Analysis of short-term instruments of export financing as well as the various forms of financing via supplier credits for medium-term export financing, taking into account the risk protection costs

Table of contents

List of figures

Table directory

1 Introductory remarks

1.1 Initial situation and problems

1.2 Goal of the work and personal motivation

1.3 Delimitation of the topic

1.4 Procedure

2 Theoretical basics

2.1 Methodology of work

2.2 Definition of important terms

2.3 Euromarket financing

2.4 Acceptance credit

2.5 Export factoring

2.6 Forfaiting

3 State export credit insurance

3.1 OECD and Berne Union regulations

3.2 Forms of coverage by the waistband

3.2.1 Supplier credit cover

3.2.2 Manufacturing risk cover

4 Short-term financing. cost comparison

4.1 General starting position

4.2 Costs of the Hermes cover

4.3 Overdraft costs

4.4 Acceptance credit costs

4.5 Costs of export factoring

4.6 Comparison of costs

5 Short-term financing. SWOT analysis

5.1 Overdraft facility

5.2 Acceptance credit

5.3 Export factoring

5.4 Comparison of the results of the SWOT analysis

6 Medium-term financing. cost comparison

6.1 General starting position

6.2 Hermes coverage costs

6.3 Equity financing

6.4 Debt financing

6.5 Forfaiting

6.6 Comparison of costs

7 Medium-term financing. SWOT analysis

7.1 Equity financing

7.2 Debt financing

7.3 Forfaiting

7.4 Comparison of the results of the SWOT analysis

8 Summary

9 Bibliography

10 Appendix

 

Abstract

This Bachelor thesis is aimed at all exporters who are interested in doing business with Belarus and who want to inform themselves about the coverage of del credere risks and export financing, since the latter is nowadays expected as part of the offer. Consequently, the aim of this work is to examine the instruments of short-term export financing and the forms of medium-term financing, taking into account the risk hedging costs for decision-making in export business with Belarus. The risks are covered by export credit guarantees issued by the Federal Republic of Germany.

Export financing is provided through supplier credits for the purpose of competitive differentiation. All instruments examined were used to refinance supplier credits. Decision methods such as cost comparison and SWOT analysis are used to determine the appropriate instrument. After the SWOT analysis, risks, opportunities and other important criteria such as security, liquidity inflow, creditworthiness requirements and administrative expenses are assessed. The use of the SWOT analysis reduces the probability of a risk or opportunity miscalculation and thus of a wrong decision.

List of figures

Fig. 1: The basic structure of supplier credit

Fig. 2: Process of the acceptance credit for refinancing a payment target

Fig. 3: Export factoring

Fig. 4: Forfaiting. basic structure

Fig. 5: Fees for the Hermes cover. Short-term export financing

Fig. 6: Fee calculation. Short-term export financing

Fig. 7: Criteria evaluation 1

Fig. 8: Evaluation matrix. Short-term export financing. risks

Fig. 9: Evaluation matrix. Short-term export financing. chances

Fig. 10: Fee calculation. Medium-term export financing

Fig. 11: Fees for the Hermes cover. Medium-term export financing

Fig. 12: Evaluation of criteria 2

Fig. 13: Evaluation matrix. Medium-term export financing. risks

Fig. 14: Evaluation matrix. Medium-term export financing. chances

Fig. 15: Exports from Germany to Belarus

Fig. 16: Ranking of the trading partners in the foreign trade of the Federal Republic of Germany

