Trade Finance 

Guide 

A Quick Reference 

for U.S. Exporters 
Trade Finance Guide: A Quick Reference for U.S. Exporters is designed to help U.S. companies, especially small and medium-sized 

enterprises, learn the basic fundamentals of trade finance so that they can turn their export opportunities into actual sales and 

achieve the ultimate goal of getting paid–especially on time–for those sales. Concise, two-page chapters offer the basics of 

numerous financing techniques, from open accounts, to forfaiting to government assisted foreign buyer financing. 
TRADE FINANCE GUIDE 

Table of Contents 

Introduction .....................................................................................1


Chapter 1: Methods of Payment in International Trade .......................... 3
 

Chapter 2: Cash-in-Advance.................................................................. 5
 

Chapter 3: Letters of Credit................................................................... 7
 

Chapter 4: Documentary Collections..................................................... 9
 

Chapter 5: Open Account ....................................................................11
 

Chapter 6: Export Working Capital Financing .......................................13
 

Chapter 7: Government-Guaranteed Export Working Capital 

Loan Programs ...................................................................15
 

Chapter 8: Export Credit Insurance ......................................................17


Chapter 9: Export Factoring.................................................................19
 

Chapter 10: Forfaiting ...........................................................................21
 

Chapter 11: Government-Assisted Foreign Buyer Financing....................23
 

Chapter 12: Foreign Exchange Risk Mangement.................................... 25
 

Published April 2008 

1 

TRADE FINANCE GUIDE 

Introduction 

Opportunities, Risks, and 

Trade Finance 

A Quick GlAnce 

Trade Finance Guide 

A concise, simple, and easy-to-understand guide 

for trade finance that is designed especially for U.S. 

small and medium-sized exporters. 

Trade Finance 

A means to turn export opportunities into actual 

sales and to get paid for export sales—especially on 

time—by effectively managing the risks associated 

with doing business internationally. 

Opportunities 

•	 	Reaching	the	95	percent	of	customers	worldwide	

who live outside the United States 

•	 Diversifying	customer	portfolios

Risks 

•	 	Non-payment	or	delayed	payment	by	

foreign buyers 

•	 	Political	and	commercial	risks	as	well	as	cultural	

influences 

Welcome to the second edition of the Trade Finance Guide: A Quick Reference for 

U.S. Exporters. This guide is designed to help U.S. companies, especially small 

and medium-sized enterprises (SMEs), learn the basic fundamentals of trade 

finance so that they can turn their export opportunities into actual sales and achieve the 

ultimate goal of getting paid—especially on time—for those sales. This guide provides 

general information about common techniques of export 

financing. Accordingly, you are advised to assess each 

technique in light of specific situations or needs. This 

edition includes a new chapter on foreign exchange risk 

management. The Trade Finance Guide will be revised 

and updated as needed. Future editions may include new 

chapters that discuss other trade finance techniques and 

related topics. 

Benefits of Exporting 

The United States is the world’s largest exporter, with $1.5 

trillion in goods and services exported annually. In 2006, 

the United States was the top exporter of services and 

second largest exporter of goods, behind only Germany. 

However, 95 percent of the world’s consumers live outside 

of the United States. So if you are selling only domestically, you are reaching just a small share of potential 

customers. Exporting enables SMEs to diversify their 

portfolios and insulates them against periods of slower 

growth in the domestic economy. Free trade agreements 

have opened in numerous markets including Australia, 

Canada, Chile, Israel, Jordan, Mexico, and Singapore, 

as well as Central America. Free trade agreements create more opportunities for U.S. businesses. The Trade 

Finance Guide is designed to provide U.S. SMEs with the 

knowledge necessary to grow and become competitive in 

foreign markets. 

Key Players in the Creation of the Trade Finance Guide 

The International Trade Administration (ITA) is an agency within the U.S. Department of 

Commerce, and its mission is to foster economic growth and prosperity through global 

trade. ITA provides practical information to help you select your markets and products, 

ensures that you have access to international markets as required by U.S. trade agreements, 

and safeguards you from unfair competition such as dumped and subsidized imports. 

ITA is made up of the following four units: (a) Commercial Service, the trade promotion 

unit that helps U.S. businesses at every stage of the exporting process; (b) Manufacturing 

and Services, the industry analysis unit that supports U.S. industry’s domestic and global 

competitiveness; (c) Market Access and Compliance, the country-specific policy unit that 
2 

keeps world markets open to U.S. products and helps U.S. businesses benefit from our trade 

agreements with other countries; and (d) Import Administration, the trade law enforcement unit that ensures that U.S. businesses face a level playing field in the domestic marketplace. Visit www.trade.gov for more information. 

Partnership and Cooperation 

The Trade Finance Guide was created in partnership with FCIB, an Association of 

Executives in Finance, Credit, and International Business. FCIB is headquartered in 

Columbia, Maryland, and is a prominent business educator of credit and risk management

to exporting companies of every size. FCIB’s parent, the National Association of Credit 

Management, is a non-profit organization that represents nearly 25,000 businesses in the 

United States and is one of the world’s largest credit organizations. This Trade Finance 

Guide was also created in cooperation with the U.S. Small Business Administration, 

the Export–Import Bank of the United States (Ex–Im Bank), the International Factoring 

Association, and the Association of Trade & Forfaiting in the Americas. Contact information for these organizations can be found throughout this guide. 

For More Information about the Guide 

The Trade Finance Guide was created by ITA’s Office of Finance, which is part of ITA’s 

Manufacturing and Services. The Office of Finance is dedicated to enhancing the domestic 

and international competitiveness of U.S. financial services industries and to providing 

internal policy recommendations on U.S. exports and foreign investment supported by 

official finance. For more information, contact the project manager for the guide, Yuki 

Fujiyama, tel.: (202) 482-3277; e-mail: yuki.fujiyama@mail.doc.gov. 

How to Obtain the Trade Finance Guide 

The Trade Finance Guide is available online at Export.gov, the U.S. government’s export portal. You can obtain printed copies from the Trade Information Center at 1-800-USA-TRAD(E) 

(8723), and from the Commercial Service’s global network of domestic Export Assistance 

Centers and overseas posts. To find the nearest Export Assistance Center or overseas 

Commercial Service office, visit www.export.gov or call the Trade Information Center. 

Where to Learn More about Trade Finance 

As the official export credit agency of the United States, Ex–Im Bank regularly offers trade 

finance seminars for exporters and lenders. Those seminars are held in Washington, D.C., 

and in many major U.S. cities. For more information about the seminars, visit www.exim. 

gov or call 1-800-565-EXIM (3946). For more advanced trade finance training, FCIB offers 

the 13-week International Credit and Risk Management online course, which was developed with a grant awarded by the U.S. Department of Commerce in 2001. For more information about the course, visit www.fcibglobal.com or call 1-888-256-3242. 

U.S. Department of Commerce 

International Trade Administration 
3 

TRADE FINANCE GUIDE 

Chapter 1 

Methods of Payment in 

International Trade 

To succeed in today’s global marketplace and win sales against foreign competitors, 

exporters must offer their customers attractive sales terms supported by appropriate 

payment methods. Because getting paid in full and on time is the ultimate goal for 

each export sale, an appropriate payment method must be chosen carefully to minimize 

the payment risk while also accommodating the needs of the buyer. As shown in figure 1.1, 

there are four primary methods of payment for international transactions. During or before 

contract negotiations, you should consider which method in the figure is mutually desirable for both you and your customer. 

Figure 1.1. Payment Risk Diagram 

Key Points 

•	 	To	succeed	in	 today’s	global	marketplace	and	win	sales	against	 International	 trade	

presents a spectrum of risk, which causes uncertainty over the timing of payments 

between the exporter (seller) and importer (foreign buyer). 

•	 For	exporters,	any	sale	is	a	gift	until	payment	is	received.

•	 T	 herefore,	exporters	want	to	receive	payment	as	soon	as	possible,	preferably	as	soon	

as an order is placed or before the goods are sent to the importer. 

•	 For	importers,	any	payment	is	a	donation	until	the	goods	are	received.

