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What is an export credit agency? How does it help exporters?

Export credit agency is a financial institution that offers financial support to domestic exporters to facilitate exports. Learn more about export credit agency.

A businessman and businesswoman are shaking hands in front of a world map with highlighted trade routes.

International trade can significantly boost a business’s customer base and revenue. However, it also presents significant risks for exporters, from fluctuating market conditions to non-payment by foreign buyers. Export credit agencies (ECAs) play a crucial role in mitigating these risks by providing financial protection and insurance¹. In this blog post, we will explain what an export credit agency (ECA) is, how it operates, the services it offers, and types of export credit available.

What is an export credit agency (ECA)?

An export credit agency (ECA) is a financial institution that supports domestic exporters by providing financial instruments like guarantees, loans, and credit insurance to manage trade risks.² An ECA mitigates risks like buyer non-payment and political instability in the buyer’s country, and finances businesses to sell goods overseas. ECAs are most beneficial to small businesses who may struggle to manage export risks on their own.

Services offered by export credit agency

Export credit agencies work by offering financial instruments that lower the expenses and risks related to exporting. Some services provided by ECAs are as follows:

1. Export credit insurance:

This protects exporters from credit risks caused by non-payment by buyers for commercial or political reasons.

2. Export credit guarantees:

These guarantees encourage banks and financial institutions to lend to exporters by covering the risk of non-payment.

3. Direct loans:

Some ECAs offer direct loans to buyers to help them finance the procurement of goods and services from exporters.

4. Interest rate support:

Sometimes, ECAs offer subsidies to make financing more affordable for exporters.³

ECAs typically operate under the purview of governments and tend to provide favorable credit terms and accept higher risks compared to private banks.

What are the types of export credit?

Financial institutions offer various types of export credit. Some of these are as follows:

Pre-shipment financing: ECAs help exporters by providing funds to purchase raw material and turn them into finished goods.

Post-shipment credit: This helps companies maintain working capital after shipping their products, as importers usually take 3-6 months to pay invoices.

Bill discounting and invoice factoring: This involves selling invoices to a third party, usually a bank, at a discount. The exporter is paid immediately, while the third party collects payment from the importer later.⁴

How do export credit agencies differ from banks?

While ECAs and banks do offer similar financial instruments, there are some key differences between the two. Some of these differences are highlighted below:⁵

Advantages of export credit agency

Some advantages offered by ECAs to exporters are as follows:

1. Encourages confident trading:

ECAs limit risks associated with international trade and foster an exporter’s confidence to sell in overseas markets.

2. Facilitates importers' purchases:

ECAs offer credit facilities to importers, making it easier for them to buy, which drives sales for exporters.

3. Enhances balance of trade:

ECAs support trade balance by promoting exports and facilitating the inflow of foreign exchange.⁷

Disadvantages of export credit agency

Despite their benefits, export credit agencies also have some disadvantages. Some of these are as follows:

1. Political risk coverage issues:

ECAs may sometimes cover political risks tied to unethical practices, complicating risk management.

2. Reluctance to finance high-risk shipments:

ECAs may be hesitant to fund high-risk shipments, leaving some exporters without necessary support.

3. Administrative complexity:

ECAs can often face bureaucratic challenges, making the decision-making and approval procedures longer than expected.

Example of an export credit agency

The most significant ECA for Indian exporters is the Export Credit Guarantee Corporation (ECGC) Limited, an entirely government-owned organization, set up in 1957. Some of its services include insurance products that act as a hedge against non-payment by foreign buyers and guarantees to banks for extending credit facilities during pre-shipment and post-shipment. ECGC bears commercial as well as political risk and empowers Indian exporters to confidently compete on the global stage. The corporation also provides credit ratings and information services to assist Indian businesses in making informed decisions and boosting their exports.⁶

Contents of an export credit agency contract

Each ECA contract will be different based on the service provided. However, some common details that are generally included in all ECA contracts are as follows:

Date: The date on which the contract is established.

Parties involved: Identification of the parties in the contract, such as the number of trading parties, their banks, etc.

Purchase details: Provides an in-depth description of the products, including type, quantity, and other relevant information.

Role of ECA: The contract describes the ECA's involvement in the deal, including the types of financing provided, the timeline of loan and insurance processes, and any additional roles the ECA may play.

Event of default: Identification of potential default situations, such as payment failures or agent impairments, and the possible actions to be taken in these cases.

Prepayment and cancellation terms: Outlines the terms for prepayment options and specifies the conditions for contract cancellation.

Conclusion

Export credit agencies play a crucial role in the international business landscape by providing essential risk mitigation and financing services to exporters, which are often unavailable through private financial institutions. They are vital for businesses exploring new markets, offering a level of security amidst complex international trade and unpredictable political and economic conditions. For small businesses and e-commerce exporters, ECAs can play a fundamental role in risk mitigation, export enablement, and market access. For more assistance on various aspects of e-commerce exports, Indian exporters can leverage the tools and services offered by e-commerce export programs like Amazon Global Selling.

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Frequently Asked Questions

What does an export credit agency do?

An export credit agency provides financial support, insurance, and risk protection to exporters engaging in international trade.

What is an export credit agency program?

An export credit agency program is a portfolio of financial instruments and services delivered by an export credit agency to exporters. They offer instruments like export credit insurance, export credit guarantee, and direct credit to help exporters manage risks and access financing for international trade.

How does an export credit agency work?

Export credit agencies provide loans, loan guarantees, and insurance to assist domestic companies in managing risks associated with selling in international markets.⁸

When can export credit be availed?

To be eligible for export credit, an exporter must fulfill some requirements such as having a legitimate export order, being officially registered as an exporter, maintaining a solid credit history, and possessing all necessary export documents.⁹

Published on August 13, 2024.

Sources:

1. https://www.trade.gov/export-credit-insurance

2. https://www.investopedia.com/terms/e/export-credit-agency.asp

3. https://www.pwc.com/m1/en/blogs/pdf/export-credit-agency-financing.pdf

4. https://www.paisabazaar.com/business-loan/bill-discounting/

5. https://corporatefinanceinstitute.com/resources/commercial-lending/export-credit-agency-eca/

6. https://www.dripcapital.com/en-in/resources/finance-guides/export-credit-agency

7. https://www.wallstreetmojo.com/export-credit-agency/#advantages-disadvantages

8. https://www.investopedia.com/terms/e/export-credit-agency.asp#:~:text=Export%20credit%20agencies%20offer%20loans,list%20of%20official%20global%20ECAs.

9. https://www.bajajfinserv.in/export-packing-credit#:~:text=To%20be%20eligible%20for%20export,all%20the%20necessary%20export%20documents.

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