Fig. 17: Information from AKA mbH

Table directory

Table 1: Total costs. overdraft facility

Table 2: Total costs. acceptance credit

Table 3: Costs. export factoring

Table 4: Total costs. export factoring

Table 5: Comparison of short-term export financing costs

Table 6: SWOT analysis. overdraft facility

Table 7: SWOT analysis. acceptance credit

Table 8: SWOT analysis. export factoring

Table 9: Explanation. Short-term export financing. risks

Table 10: Explanation. Short-term export financing. chances

Table 11: Shareholders' equity. The interest costs

Table 12: Shareholders' equity. Interest costs after discounting

Table 13: Shareholders' equity. total cost

Table 14: Liabilities. The interest costs

Table 15: Liabilities. Interest costs after discounting

Table 16: Total costs. borrowed capital

Table 17: Borrowed Capital 1. Interest Costs

Table 18: Borrowings 1. Interest costs after discounting

Table 19: Total costs. Liabilities 1

Table 20: Forfaiting costs

Table 21: Comparison of medium-term export financing costs

Table 22: SWOT analysis. equity financing

Table 23: SWOT analysis. debt financing

Table 24: SWOT analysis. Debt financing

Table 25: SWOT analysis. forfeiting

Table 26: Explanation. Medium-term export financing. risks

Table 27: Explanation. Medium-term export financing. chances

Table 28 : Overdraft facility. 72

Introductory remarks

1.1 Initial situation and problems

The analysis of the total of German exports shows an upward trend. In 2015, exports increased by 6.5 % compared to the previous year. With a surplus of 1,196,378,000 euros, the previous record from the previous year was clearly exceeded. [1] However, the upward trend cannot simply be applied to the value of export directly to individual countries. According to the Baden-Württemberg State Statistical Office, goods worth 2,285,800 euros were exported to Belarus in 2013, in 2014 the export value was significantly lower and in 2015 it fell to 1,270,900 euros[2]. This is mainly due to the economic and political situation in Belarus.

No export is without risk. According to the Organisation for Economic Cooperation and Development (OECD), Belarus is one of the countries with the highest risk rating. [3] However, the risk alone is no reason to forgo cooperation with this country altogether. Belarus ranked 63rd out of 239 countries in the list of trading partners in the export business with the Federal Republic of Germany in 2015 [4]and because Germany, as a country heavily dependent on exports, should therefore take advantage of these opportunities. [5]

This work places particular emphasis on political and economic del credere risks. In international business, it is very important to take the protection of the default risk into account when negotiating payment terms, because the retention of the title may not be enforceable and at the same time legal, prosecution of the claim can become very complicated and relatively expensive[6]. This leads to the first question which is examined in this paper:

1. How and at what cost can the German exporter avoid del credere risks in the export business?

The exporter has the possibility to protect himself financially by the terms of payment in the contract and by agreeing to a letter of credit or demanding advance payment from the importer. These terms of payment entail risks for the importer. Of course, the prepayment is the most unfavourable alternative for him.

The letter of credit plays a very important role in securing payments in foreign trade transactions and can even support the further financing of foreign trade transactions, but it carries a risk for the buyer because the importer does not simultaneously receive the goods and the documents for the goods. And if the goods are not delivered as agreed in the contract in terms of type, quantity or quality, he shall bear any losses alone, he shall not be able to resell the goods and as a result shall not receive any further financing from his bank. [7]

In order to avoid the risks, the importer can refuse the order. Therefore, when exporting to financially unstable countries, it is important to consider whether the importer is able to pay the full amount immediately, or whether it is better to look for a suitable financing instrument that is optimal for both sides.

Janus H. points out: "The Achilles' heel of exports in the economic crisis is, however, apart from the general decline in demand, not so much risk assumption as financing[8]. In Germany, the economic crisis is long gone, but in an importing country with a difficult economic situation such as Belarus, capital shortages can occur and, as a result, financing problems.

It is also very important to choose the right form of financing for medium to long-term export financing, because it is precisely here that the wrong decision can have a negative impact on the company. If the decision is made solely on the basis of costs, the business result may be more cost-effective, but it is doubtful whether it corresponds to the strategic corporate objectives and takes all opportunities and risks into account. This gives rise to the second question of this work:

2. What opportunities and risks are associated with the respective financing instrument or form of financing?

1.2 Goal of the work and personal motivation

I started to work on the chosen topic when I became aware of the fact that German exporters and Belarusian importers have very different, sometimes even contradictory interests in the question of financing exports. [9] Therefore, the aim of this thesis is to examine the question of how to determine the appropriate short-term instrument and the appropriate medium-term form of export financing, taking into account the costs of risk protection in the export business with Belarus.