•	 	Therefore,	 importers	 want	 to	 receive	 the	 goods	 as	 soon	 as	 possible	 but	 to	 delay	

payment as long as possible, preferably until after the goods are resold to generate 

enough income to pay the exporter. 
4 

Cash-in-Advance 

With cash-in-advance payment terms, the exporter can avoid credit risk because payment is 

received before the ownership of the goods is transferred. Wire transfers and credit cards are 

the most commonly used cash-in-advance options available to exporters. However, requiring 

payment in advance is the least attractive option for the buyer, because it creates cash-flow 

problems. Foreign buyers are also concerned that the goods may not be sent if payment is 

made in advance. Thus, exporters who insist on this payment method as their sole manner of 

doing business may lose to competitors who offer more attractive payment terms. 

Letters of Credit 

Letters of credit (LCs) are one of the most secure instruments available to international 

traders. An LC is a commitment by a bank on behalf of the buyer that payment will be 

made to the exporter, provided that the terms and conditions stated in the LC have been 

met, as verified through the presentation of all required documents. The buyer pays his or 

her bank to render this service. An LC is useful when reliable credit information about a 

foreign buyer is difficult to obtain, but the exporter is satisfied with the creditworthiness 

of the buyer’s foreign bank. An LC also protects the buyer because no payment obligation 

arises until the goods have been shipped or delivered as promised. 

Documentary Collections 

A documentary collection (D/C) is a transaction whereby the exporter entrusts the collection of a payment to the remitting bank (exporter’s bank), which sends documents to a 

collecting bank (importer’s bank), along with instructions for payment. Funds are received 

from the importer and remitted to the exporter through the banks involved in the collection in exchange for those documents. D/Cs involve using a draft that requires the importer 

to pay the face amount either at sight (document against payment) or on a specified date 

(document against acceptance). The draft gives instructions that specify the documents 

required for the transfer of title to the goods. Although banks do act as facilitators for their 

clients, D/Cs offer no verification process and limited recourse in the event of non-payment. Drafts are generally less expensive than LCs. 

Open Account 

An open account transaction is a sale where the goods are shipped and delivered before 

payment is due, which is usually in 30 to 90 days. Obviously, this option is the most advantageous option to the importer in terms of cash flow and cost, but it is consequently the 

highest risk option for an exporter. Because of intense competition in export markets, foreign buyers often press exporters for open account terms since the extension of credit by 

the seller to the buyer is more common abroad. Therefore, exporters who are reluctant to 

extend credit may lose a sale to their competitors. However, the exporter can offer competitive open account terms while substantially mitigating the risk of non-payment by using of 

one or more of the appropriate trade finance techniques, such as export credit insurance. 

U.S. Department of Commerce 

International Trade Administration 
5 

TRADE FINANCE GUIDE 

Chapter 2 

Cash-in-Advance 

W

chArActeristics of 

cAsh-in-AdvAnce 

Applicability 

Recommended	 for	 use	 in	 high-risk	 trade	 relationships or export markets, and ideal for Internet-based 

businesses. 

Risk 

Exporter is exposed to virtually no risk as the burden 

of risk is placed nearly completely on the importer. 

Pros 

•	 Payment	before	shipment

•	 Eliminates risk of non-payment 

Cons 

•	 May lose customers to competitors over 

payment terms 

•	 No	additional	earnings	through	financing	

operations 

ith the cash-in-advance payment method, the exporter can avoid credit risk or 

the risk of non-payment since payment is received prior to the transfer of ownership of the goods. Wire transfers and credit cards are the most commonly used 

cash-in-advance options available to exporters. However, requiring payment in advance is 

the least attractive option for the buyer, because it tends to create cash-flow problems, and 

it often is not a competitive option for the exporter especially when the buyer has other vendors to choose from. 

In addition, foreign buyers are often concerned that the 

goods may not be sent if payment is made in advance. 

Exporters who insist on cash-in-advance as their sole 

method of doing business may lose out to competitors who 

are willing to offer more attractive payment terms. 

Key Points 

•	 F	 ull	or	significant	partial	payment	is	required,	usually through a credit card or a bank or wire transfer, 

before the ownership of the goods is transferred. 

•	 	Cash-in-advance,	especially	a	wire	transfer,	is	the	

most secure and favorable method of international 

trading for exporters and, consequently, the least 

secure and attractive method for importers. However, 

both the credit risk and the competitive landscape 

must be considered. 

•	 I	 nsisting	on	cash-in-advance	could,	ultimately,	cause	

exporters to lose customers to competitors who are 

willing to offer more favorable payment terms to 

foreign buyers. 

•	 Creditworthy	foreign	buyers,	who	prefer	greater	

security and better cash utilization, may find cashin-advance unacceptable and simply walk away from 

the deal. 

Wire Transfer: Most Secure and Preferred Cash-in-Advance Method 

An international wire transfer is commonly used and is almost immediate. Exporters 

should provide clear routing instructions to the importer when using this method, including the receiving bank’s name and address, SWIFT (Society for Worldwide Interbank 

Financial Telecommunication) address, and ABA (American Banking Association) number, 

as well as the seller’s name and address, bank account title, and account number. This 

option is more costly to the importer than other cash-in-advance options as the fee for an 

international wire transfer is usually paid by the sender. 
6 

Credit Card: A Viable Cash-in-Advance Method 

Exporters who sell directly to foreign buyers may select credit cards as a viable cash-inadvance option, especially for consumer goods or small transactions. Exporters should 

check with their credit card companies for specific rules on international use of credit 

cards. The rules governing international credit card transactions differ from those for 

domestic use. Because international credit card transactions are typically placed using the 

Web, telephone, or fax, which facilitate fraudulent transactions, proper precautions should 

be taken to determine the validity of transactions before the goods are shipped. Although 

exporters must endure the fees charged by credit card companies and take the risk of 

unfounded disputes, credit cards may help business grow because of their convenience. 

Payment by Check: A Less-Attractive Cash-in-Advance Method 

Advance payment using an international check may result in a lengthy collection delay 

of several weeks to months. Therefore, this method may defeat the original intention of 

receiving payment before shipment. If the check is in U.S. dollars and drawn on a U.S. 

bank, the collection process is the same as for any U.S. check. However, funds deposited 

by non-local checks, especially those totaling more than $5,000 on any one day, may not 

become available for withdrawal for up to 10 business days due to Regulation CC of the 

Federal Reserve (§ 229.13 (ii)). In addition, if the check is in a foreign currency or drawn on 

a foreign bank, the collection process can become more complicated and can significantly 

delay the availability of funds. Moreover, if shipment is made before the check is collected, 

there is a risk that the check may be returned due to insufficient funds in the buyer’s 

account or even because of a stop-payment order. 

When to Use Cash-in-Advance Terms 

•	 The	importer	is	a	new	customer	and/or	has	a	less-established	operating	history.

•	 The	importer’s	creditworthiness	is	doubtful,	unsatisfactory,	or	unverifiable.

•	 The	political	and	commercial	risks	of	the	importer’s	home	country	are	very	high.

•	 The	exporter’s	product	is	unique,	not	available	elsewhere,	or	in	heavy	demand.

•	 	The	 exporter	 operates	 an	Internet-based	 business	 where	 the	 acceptance	 of	 credit	

card payments is a must to remain competitive. 

U.S. Department of Commerce 

International Trade Administration 
7 

TRADE FINANCE GUIDE 

Chapter 3 

Letters of Credit 

Letters of credit (LCs) are one of the most secure instruments available to international traders. An LC is a commitment by a bank on behalf of the buyer that payment 

will be made to the beneficiary (exporter) provided that the terms and conditions 

stated in the LC have been met, consisting of the presentation of specified documents. The 

buyer pays his bank to render this service. An LC is useful when reliable credit information about a foreign buyer is difficult to obtain, but the 

exporter is satisfied with the creditworthiness of the 

buyer’s foreign bank. This method also protects the buyer 

since the documents required to trigger payment provide 

evidence that the goods have been shipped or delivered 

as promised. However, because LCs have many opportunities for discrepancies, documents should be prepared 

by well-trained professionals or outsourced. Discrepant 

documents, literally not having an “i dotted and t 

crossed,” can negate the bank’s payment obligation. 

chArActeristics of A letter 

of credit 

Applicability 

Recommended	for	use	in	new	or	less-established	

trade relationships when the exporter is satisfied 

with the creditworthiness of the buyer’s bank. 

Risk 

Risk	is	evenly	spread	between	seller	and	buyer,	provided that all terms and conditions are adhered to. 

