Buyer financing package secured an export trade transaction to Finland and made the buyer happy – export financing is part of competitiveness
In a competitive situation, export financing offers tangible benefits to both exporters and buyers. Financing is a way for the export company to protect against risks and improve its competitiveness by being able to offer better payment terms to the buyer.Swedish and German companies already eagerly make use of export financing. The goal is to change the culture in Finland as well, in order to boost the export operations of SMEs, in particular. In our case study, the company secured a deal in Finland and prompted the buyer to enquire again about financing opportunities.
It is typical of Finnish SMEs to prefer advance payment in export trade transactions, instead of offering a payment period to the buyer. In many markets, requiring an advance payment definitely pays off: the exporter ensures they receive the payment before the product is delivered. However, if a foreign competitor is selling an equally good product with more flexible payment terms to the buyer, there is a risk of the Finnish company losing the deal.
“This has to do with lack of knowledge or misunderstandings: the methods offered by export financing are simply not well known among SMEs. This is an extremely important focus area for us, and we want to advise and encourage SMEs engaged in or planning to export to look into this option. Finland needs more SMEs like that, and competence in financing may be the decisive step for successful export trade and subsequent growth of business operations,” says Erno Ihto, Finance Manager at Finnvera.
- Case study
A Finnish listed company started preparing for an export trade transaction with a buyer company located in the Middle East. The transaction price was slightly less than EUR 10 million. The Finnish company was familiar with export financing tools, but the price was a challenge: large international banks were not eager to arrange for a financing package since, for them, EUR 10 million was not a large enough project. The exporter contacted Handelsbanken to find out if financing could be arranged through them.
An export company should contact providers of financing well in advance – right at the beginning of the trade negotiations or perhaps even sooner. The export financing arrangement will be compiled by the bank and Finnvera, which will use its export credit guarantees to guarantee the political and commercial risks related to the transaction. Typically, payment periods range from 3 to 10 years.
“Buyer financing is an option when the maximum transaction amount is EUR 3–4 million. The loan amount can be up to 85 per cent of the transaction amount, and the rest must be obtained elsewhere by the buyer,” says Vesa Kalenius, Vice President, Trade & Export Finance at Handelsbanken.
- In addition to the Middle East, the buyer company had operations in Asia and, to a smaller extent, in Europe, but it had no experience in using buyer financing in its projects, so the bank provided the company with guidance, in as much detail as needed. To start, Handelsbanken requested the buyer’s financial statements for the past three years and information on the company’s ownership structure. The bank also received the buyer’s operating plan, which showed how the investment will affect future cash flows and result. Based on this, Handelsbanken prepared a preliminary analysis and sent the first indication to the buyer. An indication refers to a financing or guarantee offer that is not yet binding. Based on the indication, additional negotiations were conducted on the loan period and interest rate margin, among other things. Concurrently, the exporter prepared a transaction contract. After the transaction contract was signed, the bank sent the final indication to the buyer and prepared a legal opinion document, which is needed to confirm that the loan agreement model used is legally valid in the country of the buyer.
“Export financing offers numerous financial benefits to the export company. The exporter receives the price as cash from the transaction when the products are delivered, so financing during delivery will not become an issue. The key indicators will improve. Protecting against risk will eliminate the danger of credit risk. A reasonably-priced and long-term financing arrangement is also a good competitive tool in the sales situation: many foreign buyers are already accustomed to asking about financing arrangements, since they have found that such arrangements suit their operations,” Kalenius says.
Buyers expect both good products and financing
The buyers may vary in size and have a solid financial standing but still be interested in financing options. Therefore, the exporter should put their feelers out in the sales negotiations if the matter of buyer financing is brought up.
“The benefits provided by export financing arrangements to the buyer include long-term financing as well as terms and conditions that are often more favourable than those of a regular bank loan. For example, repayment typically starts only after the purchased equipment has been installed and is in operation. The buyer does not need to use their existing bank limits, and the arrangements offer an opportunity to reduce the interest rate risk,” Kalenius says.
- In this transaction, a loan of 1+5 years was arranged for the buyer. The first year covered the construction of the product, and thereafter, the repayment period was five years. The loan package consisted of standardised loan documentation created by Handelsbanken for small export financing projects, Finnvera’s 95 per cent guarantee for commercial and political risk, as well as a 5-year euro-denominated financing with a fixed interest rate arranged through Finnvera’s subsidiary Finnish Export Credit Ltd. Combined with a high-tech export product, these trump cards secured the deal for the Finnish exporter.
“For smaller export companies, in particular, using the buyer credit is a huge advantage, which may open doors to international markets and, subsequently, to the next level of growth,” Kalenius says.
Many foreign buyers have become increasingly active in recent years in asking what kind of a financing package the exporter would offer with their product. According to the impact study commissioned by Finnvera, offering a buyer financing arrangement in large corporate export trade transactions may today be a prerequisite of inclusion in competitive bidding.
“The situation is the same in smaller export trade transactions or in exports by SMEs. Today, knowing the ropes of buyer financing is an important part of sales and export competitiveness. Our export trade financing barometer last year showed that SMEs, in particular, need guidance and support in this area,” Erno Ihto at Finnvera says.
- In our example transaction, arranging financing was an excellent competitive tool for the Finnish exporter. The buyer was also happy with the cooperation and the help they received, since they had no prior experience in export credits or working with Finnvera. Their satisfaction was also indicated by the fact that the buyer approached the providers of financing again with a new project. This experience is an excellent example of the benefits that export financing offers to companies.