Letters from the GFC
Consider this situation: you’re a growing small business producing machinery for a niche industry. You have a keen overseas buyer, but there are two obstacles to closing the deal. One, your buyer proposes to make payment by documentary letter of credit, but your Australian bank won’t confirm a letter of credit issued by the buyer’s overseas bank. Two, because of the high cost of the machine, the buyer wants to spread their payments over a number of years. This isn’t feasible, as it would put too much strain on your working capital.
The current uncertain economic environment sees a tight credit market with banks averse to risk; this is reflected in an unwillingness to confirm letters of credit issued by banks they are unfamiliar with, or in jurisdictions they consider higher risk. There is also a growing reluctance among banks to confirm letters of credit that have a term of more than a few months.
In this case, EFIC can issue a documentary credit guarantee to your bank. This means EFIC takes on the risk that the buyer’s bank won’t pay your bank, and enables your bank to confirm that it will make export contract payments to you.
The added confidence that you’ll get paid, and therefore that your working capital won’t be stretched, may allow you to offer extended payment terms to an overseas buyer, making your contract bid more competitive.
The letter of credit may be structured so that although your buyer makes payments to its bank over several years, your bank will pay you under the letter when you deliver the goods and provide the appropriate documents.
In a recent example, EFIC helped a farm equipment manufacturer enter a contract with a buyer in Turkey. The machinery cost around $1 million per unit, so buyer requested extended payment terms. EFIC provided a guarantee to the exporter’s Australian bank, guaranteeing the payments due from the buyer’s Turkish bank under a letter of credit. EFIC’s involvement enabled the buyer to pay their Turkish bank for the equipment over five years, which was a deal winner for the Australian exporter.
—Peter Pyrgiotis, former head of Business Development at the Export Finance and Insurance Corporation: www.efic.gov.au