Pros 

•	 Payment	made	after	shipment

•	 A variety of payment, financing, and risk 

mitigation options available 

Cons 

•	 Complex and labor-intensive process 

•	 Relatively	expensive	method	in	terms	of	

transaction costs 

Key Points 

•	 An LC, also referred to as a documentary credit, is 

a contractual agreement whereby the issuing bank 

(importer’s bank), acting on behalf of its customer 

(the buyer or importer), authorizes the nominated 

bank (exporter’s bank), to make payment to the beneficiary or exporter against the receipt of stipulated 

documents. 

•	 The LC is a separate contract from the sales contract 

on which it is based; therefore, the bank is not concerned whether each party fulfills the terms of the 

sales contract. 

•	 The bank’s obligation to pay is solely conditioned 

upon the seller’s compliance with the terms and conditions of the LC. In LC transactions, banks deal in 

documents only, not goods. 

•	 LCs	can	be	arranged	easily	for	one-time	deals.

•	 Unless	the	conditions	of	the	LC	state	otherwise,	it	is	always	irrevocable,	which	means	

the document may not be changed or cancelled unless the seller agrees. 

Confirmed Letter of Credit 

A greater degree of protection is afforded to the exporter when an LC issued by a foreign 

bank (the importer’s issuing bank) is confirmed by a U.S. bank and the exporter asks its 

customer to have the issuing bank authorize a bank in the exporter’s country to confirm 

(the advising bank, which then becomes the confirming bank). This confirmation means 

that the U.S. bank adds its engagement to pay the exporter to that of the foreign bank. If an 

LC is not confirmed, the exporter is subject to the payment risk of the foreign bank and the 
8 

political risk of the importing country. Exporters should consider getting confirmed LCs 

if they are concerned about the credit standing of the foreign bank or when they are operating in a high-risk market, where political upheaval, economic collapse, devaluation or 

exchange controls could put the payment at risk. 

Illustrative Letter of Credit Transaction 

1. The importer arranges for the issuing bank to open an LC in favor of the exporter. 

2. The issuing bank transmits the LC to the nominated bank, which forwards it to
 

the exporter.
 

3. The exporter forwards the goods and documents to a freight forwarder. 

4. The freight forwarder dispatches the goods and submits documents to the
 

nominated bank.
 

5. The nominated bank checks documents for compliance with the LC and collects
 

payment from the issuing bank for the exporter.
 

6. The importer’s account at the issuing bank is debited. 

7. The issuing bank releases documents to the importer to claim the goods from the 


carrier and to clear them at customs.
 

Special Letters of Credit 

LCs can take many forms. When an LC is made transferable, the payment obligation under 

the original LC can be transferred to one or more “second beneficiaries.” With a revolving 

LC, the issuing bank restores the credit to its original amount each time it is drawn down. A 

standby LC is not intended to serve as the means of payment for goods but can be drawn in 

the event of a contractual default, including the failure of an importer to pay invoices when 

due. Standby LCs are often posted by exporters in favor of importers as well because they 

can serve as bid bonds, performance bonds, and advance payment guarantees. In addition, standby LCs are often used as counter guarantees against the provision of down payments and progress payments on the part of foreign buyers. A buyer may object to a seller’s 

request for a standby LC for two reasons: it ties up a portion of the seller’s line of credit and 

it is costly. 

Tips for Exporters 

•	 Consult	with	your	bank	before	the	importer	applies	for	an	LC.

•	 Consider	whether	a	confirmed	LC	is	needed.

•	 Negotiate	with	the	importer	and	agree	on	detailed	terms	to	be	incorporated	into	the	LC.

•	 Determine	if	all	LC	terms	can	be	met	within	the	prescribed	time	limits.

•	 Ensure	that	all	the	documents	are	consistent	with	the	terms	and	conditions	of	the	LC.

•	 Beware	of	many	discrepancy	opportunities	that	may	cause	non-payment	or	

delayed payment. 

U.S. Department of Commerce 

International Trade Administration 
9 

TRADE FINANCE GUIDE 

Chapter 4 

Documentary Collections 

chArActeristics of A 

documentAry collection 

Applicability 

Recommended	for	use	in	established	trade	

relationships and in stable export markets. 

Risk 

Riskier	for	the	exporter,	though	D/C	terms	are	more	

convenient and cheaper than an LC to the importer. 

Pros 

•	 Bank assistance in obtaining payment 

•	 The process is simple, fast, and less costly than LCs 

Cons 

•	 Banks’ role is limited and they do not 

guarantee payment 

•	 Banks do not verify the accuracy of the documents 

Adocumentary collection (D/C) is a transaction whereby the exporter entrusts the 

collection of a payment to the remitting bank (exporter’s bank), which sends documents to a collecting bank (importer’s bank), along with instructions for payment. 

Funds are received from the importer and remitted to the exporter through the banks in 

exchange for those documents. D/Cs involve using a draft that requires the importer to pa

the face amount either at sight (document against payment [D/P] or cash against documents) or on a specified 

date (document against acceptance [D/A] or cash against 

acceptance). The draft gives instructions that specify the 

documents required for the transfer of title to the goods. 

Although banks do act as facilitators for their clients under 

collections, D/Cs offer no verification process and limited 

recourse in the event of non-payment. Drafts are generally 

less expensive than letters of credit (LCs). 

y 

Key Points 

•	 D/Cs	are	less	complicated	and	less	expensive	than	LCs.

•	 Under	a	D/C	transaction,	the	importer	is	not	obligated	

to pay for goods before shipment. 

•	 The	exporter	retains	the	title	to	the	goods	until	the	

importer either pays the face amount at sight or 

accepts the draft to incur a legal obligation to pay at a 

specified later date. 

•	 Although	the	title	to	the	goods	can	be	controlled	

under ocean shipments, it cannot be controlled under 

air and overland shipments, which allow the foreign 

buyer to receive the goods with or without payment. 

•	 The	remitting	bank	(exporter’s	bank)	and	the	collecting	

bank (importer’s bank) play an essential role in D/Cs. 

•	 Although	the	banks	control	the	flow	of	documents,	

they neither verify the documents nor take any risks. They can, however, influence 

the mutually satisfactory settlement of a D/C transaction. 

When to Use Documentary Collections 

With D/Cs, the exporter has little recourse against the importer in case of non-payment. 

Thus, D/Cs should be used only under the following conditions: 

•	 The	exporter	and	importer	have	a	well-established	relationship.

•	 The	exporter	is	confident	that	the	importing	country	is	politically	and	

economically stable. 

•	 An	open	account	sale	is	considered	too	risky,	and	an	LC	is	unacceptable	to	

the importer. 
10 

Typical Simplified D/C Transaction Flow 

1. The exporter ships the goods to the importer and receives the documents in exchange. 

2. The exporter presents the documents with instructions for obtaining payment 


to his bank.
 

3. The exporter’s remitting bank sends the documents to the importer’s collecting bank. 

4. The collecting bank releases the documents to the importer on receipt of payment or 

acceptance of the draft. 

5. The importer uses the documents to obtain the goods and to clear them at customs. 

6. Once the collecting bank receives payment, it forwards the proceeds to the 


remitting bank.
 

7. The remitting bank then credits the exporter’s account. 

Documents against Payment Collection 

With a D/P collection, the exporter ships the goods and then gives the documents to his 

bank, which will forward the documents to the importer’s collecting bank, along with 

instructions on how to collect the money from the importer. In this arrangement, the collecting bank releases the documents to the importer only on payment for the goods. Once 

payment is received, the collecting bank transmits the funds to the remitting bank for payment to the exporter. Table 4.1 shows an overview of a D/P collection: 

Table 4.1. Overview of a D/P collection 

Time of Payment After shipment, but before documents are released 

Transfer of Goods After payment is made at sight 

Exporter Risk If draft is unpaid, goods may need to be disposed of or may be delivered without 

payment if documents do not control title. 

Documents Against Acceptance Collection 

With a D/A collection, the exporter extends credit to the importer by using a time draft. 

The documents are released to the importer to claim the goods upon his signed acceptance 

of the time draft. By accepting the draft, the importer becomes legally obligated to pay at 

a specific date. At maturity, the collecting bank contacts the importer for payment. Upon 

receipt of payment, the collecting bank transmits the funds to the remitting bank for payment to the exporter. Table 4.2 shows an overview of a D/A collection. 

