Foreign buyers’ interest in buyer financing is increasing
Arranging financing for a foreign buyer is often an important element of export trade negotiations, in both small and large transactions. Buyer financing increases the competitiveness of the offer and improves the opportunities of closing the deal in a competitive market. Foreign buyers’ interest in the arrangement of financing has also increased in recent years.Buyer financing played a key role in Raumaster’s and Konecranes’ trade transactions in Thailand.
Export trade transactions are often the sum of many parts. The buyer may already have financing in place but could still be interested in other financing options, too.
“Foreign buyers’ interest in the arrangement of financing has increased in recent years, perhaps due to enterprises’ balance sheet thinking. They pursue a position in which they do not need to use existing bank limits but can seek alternative ways to arrange financing. Secondly, the low interest rate level of the euro also makes buyer credit an attractive option, although in that case, the buyer takes a currency risk,” says Vesa Kalenius, Vice President, Trade & Export Finance at Handelsbanken.
He points out that especially for smaller export companies, the use of buyer credit is a major advantage that transfers the credit risk involved in export trade away from the company. In addition, it is worth noting that buyer credit does not protect against pre-delivery risks. That protection can be achieved with a pre-delivery credit risk guarantee or documentary credit granted by Finnvera – especially when manufacturing customised goods.
“The use of buyer credit brings security into export trade transactions and is a reasonably inexpensive form of financing. In general, the arrangements are actively used by large enterprises, even if you would think that a single loss would not have a big impact on them. On the other hand, small enterprises rarely use them even though they are more extensively affected if losses occur,” Kalenius comments.
The arrangement of financing might be crucial for SMEs’ export efforts or minor export trade transactions.
“We started developing buyer credit for minor export trade transactions, ranging approximately from EUR 2 million to EUR 20 million, and created a simplified loan agreement, in which terms, conditions and documentation are condensed into a couple of appendices.It proved to be well-functioning in Sweden and was piloted in Finland, too, when there were inquiries for financing in small projects. The up side is that the loan agreement is easy to understand and accept. The down side is that it is a standardised package with only a little flexibility. However, it is generally functional in minor export trade transactions,” says Kalenius.
An export company salesperson’s toolbox should always contain a financing option
The arrangement of buyer financing came up when Raumaster Paper, a company from Rauma specialising in material handling systems, conducted trade negotiations with Hiang Seng Fibre Container Company, located in Thailand and manufacturing paper, board and cardboard packaging and boxes. The 2,000-employee plant expanded its operations and needed new machinery. Raumaster Paper was selling a conveyor system for the plant, for taking reels of board from the slitter to the automated warehouse.
Financing was arranged by Handelsbanken, with a guarantee from Finnvera.
“We had used buyer credit arrangements in 2006 in a transaction in Turkey. In that case, we had Italian competitors who used a similar arrangement. Finnvera gave a guarantee to a German bank and we won the deal. The need for buyer financing depends on the client,” says Kaarlo Talvinen, Sales Director at Raumaster Paper.
The lifting equipment manufacturer Konecranes delivered an automated paper warehouse crane to the same plant in Thailand and also utilised buyer financing, a financial instrument that is very familiar to Konecranes. Matti Malminen Director, Trade & Export Finance at Konecranes, says that buyer credit is well suited to both large corporates and SMEs involved in exports, for small and large transactions alike. Not all transactions are worth tens or hundreds of millions. He praises Handelsbanken’s flexibility in arranging buyer financing.
“Often the buyer asks early on about financing possibilities or whether we can grant a certain payment period to the buyer. We tell them that we are a crane manufacturer, not a bank, but we know good third parties who can help them,” Malminen says.
According to Malminen, certain buyers want to use buyer credit for transparency’s sake, for instance. As the buyer pays all expenses, the costs are fully known.
“We would like to encourage the SME sector to use various forms of export financing. You can get help from Finnvera and banks once you dare to take the first step. The goal is to boost Finland’s growth with export trade and, in that sense, it is great that various financing possibilities are available to SMEs, too.”
Malminen emphasises that an export company salesperson’s toolbox should always contain at least the basic information about different financing options as often competitors from different countries can offer financing to the buyer.
“Without financing, you might lose deals and never find out why.”
Joint efforts to export Finnish know-how
Tuula Jermilä, Finance Manager at Finnvera, says that export trade arrangements require a long-term approach and financing arrangements are not necessarily easy when there are several parties involved. Export trade is team play, in which the provider of financing should be involved as early as possible to make the process easier for the exporter.
In small export trade transactions, the exporter conducts preliminary negotiations about financing with the buyer, the bank takes care of the actual credit negotiations and Finnvera’s role is to cover the credit risk related to the buyer’s ability to pay. Often Finnvera makes the decision about accepting the credit risk already after the exporter’s preliminary contact.
When the financing bank has been found, negotiations continue with the credit terms and conditions. These negotiations may take a long time and the terms and conditions are often specified in further detail only when trade negotiations proceed. In practice, the bank always acquires approval from Finnvera for the key credit terms and conditions during the negotiations. The buyer may have several financing options and, in the end, it is the buyer who decides which financing option to choose. “The most important thing is that the exporter wins the deal,” says Jermilä.
Buyer credit gives security to the exporter
The length of the trade negotiations surprised Raumaster’s Kaarlo Talvinen. However, the duration depends on many factors, not only on phases related to financing and credit. In any case, Talvinen is satisfied with the successful closing of the deal. He believes that on a case-by-case basis, buyer financing will be useful in the future, too.
“The buyer credit arrangement provides us with security, too: the bank makes the scheduled payments after the advance payment directly to us against our invoices and documents received from the client.”
Currently, Raumaster’s operations focus increasingly on Europe. The boom is on and there are a lot of offer-related inquiries. Orders placed extend well into the next year. However, the company’s market area is the whole world. Talvinen says that in negotiations, you must always be familiar with the local culture and know the rules and conventions with regard to the proper moment to start discussing financing. Achieving trust is important in the long term.
“Our goal is to establish a long-term relationship with the client, not to conduct individual trade transactions.”