Bill of Exchange Guarantee
Bill of Exchange Guarantee secures the lender against credit risks arising when the lender purchases a bill of exchange from the exporter. The Bill of Exchange Guarantee assists an exporter in arranging bank financing for an export transaction.
The guarantee applies when the exporter has granted credit to a foreign buyer for the purchase of Finnish goods and the buyer has accepted the payment terms and the bill of exchange as the debt instrument. With the security provided by the guarantee, the bank purchases the bill of exchange from the exporter without recourse. The guarantee protects the bank against the risk that the buyer would not pay the bill of exchange at maturity.
When the exporter sells the bill of exchange to a bank, the exporter receives payment which is the amount of the bill of exchange less the financing costs. The exporter may even realize benefits in case the local financing available for the buyer is more expensive.
Finnvera issues guarantees of less than 2 million euros without any security requirements and in these cases uses a simplified process and documentation as well as predictable pricing model. The simplified guarantee can also be applied to larger export transactions provided the credit risk is low. In addition, Finnvera collects information on bills of exchange in various countries.
- Commercial risks, i.e. the borrower’s inability or unwillingness to pay the debt
- Political risks, i.e. risks that are beyond the lender’s and borrower’s control and often associated with the borrower’s country, such as restrictions on the transfer of the credit currency, rescheduling of debts or force majeure events, such as flood, earthquake, war or civil war etc.
- In relation to small export transactions, also risks related to the practices of using a bill of exchange as a debt instrument in the buyer’s country.
- When the credit period is less than one year and the exports are continuous, the maximum coverage is 90%
- When the credit period is over 2 years or in the case of a single export transaction, the maximum coverage is 95%
The bank’s residual risk is 5% or 10%. Usually the residual risk is transferred from the bank to the exporter or, alternatively, the bank may require some kind of security from the exporter for the residual risk. Usually the bank purchases the bill of exchange without recourse to the exporter, apart from the residual risk.
Terms and conditions of the Bill of Exchange Guarantee
Requirements for issuing the guarantee:
- The export transaction must meet the requirement of Finnish interest
- Based on financial information and Finnvera’s analysis, the borrower is creditworthy
- Based on Finnvera’s country risk analysis, the borrower’s country is creditworthy
- Bills of exchange are acceptable debt instruments in the country in question
- The guarantee is granted for a maximum tenor of 5 years.
Short-term guarantees can normally only be granted for exports to countries with political risk, i.e. not to the EU Member States or other Western industrialised countries (ask for more information regarding the permitted exceptions).
When the repayment period is 2–5 years, the guarantee terms comply with the regulations of the OECD Export Credit Arrangement for long-term officially supported export credits:
- Cash payment at least 15 % of the contract value, the credit may not exceed 85 %
- The credit period is determined by the type of goods, the contract value and the category of the buyer’s country
- The starting point of repayment period is set
- The credit must be repaid in equal semiannual instalments without any grace period. Each instalment must be documented with a separate bill of exchange.
A guarantee premium is charged as a flat fee on the principal of the credit. The premium is payable at the time of discounting the bill of exchange. The premium depends on factors such as the creditworthiness of the borrower and the borrower’s country and the risk period.
The beneficiary of the export credit guarantee, i.e. the Guarantee Holder, usually the exporter or the bank, submits a claim for indemnification based on an export credit guarantee with a signed written application. The applicant may also be the transferee of an indemnity right.