Table 4.2. Overview of a D/A Collection 

Time of Payment On maturity of draft at a specified future date 

Transfer of Goods Before payment, but upon acceptance of draft 

Exporter Risk Has no control of goods and may not get paid at due date 

U.S. Department of Commerce 

International Trade Administration 
11 

TRADE FINANCE GUIDE 

Chapter 5 

Open Account 

An open account transaction is a sale where the goods are shipped and delivered 

before payment is due, which is usually in 30 to 90 days. Obviously, this option 

is the most advantageous to the importer in terms of cash flow and cost, but it is 

consequently the highest-risk option for an exporter. Because of intense competition in 

export markets, foreign buyers often press exporters for open account terms. In addition, 

the extension of credit by the seller to the buyer is more 

common abroad. Therefore, exporters who are reluctant 

to extend credit may lose a sale to their competitors. 

However, though open account terms will definitely 

enhance export competitiveness, exporters should thoroughly examine the political, economic, and commercial 

risks as well as cultural influences to ensure that payment will be received in full and on time. It is possible to 

substantially mitigate the risk of non-payment associated 

with open account trade by using such trade finance 

techniques as export credit insurance and factoring. 

Exporters may also seek export working capital financing 

to ensure that they have access to financing for production and for credit while waiting for payment. 

Key Points 

•	 The goods, along with all the necessary documents, 

are shipped directly to the importer who has agreed 

to pay the exporter’s invoice at a specified date, 

which is usually in 30 to 90 days. 

•	 The exporter should be absolutely confident that the 

importer will accept shipment and pay at the agreed 

time and that the importing country is commercially 

and politically secure. 

•	 Open account terms may help win customers in competitive markets and may be used with one or more 

of the appropriate trade finance techniques that 

mitigate the risk of non-payment. 

chArActeristics of An 

open Account 

Applicability 

Recommended	for	use	(a)	in	low-risk	trading	

relationships	or	markets	and	(b)	in	competitive	

markets to win customers with the use of one or 

more appropriate trade finance techniques. 

Risk 

Significant risk to exporter because the buyer could 

default on payment obligation after shipment of 

the goods. 

Pros 

•	 Boosts competitiveness in the global market 

•	 Helps establish and maintain a successful trade 

relationship 

Cons 

•	 Significant exposure to the risk of non-payment 

•	 Additional costs associated with risk mitigation 

measures 

How to Offer Open Account Terms in Competitive Markets 

Open account terms may be offered in competitive markets with the use of one or more of 

the following trade finance techniques: (a) export working capital financing, (b) government-guaranteed export working capital programs, (c) export credit insurance, and (d) 

export factoring. More detailed information on each trade finance technique is provided in 

Chapters 6 through 9 of this guide. 
12 

Export Working Capital Financing 

Exporters who lack sufficient funds to extend open accounts in the global market needs 

export working capital financing that covers the entire cash cycle, the from purchase of 

raw materials through the ultimate collection of the sales proceeds. Export working capital 

facilities, which are generally secured by personal guarantees, assets, or receivables, can 

be structured to support export sales in the form of a loan or a revolving line of credit. 

Government-Guaranteed Export Working Capital Programs 

The U.S. Small Business Administration and the Export–Import Bank of the United States 

offer programs that guarantee export working capital facilities granted by participating 

lenders to U.S. exporters. With those programs, U.S. exporters can obtain needed facilities 

from commercial lenders when financing is otherwise not available or when borrowing 

capacity needs to be increased. 

Export Credit Insurance 

Export credit insurance provides protection against commercial losses (such as default, 

insolvency, and bankruptcy) and political losses (such as war, nationalization, and currency inconvertibility). It allows exporters to increase sales by offering liberal open account 

terms to new and existing customers. Insurance also provides security for banks that are 

providing working capital and are financing exports. 

Export Factoring 

Factoring in international trade is the discounting of short-term receivables (up to 180 days). 

The exporter transfers title to short-term foreign accounts receivable to a factoring house, 

or a factor, for cash at a discount from the face value. It allows an exporter to ship on open 

account as the factor assumes the financial ability of the importer to pay and handles collections on the receivables. The factoring house usually works with exports of consumer goods. 

Trade Finance Technique Unavailable for Open Account Terms: 

Forfaiting 

Forfaiting is a method of trade financing that allows the exporter to sell medium-term 

receivables (180 days to 7 years) to the forfaiter at a discount, in exchange for cash. The 

forfaiter assumes all the risks, thereby enabling the exporter to offer extended credit terms 

and to incorporate the discount into the selling price. Forfaiters usually work with exports 

of capital goods, commodities, and large projects. Forfaiting was developed in Switzerland 

in the 1950s to fill the gap between the exporter of capital goods, who would not or could 

not deal on open account, and the importer, who desired to defer payment until the capital 

equipment could begin to pay for itself. More detailed information about forfaiting is provided in Chapter 10 of this guide. 

U.S. Department of Commerce 

International Trade Administration 
13 

TRADE FINANCE GUIDE 

Chapter 6 

Export Working Capital Financing
 

Export working capital (EWC) financing allows exporters to purchase the goods and 

services they need to support their export sales. More specifically, EWC facilities 

extended by commercial lenders provide a means for small and medium-sized 

enterprises (SMEs) that lack sufficient internal liquidity to process and acquire goods and 

services to fulfill export orders and to extend open account terms to their foreign buyers. 

EWC funds are commonly used to finance three different 

areas: (a) materials, (b) labor, and (c) inventory, but they 

can also be used to finance receivables generated from 

export sales and/or standby letters of credit used as performance bonds or payment guarantees to foreign buyers. 

An unexpected large export order or many incremental 

export orders can place challenging demands on working capital. EWC financing, which is generally secured 

by personal guarantees, assets, or high-value accounts 

receivable, helps to ease and stabilize cash-flow problems 

of exporters while they fulfill export sales and grow competitively in the global market. 

Key Points 

•	 Funds may be used to acquire materials, labor, 


inventory, goods, and services for export.
 

•	 A facility can support a single export transaction 

(transaction-specific short-term loan) or multiple 

export transactions (revolving line of credit) on open 

account terms. 

•	 A transaction-specific loan is generally up to one year, 

and a revolving line of credit may extend up to three 

years. 

•	 Availability is generally limited to financially-stable 

large corporations or established SMEs with access 

to strong personal guarantees, assets, or high-value 

accounts receivable. 

•	 A government guarantee may be needed to obtain a 

facility that can meet export needs. 

•	 Exporters	may	need	risk	mitigation	to	offer	open	account	terms	confidently	

in the global market. 

chArActeristics 

of An export WorkinG 

cApitAl fAcility 

Applicability 

Used to purchase raw materials, supplies, and equipment to fulfill a large export sales order or many 

small export sales orders. 

Risk 

Significant risk of non-payment for exporter unless 

proper risk mitigation measures are used. 

Pros 

•	 Allows fulfillment of export sales orders 

•	 Allows exporter to offer open account terms to 

remain competitive 

Cons 

•	 Generally available only to SMEs with access to 

strong personal guarantees, assets, or high-value 

receivables 

•	 Additional costs associated with risk mitigation 

measures 

Where and How to Obtain an Export Working Capital Facility 

Many commercial banks and lenders offer facilities for export activities. To qualify, exporters generally need (a) to be in business profitably for at least 12 months (not necessarily in 

exporting), (b) to demonstrate a need for transaction-based financing, and (c) to provide 

documents to demonstrate that a viable transaction exists. Note that personal guarantees, collateral assets, or high-value accounts receivable are generally required for SMEs 

to obtain commercial EWC facilities. The lender may place a lien on the exporter’s assets, 
14 

such as inventory and accounts receivable, to ensure repayment of a loan. In addition, all 

export sales proceeds will usually be collected by the lender before the balance is passed 

on to the exporter. Fees and interest rates are usually negotiable between the lender and 

the exporter. 

Short-Term Loans or Revolving Lines of Credit 

Basically, there are two types of EWC facilities: transaction-specific short-term loans and 

revolving lines of credit. Short-term loans, which are appropriate for large and periodic 

export orders, are typically if the outflows and inflows of funds are predictable over time. 

