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Guarantee, Export Guarantee, Export Credit Guarantee – Finnvera’s financing terms explained in plain language

Cranes on a shipyard in Turku.
Especially in major export transactions nowadays, it is more frequently the practice that the export company also makes an offer of financing for the deal to the potential foreign buyer in connection with the actual offer.

13.12.2019

Finnvera finances various stages of business with loans, guarantees and export credit guarantees. The latest addition to the product offering is the SME Guarantee. But what do the different terms mean? What is the difference between an Export Guarantee and an Export Credit Guarantee? Below you can find the terms in a nutshell.

Guarantee

A guarantee is usually a so-called surety, in which the guarantor commits to repaying the loan themselves if the original debtor cannot do this. The guarantor’s liability for the loan is equivalent to the liability for a loan they have drawn themselves.

Many home buyers have heard of surety when applying for mortgage. If the debtor does not have sufficient real security for the loan when the value of the apartment being bought does not cover the entire mortgage amount, a guarantor can be used for the remaining amount. When SMEs and midcap enterprises apply for a loan from a bank or another financial institution, Finnvera can act as that guarantor. Finnvera’s guarantee is intended, for instance, for investments, working capital and financing required by business or enterprise acquisitions. It is a suitable option for SMEs and, on special grounds, for large corporates, too.

If the enterprise cannot repay the loan granted by the bank, Finnvera’s liability for the loan is equivalent to the liability for a loan they have drawn themselves.

Guarantee’s different definitions

The English term guarantee is used in different kinds of products. Enterprises looking into Finnvera’s products, especially enterprises involved in export trade, may find it confusing to hear Finnvera talk about an Export Guarantee and an Export Credit Guarantee. The latter act as insurance: if the payment for the deal is not received and the terms and conditions of the guarantee are fulfilled, the seller receives compensation.

Export Guarantee

In most cases, an Export Guarantee refers to the scenario in which an enterprise receives a bank loan guaranteed by Finnvera for manufacturing an export product, and Finnvera grants its guarantee to the bank for the possibility that the enterprise cannot repay the loan. This is called pre-delivery export financing for working capital. Finnvera’s Export Guarantee can also be used as security for the bank that provides an export company with guarantees for offers, advance payments or deliveries required by the buyer.

Export Credit Guarantee

An Export Credit Guarantee safeguards exports, just like an Export Guarantee does, but to put it simply, the difference is related to the party, with which the risk adopted by Finnvera is associated. In an Export Guarantee, Finnvera becomes liable for compensation when the export company cannot repay the loan or deliver the goods to the buyer as agreed. In an Export Credit Guarantee, Finnvera becomes liable for compensation when the buyer does not pay their invoice. A buyer-related commercial risk can occur, for instance, in the case in which the buyer cannot pay or leaves the invoice unpaid for another reason and, as a result, the export company does not receive the money it is due from the deal. An extreme example of a political risk is a social crisis or a war in the buyer’s country.

As the State’s official export credit agency, Finnvera’s product palette includes export credit guarantees tailored for different situations, which an export company can use in preparing itself for commercial and political risks.

Export Credit Guarantee and Export Credit

Especially in major export transactions nowadays, it is more frequently the practice that the export company also makes an offer of financing for the deal to the potential foreign buyer in connection with the actual offer. It is also customary that buyers require financing offers as a condition for the deal. This is called buyer credit or export credit, which can be granted by a bank or Finnvera’s subsidiary Finnish Export Credit. Finnvera guarantees buyer credit with an Export Credit Guarantee. As buyer financing may be the decisive factor in closing the deal for a Finnish export company, Finnvera advises also SMEs involved in export trade to look into the possibility of buyer financing.

An Export Credit Guarantee for a domestic investment?

As its name suggests, the purpose of export credit guarantee operations is to promote exports and internationalisation and in that way strengthen the Finnish economy. The term export credit guarantee refers to the Act on the State’s Export Credit Guarantees, which defines the terms, conditions and principles applied to the State’s export credit guarantee operations. According to the act, export credit guarantees are granted against the risk of loss arising from exports or from investments carried out abroad but also from investments carried out in Finland that are intended to promote exports. The legislative amendment of 2015 made it possible to use export credit guarantees in guaranteeing investments carried out in Finland, too, provided that these investments are for manufacturing a product intended to be exported. One of the most prominent examples in recent years is Metsä Fibre’s bioproduct mill built in Äänekoski, where export credit and export credit guarantees could be used in financing.

The English term guarantee is used in different kinds of products.

Focus on developing your product and deals – there is help available for financing!

In the jungle of terms, you should keep in mind that you can always leave the choosing of the correct kind of guarantee to Finnvera’s expert and focus on developing a winning product and finding new clients. The purpose of guarantees is precisely to secure the operating conditions of Finnish enterprises.

If you have questions related to export trade financing, risks or the target country, contact us early enough – before the sales contract is signed. For more information, see our website: www.finnvera.fi/pk-vienti (in Finnish)

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