the guarantee agreement.

  3. Collateral and Borrowing Capacity: Guaranteed loans are to be secured by a  collateral.

  4. Qualified Exporters and Lenders: Exporters must be domiciled in the United States (regardless of domestic/foreign ownership requirements), show a successful track record of past performance, including an operating history of at least one year, and have a positive net worth.

Export Credit Insurance Program

• A wide range of policies to accommodate different insurance needs. Its major features are: U.S. content requirements, restrictions on sales destined for military use and to communist nations.

  1. Short–term single–buyer policies: These cover a single sale or repetitive sales over a one–year period to a single buyer. They provide coverage against political and commercial risks. They support products such as consumables, raw materials, spare parts, low–cost capital goods, etc.

  2. Short–term multibuyer policies: These cover short–term export sales to many different buyers against political and commercial risks. Product coverage is the same as above.

  3. Small business policy (graduate to short–term multibuyer when annual export credit sales exceed $3 million): This short–term policy covers small businesses with average annual export credit sales of less than $3 million. It provides coverage against political and commercial risks.

  4. Small business environmental policy: This short–term policy provides coverage to small businesses that export environmental goods and services against political and commercial risks.

  5. Financial institution buyer credit policy: This protects financial institutions against losses on short–term direct credit loans or reimbursement loans to foreign buyers of U.S. goods and services.

  6. The bank letter of credit policy: This provides coverage against the failure of a foreign financial institution (the issuing bank) to honor its letter of credit to the insured bank.

  7. Financing and operating lease policy: These two separate leases provide coverage against political and/or commercial risks—policies protect lessor against loss of a stream of lease payments and fair market value of the leased product.

• Guarantees: The program provides repayment protection for private–sector loans to creditworthy buyers of U.S. goods and services. There is also special coverage for U.S. or foreign lenders on lines of credit extended to foreign banks or foreign buyers.

• Direct Loan Program: This is an intermediate/long–term loan provided to creditworthy foreign buyers for the purchase of U.S. capital goods and services.

• Project Finance Program: This program supports exports of U.S. capital equipment and related services for projects whose repayment depends on project cash flows, as defined in the contract.

Small Business Administration (SBA)

• Small BusiExport Working Capital

• This guarantees short–term working capital loans to U.S. small business exporters.

• To be processed by the SBA, loan guarantee requests must be equal to or less than $1.00 mill.

•  International Trade Loan Program

Overseas Private Investment Corporation (OPIC)
 

• This self–supporting agency of the U.S. government insures U.S. investors against political and commercial risks and provides financing through loans and loan guarantees.

• OPIC assists American investors through four principal activities designed to promote overseas investment and reduce associated risks:

• Financing of Business Through Loans and Loan Guarantees

• Providing Support to Private Investments

• Insuring Investments Against a Broad Range of Political Risks

• Engaging in Outreach Activities

Private Export Funding Corporation (PEFCO)
 

• This private corporation works in conjunction with Eximbank in the financing of foreign purchases of U.S. goods and services. PEFCO loans are guaranteed by Eximbank.

•  It acts as a supplemental lender to traditional sources by making loans available for foreign purchasers of U.S. goods and services.
   

Department of Agriculture: The USDA provides financial support for export of U.S. agricultural products through GSM–102, GSM–103, and Public Law 480.
 

State and Local Export Financing Programs: States provide different programs to expand exports: loans, loan guarantees. They also act as delivery agents for Eximbank programs.