Short-term loans can be contracted for 3, 6, 9, or 12 months, and the interest rates are usually 

fixed over the requested tenors. Revolving lines of credit, however, are appropriate for a series 

of small export orders because they are designed to cover temporary funding needs that 

cannot always be anticipated. Revolving lines of credit have a very flexible structure so that 

exporters can draw funds against current account at any time and up to a specified limit. 

Why a Government Guarantee May Be Needed 

The U.S. Small Business Administration and the Export–Import Bank of the United States 

offer programs that guarantee EWC facilities to U.S. exporters. These programs allow U.S. 

exporters to obtain needed facilities from participating lenders when commercial financing is otherwise not available or when their borrowing capacity needs to be increased. 

Advance rates offered by commercial banks on export inventory and foreign accounts 

receivables are not always sufficient to meet the needs of exporters. In addition, some lenders do not lend to exporters without a government guarantee due to repayment risks associated with export sales. More detailed information is provided in Chapter 7. 

Why Risk Mitigation May Be Needed 

Although EWC financing certainly makes it possible for exporters to offer open account terms 

in today’s highly competitive global markets, the use of such financing does not necessarily 

eliminate the risk of non-payment by foreign customers. Some forms of risk mitigation may 

be needed in order to offer open account terms more confidently in the global market and to 

obtain EWC financing. For example, a lender may require an exporter to obtain export credit 

insurance as a condition of providing working capital and financing exports. 

U.S. Department of Commerce 

International Trade Administration 
15 

TRADE FINANCE GUIDE 

Chapter 7 

Government-Guaranteed Export 


Working Capital Loan Programs
 

Financing offered by commercial lenders on export inventory and foreign accounts 

receivables is not always sufficient to meet the needs of U.S. exporters. Early-stage 

small and medium-sized exporters are usually not eligible for commercial financing 

without a government guarantee. In addition, commercial lenders are generally reluctant 

to extend credit due to the repayment risk associated with export sales. In such cases, government-guaranteed export working capital (EWC) loans 

can provide the exporter with the liquidity to accept new 

business, can help grow U.S. export sales, and can let U.S. 

firms compete more effectively in the global marketplace. 

Two U.S. government agencies—the U.S. Small Business 

Administration (SBA) and the Export–Import Bank of 

the United States (Ex–Im Bank)—offer loan guarantees 

to participating lenders for making export loans to U.S. 

businesses. Both agencies focus on export trade financing, with SBA typically handling facilities up to $2 million 

and Ex–Im Bank processing facilities of all sizes. Through 

government-guaranteed EWC loans, U.S. exporters can 

obtain financing from participating lenders when commercial financing is otherwise not available or when their 

borrowing needs are greater than the lenders’ credit standards would allow. 

Key Points 

•	 The loan expands access to EWC for supplier financing and production costs. 

•	 The loan maximizes the borrowing base by turning 

export inventory and accounts receivable into cash. 

•	 Risk mitigation may be needed to offer open account 

terms confidently in the global market. 

•	 SBA’s	 EWC	 loan	 is	 appropriate	 for	 U.S.	 small-sized	

businesses and has credit lines up to $2 million. 

•	 Ex–Im	Bank’s	EWC	loan	is	available	to	all	U.S.	businesses, including small and medium-sized exporters, 

and has credit lines of all sizes. 

chArActeristics of A 

Government-GuArAnteed 

export WorkinG cApitAl 

loAn 

Applicability 

Recommended	when	commercial	financing	is	

otherwise not available or when pre-approved 

borrowing capacity is not sufficient. 

Risk 

Exposure of exporter to the risk of non-payment 

without the use of proper risk mitigation measures. 

Pros 

•	 Encourages lenders to offer financing 

to exporters 

•	 Enables lenders to offer generous advance rates 

Cons 

•	 Cost of obtaining and maintaining a 

guaranteed facility 

•	 	Additional	costs	associated	with	risk	mitigation	

measures 

Comparison: Commercial Facility versus GovernmentGuaranteed Facility 

Table 7.1 is an example of how a government-guaranteed export loan from a lender participating with SBA or Ex–Im Bank can increase your borrowing base against your total collateral value. Advance rates may vary depending on the quality of the collateral offered. 
U.S. Department of Commerce 

International Trade Administration 

16 

Table 7.1. Commercial Facility versus Government-Guaranteed Facility 

Borrow up to $1.65 million against Commercial Facility Without a Commercial Facility With a 

your collateral value of $2 million Government Guarantee Government Guarantee 

COLLATERAL VALUE Advance Borrowing Base Advance Borrowing Base 

Export inventory 

Raw materials $200,000 20% $40,000 75% $150,000 

Work-in-process $200,000 0% $0 75% $150,000 

Finished goods $600,000 50% $300,000 75% $450,000 

Export accounts receivable 

On open account $400,000 0% $0 90% $360,000 

By letter of credit $600,000 70% $420,000 90% $540,000 

Total collateral value $2,000,000 

Total borrowing base $760,000 $1,650,000 

Key Features of the SBA’s Export Working Capital Program 

• Exporters must meet SBA eligibility and size standards. 

• There is no application fee and no restrictions regarding foreign content or military sales.1 

•	 A 0.25 percent upfront facility fee is based on the guaranteed portion of a loan of 


12 months or fewer.
 

• Fees and interest rates charged by the commercial lender are negotiable. 

•	 The “Export Express” pilot program can provide exporters and lenders a streamlined 

method to obtain SBA-backed financing for EWC loans of up to $250,000. With an 

expedited eligibility review, a response may be obtained in fewer than 24 hours. 

For more information, visit the SBA Web site at www.sba.gov and click on the dropdown menu 

for SBA Programs and select “International Trade” or call 1-800-U-ASK-SBA (8-275-722). 

Key Features of Ex–Im Bank’s Export Working Capital Program 

•	 Exporters	must	adhere	to	the	Bank’s	requirements	for	content,	non-nuclear	uses,	nonmilitary uses, and environmental and economic impact and to the Country Limitation 

Schedule. 

•	 There	is	a	non-refundable	$100	application	fee.

•	 A	1.5	percent	upfront	facility	fee	is	based	on	the	total	loan	amount	and	a	one-year	loan	

but may be reduced to 1 percent with export credit insurance and if designated requirements are met. 

•	 Fees	and	interest	rate	charged	by	the	commercial	lender	are	usually	negotiable.

•	 Enhancements	are	available	for	minority-	or	woman-owned,	rural	and	environmental	firms.

For more information, visit the Ex–Im Bank Web site at www.exim.gov or call 

1-800-565-EXIM (3946). 

Why Risk Mitigation May Be Needed 

Government guarantees on export loans do not make exporters immune to the risk of nonpayment by foreign customers. Rather, the government guarantee provides lenders with 

an incentive to offer financing by reducing the lender’s risk exposure. Exporters may need 

some form of risk mitigation, such as export credit insurance, to offer open account terms 

more confidently. 

1 SBA encourages the use of American-made products, if feasible. Borrowers must comply with all export control requirements. 
17 

TRADE FINANCE GUIDE 

Chapter 8 

Export Credit Insurance 

E

chArActeristics of export 

credit insurAnce 

Applicability 

Recommended	for	use	in	conjunction	with	open	

account terms and export working capital financing. 

Risk 

Risk	of	uncovered	portion	of	the	loss	shared	by	

exporters, and their claims may be denied in case of 

non-compliance with requirements specified in 

the policy. 

Pros 

•	 Reduces	the	risk	of	non-payment	by	foreign	

buyers 

•	 Offer open account terms safely in the 

global market 

Cons 

•	 Cost of obtaining and maintaining an 

insurance policy 

•	 Risk	sharing	in	the	form	of	a	deductible	(coverage	

is	usually	below	100	percent)

xport credit insurance (ECI) protects an exporter of products and services against the 

risk of non-payment by a foreign buyer. In other words, ECI significantly reduces the 

payment risks associated with doing international business by giving the exporter 

conditional assurance that payment will be made if the foreign buyer is unable to pay. 

Simply put, exporters can protect their foreign receivables against a variety of risks that 

could result in non-payment by foreign buyers. ECI generally covers commercial risks, such as insolvency of the 

buyer, bankruptcy, or protracted defaults (slow payment), 

and certain political risks such as war, terrorism, riots, 

and revolution. ECI also covers currency inconvertibility, 

expropriation, and changes in import or export regulations. ECI is offered either on a single-buyer basis or on a 

portfolio multi-buyer basis for short-term (up to one year) 

and medium-term (one to five years) repayment periods. 

Key Points 

•	 ECI allows exporters to offer competitive open 

account terms to foreign buyers while minimizing 

the risk of non-payment. 

•	 Even creditworthy buyers could default on payment 

due to circumstances beyond their control. 

•	 With reduced non-payment risk, exporters can 

increase export sales, establish market share in 

emerging and developing countries, and compete 

more vigorously in the global market. 

•	 When foreign accounts receivables are insured, lenders are more willing to increase the exporter’s borrowing capacity and to offer attractive financing terms. 

Coverage 

Short-term ECI, which provides 90 to 95 percent coverage against commercial and political risks that result in 

buyer payment defaults, typically covers (a) consumer goods, materials, and services up to 

180 days, and (b) small capital goods, consumer durables, and bulk commodities up to 360 

days. Medium-term ECI, which provides 85 percent coverage of the net contract value, usually covers large capital equipment up to five years. ECI, which is often incorporated into 

the selling price, should be a proactive purchase exporters already have coverage before a 

customer becomes a problem. 

Where Can I Get Export Credit Insurance? 

ECI policies are offered by many private commercial risk insurance companies as well as 

the Ex–Im Bank, which is the government agency that assists in financing the export of 

U.S. goods and services to international markets. U.S. exporters are strongly encouraged to 
shop for a good specialty insurance broker who can help them select the most cost-effective 

solution for their needs. Reputable, well-established companies that sell commercial ECI 

policies are easily found on the Internet. You may also buy ECI policies directly from Ex–Im 

Bank. In addition, a list of active insurance brokers registered with Ex–Im Bank is available 

at www.exim.gov or you can call 1-800-565-EXIM (3946) for more information. 

Private-Sector Export Credit Insurance 

•	 Premiums	are	individually	determined	on	the	basis	of	risk	factors	and	may	be	reduced	

for established and experienced exporters. 

•	 Most	 multi-buyer	 policies	 cost	 less	 than	 1	 percent	 of	 insured	 sales,	 whereas	 the	

prices of single-buyer policies vary widely due to presumed higher risk. 

•	 The	cost	in	most	cases	is	significantly	less	than	the	fees	charged	for	letters	of	credit.	

•	 There	are	no	restrictions	regarding	foreign	content	or	military	sales.

Ex–Im Bank’s Export Credit Insurance 

•	 Ex–Im	Bank	customers	are	advised	to	refer	to	the	Exposure	Fee	Advice	Tables	(which	

are posted on the bank’s Web site www.exim.gov under the “Tools” section) to determine exposure fees (premiums). 

•	 Coverage	is	available	in	riskier	emerging	foreign	markets	where	private	insurers	

may not operate. 

•	 Exporters	electing	an	Ex–Im	Bank	working	capital	guarantee	may	receive	a	25	percent premium discount on multi-buyer insurance policies. 

•	 Enhanced	support	is	offered	for	environmentally	beneficial	exports.

•	 Products	must	be	shipped	from	the	United	States	and	have	at	least	50	percent	U.S.	

content. 

•	 Ex–Im	Bank	is	unable	to	support	military	products	or	purchases	made	by	foreign	

military entities. 

•	 Support	for	exports	may	be	closed	or	restricted	in	certain	countries	for	U.S.	government policy reasons (for more information, see the Country Limitation Schedule 

posted on the bank’s Web site under the “Tools” section). 

U.S. Department of Commerce 

International Trade Administration 

18 
19 

TRADE FINANCE GUIDE 

Chapter 9 

Export Factoring 

E

chArActeristics 


of export fActorinG
 

Applicability 

Ideal	for	an	established	exporter	who	wants	(a)	to	

have the flexibility to sell on open account terms, 

(b)	to	avoid	incurring	any	credit	losses,	or	(c)	to	outsource credit and collection functions. 

Risk 

Risk	inherent	in	an	export	sale	virtually	eliminated.

Pros 

•	 Eliminates the risk of non-payment by foreign 

buyers 

•	 Maximizes cash flows 

Cons 

•	 More costly than export credit insurance 

•	 Generally not available in developing countries 

xport factoring is a complete financial package that combines export working capital 

financing, credit protection, foreign accounts receivable bookkeeping, and collection 

services. A factoring house, or factor, is a bank or specialized financial firm that performs financing through the purchase of invoices or accounts receivable. Export factoring is 

offered under an agreement between the factor and exporter, in which the factor purchases 

the exporter’s short-term foreign accounts receivable for 

cash at a discount from the face value, normally without recourse. It also assumes the risk on the ability of 

the foreign buyer to pay, and handles collections on the 

receivables. Thus, by virtually eliminating the risk of nonpayment by foreign buyers, factoring allows the exporter 

to offer open accounts, improves liquidity position, 

and boosts competitiveness in the global marketplace. 

Factoring foreign accounts receivables can be a viable 

alternative to export credit insurance, long-term bank 

financing, expensive short-term bridge loans or other 

types of borrowing that create debt on the balance sheet. 

Key Points 

•	 Factoring is recommended for continuous short-term 

export sales of consumer goods on open accounts. 

•	 It offers 100 percent protection against the foreign 

buyer’s inability to pay — with no deductible or 

risk sharing. 

•	 It is an attractive option for small and mediumsized exporters, particularly during periods of rapid 

growth, because cash flow is preserved and risk is 

virtually eliminated. 

•	 It is unsuitable for the new-to-export company as 

factors generally (a) do not take on a client for a onetime deal and (b) require access to a certain volume of the exporter’s yearly sales. 

How Does Export Factoring Work? 

The exporter signs an agreement with the export factor who selects an import factor 

through an international correspondent factor network, who then investigates the foreign 

buyer’s credit standing. Once credit is approved locally, the foreign buyer places orders for 

goods on open account. The exporter then ships the goods and submits the invoice to the 

export factor, who then passes it to the import factor. The import factor then handles the 

local collection and payment of the accounts receivable. During all stages of the transaction, records are kept for the exporter’s bookkeeping. 
20 

Two Common Export Factoring Financing Arrangements 

and Their Costs 

In discount factoring, the factor issues an advance of funds against the exporter’s receivables until money is collected from the importer. The cost is variable, depending on the time 

frame and the dollar amount advanced. In collection factoring, the factor pays the exporter 

(less a commission charge) when receivables are at maturity, regardless of the importer’s 

financial ability to pay. The cost is fixed, and usually ranges between 1 and 4 percent, 

depending on the country, sales volume, and amount of paperwork. However, as a rule of 

thumb, export factoring usually costs about twice as much as export credit insurance. 

Limitations of Export Factoring 

• It exists in countries with laws that support the buying and selling of receivables. 

•	 It generally does not work with foreign account receivables that have more than 


180-day terms.
 

• It may be cost prohibitive for exporters with tight profit margins. 

Export Factoring Industry Profile 

Although U.S. export factors have traditionally focused on specific market sectors such as 

textiles and apparel, footwear, and carpeting, they are now working with more diversified 

products. Today, U.S. exporters who use export factoring are manufacturers, distributors, 

wholesalers, or service firms with sales ranging from $5 million to $200 million. Factoring 

is also a valuable financial tool for larger U.S. corporations to manage their balance sheets. 

International factoring in the United States is now worth more than $6 billion annually, 

greatly contributing to the growth in U.S. exports. 

Where to Find a Factor 

The international factoring business involves networks, which are similar to correspondents in the banking industry. There are two sources for global networks: Factors 

Chain International (FCI) and International Factors Group (IFG). FCI is located in the 

Netherlands, and their Web site is www.factors-chain.com. IFG is located in Belgium, and 

their Web site is www.ifg-group.com. Another useful source is the International Factoring 

Association (IFA), which is the world’s largest association of financial firms that offer factoring services. The IFA is located in Pismo Beach, California, and their Web site is www. 

factoring.org. 

U.S. Department of Commerce 

International Trade Administration 
21 

TRADE FINANCE GUIDE 

Chapter 10 

Forfaiting 

F

chArActeristics of 

forfAitinG 

Applicability 

Ideal for exports of capital goods, commodities, and 

large	projects	on	medium-term	credit	(180	days	to	

seven	years).

Risk 

Risk	inherent	in	an	export	sale	is	virtually	eliminated.

Pros 

•	 Eliminates the risk of non-payment by foreign 

buyers 

•	 Offers strong capabilities in emerging and 

developing markets 

Cons 

•	 Cost is often higher than commercial lender 

financing 

•	 Limited to medium-term transactions and those 

exceeding $100,000 

orfaiting is a method of trade finance that allows exporters to obtain cash by selling their medium-term foreign accounts receivable at a discount on a “without 

recourse” basis. A forfaiter is a specialized finance firm or a department in a bank 

that performs non-recourse export financing through the purchase of medium-term trade 

receivables. Similar to factoring, forfaiting virtually eliminates the risk of non-payment, 

once the goods have been delivered to the foreign buyer 

in accordance with the terms of sale. However, unlike 

factors, forfaiters typically work with exporters who sell 

capital goods, commodities, or large projects and needs 

to offer periods of credit from 180 days to seven years. In 

forfaiting, receivables are normally guaranteed by the 

importer’s bank, which allows the exporter to take the 

transaction off the balance sheet to enhance key financial ratios. The current minimum transaction size for 

forfaiting is $100,000. In the United States, most users of 

forfaiting are large established corporations, but small 

and medium-sized companies are slowly embracing 

forfaiting as they become more aggressive in seeking 

financing solutions for countries considered high risk. 

Key Points 

•	 Forfaiting eliminates virtually all risk to the exporter, 

with 100 percent financing of contract value. 

•	 Exporters can offer medium-term financing in markets where the credit risk would otherwise be too high. 

•	 Forfaiting generally works with bills of exchange, 

promissory notes, or a letter of credit. 

•	 The exporter is normally required to obtain a bank 

guarantee for the foreign buyer. 

•	 Financing can be arranged on a one-shot basis in any 

of the major currencies, usually at a fixed interest rate, 

but a floating rate option is also available. 

•	 Forfaiting	 can	be	used	 in	 conjunction	with	 officially	 supported	 credits	backed	by	

export credit agencies, such as the Export–Import Bank of the United States. 

How Forfaiting Works 

The exporter approaches a forfaiter before finalizing a transaction’s structure. Once the 

forfaiter commits to the deal and sets the discount rate, the exporter can incorporate the 

discount into the selling price. The exporter then accepts a commitment issued by the 

forfaiter, signs the contract with the importer, and obtains, if required, a guarantee from 

the importer’s bank that provides the documents required to complete the forfaiting. The 

exporter delivers the goods to the importer and delivers the documents to the forfaiter who 

verifies them and pays for them as agreed in the commitment. Since this payment is with­
out recourse, the exporter has no further interest in the transaction and it is the forfaiter 

who must collect the future payments due from the importer. 

Cost of Forfaiting 

The cost of forfaiting is determined by the rate of discount based on the aggregate of the 

LIBOR (London inter bank offered rate) rates for the tenor of the receivables and a margin 

reflecting the risk being sold. The degree of risk varies based on the importing country, the 

length of the loan, the currency of transaction, and the repayment structure—the higher 

the risk, the higher the margin and, therefore, the discount rate. However, forfaiting can be 

more cost-effective than traditional trade finance tools because of many attractive benefits 

it offers to the exporter. 

Three Additional Major Advantages of Forfaiting 

Volume: Forfaiting can work on a one-shot deal, without requiring an ongoing volume of business. 

Speed: Commitments can be issued within hours or days depending on details and country. 

Simplicity: Documentation is usually simple, concise, and straightforward. 

Forfaiting Industry Profile 

Forfaiting was developed in Switzerland in the 1950s to fill the gap between the exporter 

of capital goods, who would not or could not deal on open account, and the importer, who 

desired to defer payment until the capital equipment could begin to pay for itself. Although 

the number of forfaiting transactions is growing worldwide, industry sources estimate that 

only 2 percent of world trade is financed through forfeiting. U.S. forfaiting transactions 

account for only 3 percent of that volume. Forfaiting firms have opened around the world, 

but the Europeans maintain a hold on the market, including in North America. Although 

these firms remain few in number in the United States, the innovative financing they provide should not be overlooked as a viable means of export finance for U.S. exporters. 

Where to Find a Forfaiter 

The Association of Trade & Forfaiting in the Americas, Inc. (ATFA) and the International 

Forfaiting Association (IFA) are useful sources for locating forfaiters willing to finance 

exports. ATFA and IFA are associations of financial institutions dedicated to promoting 

international trade finance through forfaiting. ATFA is located in New York, and its Web 

site is www.afia-forfaiting.org. IFA is located in Switzerland and its Web site is www.forfaiters.org. 

U.S. Department of Commerce 

International Trade Administration 

22 
23 

TRADE FINANCE GUIDE 

Chapter 11 

Government-Assisted Foreign 

Buyer Financing 

I

chArActeristics of 

Government-Assisted 

foreiGn Buyer finAncinG 

Applicability 

Suitable for the export of high-value capital goods 

or	services	or	large-scale	projects	that	require	

extended-term financing. 

Risk 

Risk	is	transferred	to	Ex–Im	Bank	and	to	the	foreign	

buyer	who	 is	required	to	 make	 a	 15	 percent	 down	

payment to the exporter. 

Pros 

•	 Buyer financing as part of an attractive sales 

package 

•	 Cash payment upon shipment of the goods 

or services 

Cons 

•	 Subject	to	certain	restrictions	for	U.S.	

government policy reasons 

•	 Possible	lengthy	process	of	approving	financing

nternational sales of high-value capital goods or services and exports to large-scale 

projects, which require medium- or long-term financing, often pose special challenges 

to exporters as commercial lenders may be reluctant to lend large sums to foreign buyers, especially those in developing countries, for extended periods. One viable solution 

to these challenges is foreign buyer financing offered by the Export–Import Bank of the 

United States (Ex–Im Bank). As the official U.S. export 

credit agency, Ex–Im Bank supports the purchases of U.S. 

goods and services by creditworthy foreign buyers who 

are unable to obtain financing they need through traditional commercial sources. Ex–Im Bank does not compete 

with commercial lenders but provides products that fill 

gaps in trade financing by assuming country and credit 

risks that the private sector is unable or unwilling to 

accept. With Ex–Im Bank’s foreign buyer financing, U.S. 

exporters can turn their business opportunities into real 

transactions and get paid cash on delivery and acceptance of the goods or services. 

Key Points 

•	 Government-assisted foreign buyer financing helps 

turn export opportunities, especially in high-risk 

emerging markets, into real transactions for large U.S. 

corporations and established medium-sized companies, as well as for their small business suppliers. 

•	 Creditworthy foreign buyers can obtain loans needed 

for purchases of U.S. goods and services, especially 

high-value capital goods or services and exports to 

large-scale projects. 

•	 This type of financing provides direct loans to foreign buyers at a fixed rate or provides guarantees for 

term financing offered by commercial lenders. 

•	 Financing is available for medium-term 


(up to 5 years) and long-term (generally up to 10 


years) transactions.
 

Key Common Features of Ex-Im Bank’s Loan Guarantees 

and Direct Loans 

Ex–Im Bank assists U.S. exporters by providing direct loans or by guaranteeing commercial 

loans to creditworthy foreign buyers for purchases of U.S. goods and services. They are 

generally used to finance the purchase of high-value capital equipment or services or 

exports to large-scale projects that require medium- or long-term financing. Ex–Im Bank’s 
foreign buyer financing is also used to finance the purchase of refurbished equipment, 

software, and certain banking and legal fees, as well as some local costs and expenses. 

There is no minimum or maximum limit to the size of the export sale that may be 

supported by the bank’s foreign buyer financing. Ex–Im Bank requires the foreign buyer 

to make a cash payment to the exporter equal to at least 15 percent of the U.S. supply 

contract. Repayment terms of up to five years are available for exports of capital goods and 

services. Transportation equipment and exports to large-scale projects may be eligible 

for repayment terms up to 10 years (12 to 15 years for certain sectors). Military items are 

generally not eligible for Ex–Im Bank financing nor are sales to foreign military entities. In 

addition, goods must meet the bank’s foreign content requirements. Finally, Ex–Im Bank 

financing may not be available in certain countries and certain terms for U.S. government 

policy reasons (for more information, see the Country Limitation Schedule posted on the 

bank’s Web site, www.exim.gov, under the “Tools” section). 

Key Features of Ex-Im Bank Loan Guarantees 

• Loans are made by commercial banks and guaranteed by Ex–Im Bank. 

•	 Loans cover 100 percent principal and interest for 85 percent of the U.S. 


contract price.
 

• Interest rates are negotiable, and are usually floating and lower than fixed rates. 

•	 Loans are fully transferable, can be securitized, and are available in certain 


foreign currencies.
 

•	 Loans have a faster documentation process with the assistance of 


commercial banks.
 

• Cash payment financing is promoted. 

• There are no U.S. vessel shipping regulations for amounts less than $20 million. 

Key Features of Ex-Im Bank Direct Loans 

• Fixed-rate loans are provided directly to creditworthy foreign buyers. 

• Loans support 85 percent of the U.S. contract price. 

• Exporters will be paid in full upon disbursement of a loan to foreign buyers.

• Generally, the goods must be carried exclusively on U.S. vessels. 

• Loans are best used when the buyer insists on a fixed rate. 

Fees and Ex-Im Bank Contact Information 

•	 Letter	of	interest—$100

•	 Preliminary	commitment—0.1	of	1	percent	of	the	financed	amount	up	to	$25,000

•	 Guarantee	commitment—0.125	percent	per	year	on	the	undisbursed	balance	of	the	loan

•	 Direct	loan	commitment—0.5	percent	per	year	on	the	undisbursed	balance	of	the	loan

•	 Exposure	fee—varies,	depending	on	tenor,	country	risk,	and	buyer	credit	risk

For more information about loans from the Ex–Im Bank, visit its Web site at www.exim.gov 

or call 1-800-565-EXIM (3946). 

U.S. Department of Commerce 

International Trade Administration 

24 
25 

TRADE FINANCE GUIDE 

Chapter 12 

Foreign Exchange Risk 

Management 

Foreign exchange (FX) is a risk factor that is often overlooked by small and mediumsized enterprises (SMEs) that wish to enter, grow, and succeed in the global marketplace. Although most U.S. SME exporters prefer to sell in U.S. dollars, creditworthy 

foreign buyers today are increasingly demanding to pay in their local currencies. From the

viewpoint of a U.S. exporter who chooses to sell in foreign 

currencies, FX risk is the exposure to potential financial 

losses due to devaluation of the foreign currency against 

the U.S. dollar. Obviously, this exposure can be avoided 

by insisting on selling only in U.S. dollars. However, such 

an approach may result in losing export opportunities to 

competitors who are willing to accommodate their foreign 

buyers by selling in their local currencies. This approach 

could also result in the non-payment by a foreign buyer 

who may find it impossible to meet U.S. dollar-denominated payment obligations due to the devaluation of the 

local currency against the U.S. dollar. While coverage for 

non-payment could be covered by export credit insurance, 

such “what-if” protection is meaningless if export opportunities are lost in the first place because of the “payment 

in U.S. dollars only” policy. Selling in foreign currencies, if 

FX risk is successfully managed or hedged, can be a viable 

option for U.S. exporters who wish to enter and remain 

competitive in the global marketplace. 

Key Points 

•	 Most	foreign	 buyers	generally	 prefer	 to	 trade	in	 their	

local currencies to avoid FX risk exposure. 

•	 U.S.	 SME	 exporters	 who	 choose	 to	 trade	 in	 foreign	

currencies can minimize FX exposure by using one 

of the widely-used FX risk management techniques 

available in the United States. 

•	 The	volatile	nature	of	the	FX	market	poses	a	great	risk	

of sudden and drastic FX rate movements, which may 

cause significantly damaging financial losses from 

otherwise profitable export sales. 

•	 The	 primary	 objective	 of	 FX	risk	 management	 is	 to	 minimize	 potential	 currency	

losses, not to make a profit from FX rate movements, which are unpredictable and 

frequent. 

chArActeristics of A 

foreiGn currency

dominAted export sAle 

Applicability 

Recommended	for	use	(a)	in	competitive	markets	

and	(b)	when	foreign	buyers	insist	on	trading	in	

their local currencies. 

Risk 

Exporter exposed to the risk of currency exchange 

loss unless a proper FX risk management technique 

is used. 

Pros 

•	 Enhances export sales terms to help exporters 

remain competitive 

•	 Reduces	non-payment	risk	because	of	local	

currency devaluation 

Cons 

•	 Cost of using some FX risk management 

techniques 

•	 Burden of FX risk management 

­
FX Risk Management Options 

A variety of options are available for reducing short-term FX exposure. The following sections list FX risk management techniques considered suitable for new-to-export U.S. SME 

companies. The FX instruments mentioned below are available in all major currencies and 

are offered by numerous commercial lenders. However, not all of these techniques may be 

available in the buyer’s country or they may be too expensive to be useful. 

Non-Hedging FX Risk Management Techniques 

The exporter can avoid FX exposure by using the simplest non-hedging technique: price 

the sale in a foreign currency. The exporter can then demand cash in advance, and the current spot market rate will determine the U.S. dollar value of the foreign proceeds. A spot 

transaction is when the exporter and the importer agree to pay using today’s exchange rate 

and settle within two business days. Another non-hedging technique is to net out foreign 

currency receipts with foreign currency expenditures. For example, the U.S. exporter who 

exports in pesos to a buyer in Mexico may want to purchase supplies in pesos from a different Mexican trading partner. If the company’s export and import transactions with Mexico 

are comparable in value, pesos are rarely converted into dollars, and FX risk is minimized. 

The risk is further reduced if those peso-denominated export and import transactions are 

conducted on a regular basis. 

FX Forward Hedges 

The most direct method of hedging FX risk is a forward contract, which enables the 

exporter to sell a set amount of foreign currency at a pre-agreed exchange rate with a 

delivery date from three days to one year into the future. For example, suppose U.S. goods 

are sold to a Japanese company for 125 million yen on 30-day terms and that the forward 

rate for “30-day yen” is 125 yen to the dollar. The U.S. exporter can eliminate FX exposure 

by contracting to deliver 125 million yen to his bank in 30 days in exchange for payment 

of $1 million dollars. Such a forward contract will ensure that the U.S. exporter can convert the 125 million yen into $1 million, regardless of what may happen to the dollar-yen 

exchange rate over the next 30 days. However, if the Japanese buyer fails to pay on time, 

the U.S. exporter will be obligated to deliver 125 million yen in 30 days. Accordingly, when 

using forward contracts to hedge FX risk, U.S. exporters are advised to pick forward delivery dates conservatively. If the foreign currency is collected sooner, the exporter can hold 

on to it until the delivery date or can “swap” the old FX contract for a new one with a new 

delivery date at a minimal cost. Note that there are no fees or charges for forward contracts 

since the lender hopes to make a “spread” by buying at one price and selling to someone 

else at a higher price. 

FX Options Hedges 

If there is serious doubt about whether a foreign currency sale will actually be completed 

and collected by any particular date, an FX option may be worth considering. Under an 

FX option, the exporter or the option holder acquires the right, but not the obligation, to 

deliver an agreed amount of foreign currency to the lender in exchange for dollars at a 

specified rate on or before the expiration date of the option. As opposed to a forward contract, an FX option has an explicit fee, which is similar to a premium paid for an insurance 

policy. If the value of the foreign currency goes down, the exporter is protected from loss. 

On the other hand, if the value of the foreign currency goes up significantly, the exporter 

can sell the option back to the lender or simply let it expire by selling the foreign currency 

on the spot market for more dollars than originally expected, but the fee would be forfeited. 

While FX options hedges provide a high degree of flexibility, they can be significantly more 

costly than FX forward hedges. 

U.S. Department of Commerce 

International Trade Administration 

26 

The International Trade Administration’s mission is to create prosperity by 

strengthening the competitiveness of U.S. industry, promoting trade and investment, and ensuring fair trade and compliance with trade laws and agreements. 

Manufacturing and Services 

Office of Finance 

1401 Constitution Ave., NW 

Washington, DC 20230 

T 202.482.3277 

F 202.482.5702 

www.trade.gov 

April	2008