At the same time, my interest lies in the economic development of my home country through trade and its risk-protected, optimal financing.

1.3 Delimitation of the topic

This work will address the possibilities of financing and eliminating or reducing economic and political del credere risks in exports to Belarus. For this, the exporter must know which instrument, which form of financing and which export credit insurance are best suited for the two business partners.

The bachelor thesis examines all possible alternatives to short-term export financing for these export relationships. The data originates from the German Chamber of Commerce Abroad (AHK) for Belarus: two variants of bank financing, current account and acceptance credit, as well as financing via the factor. [10] Export factoring is an alternative to bank financing, so this possibility will also be examined within the scope of this work.

The letter of credit and collection of documents are not examined in the context of this work, although they guarantee a high level of payment security in foreign trade business. Although the letter of credit may be related to the granting of a loan, letters of credit and debt collection are not independent financing instruments, but terms of payment[11]. The terms of payment are concerned with how the exported goods, services or goods are to be paid for. Export finance is about how the funds for financing are to be obtained and whether the exporter or the importer is financing foreign business. [12]

Supplier credit and its forms of financing are used as instruments of medium-term export financing. The importer is given the option not to pay the invoice amount at the time the service is rendered but at a later point in time.

The opposite of the supplier credit would be the buyer credit. Although the buyer credit may be a more favourable option for the importer, it is not examined within the scope of this work, because the exporter receives the full amount from the bank with the buyer credit and the transaction is terminated for him without risk[13]. The whole risk is transferred to the importer. But this should not be allowed if you want to differentiate yourself from the competition [14] and plan to develop a long-term partnership abroad[15]. As competition becomes tougher, exporters are more likely to be forced to offer the importer a suitable form of financing in [16] order to rule out default risks in the future. Therefore the different forms of financing of the supplier credit are analyzed in this Bachelor thesis. Project financing or export leasing are not considered in the context of this work.

As Euler Hermes AG, the best-known credit insurer, covers[17]both economic and political risks, the cost of this service was calculated. Private credit insurance is only suitable for covering economic risks [18] and is not mentioned in this paper because the probability of political risks occurring in exports to Belarus is quite high.

1.4 Procedure

In this bachelor thesis the possible variants of short and medium-term export financing are described, the costs for financing with the selected instruments and credit insurance are presented and finally the orientation is justified with the selection of the suitable instrument. This work is aimed at German companies wishing to export to Belarus. Therefore, the following procedure has been established:

1. Definition of objectives and questions.

2. Selection of short and medium term export financing instruments for analysis.

3. Calculation of the fees for the Hermes cover of short-term loans.

4. Calculation of credit costs and Hermes cover costs for the overdraft facility.

5. Calculation of credit costs and Hermes cover costs for the acceptance credit.

6. Calculation of export factoring costs.

7. Comparison of the results obtained.

8. Execution of the SWOT analysis of the selected financing instruments.

9. Evaluation of risks, opportunities and decisive criteria of the instruments.

10. Calculation of credit costs for medium-term export financing using the various forms of supplier credit financing as examples.

11. Comparison of the results obtained.

12. Execution of the SWOT analysis of the selected forms of financing.

Evaluation of risks, opportunities and decisive criteria of the forms of financing.

[...]

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[1] Federal Statistical Office (2016a), p. 25

[2] See Baden - Württemberg State Statistical Office (2016), http://www.statistik.badenwuerttemberg.de/ → 6&B=1

[3] Cf. o. V. (2016), S. 1

[4] Cf. Federal Statistical Office (2016b), p. 3

[5] Federal Statistical Office (2015), pp. 6 - 9

[6] Cf. Pommert, B. (2015), p. 245

[7] Cf. Ehrlich, D./ Zahn, J. C. D. / Haas, G.(2010), p. 39 - 41

[8] Janus, H. (2010), p. 340

[9] Cf. Guserl, R. / Pernsteiner, H. (2015), p. 290

[10] Cf. AHK Belarus (2012), p. 5 - 6

[11] Cf. Lenger, T./Novak, V. (2013), p. 231 - 243

[12] Cf. Büter, C. (2013), p. 323

[13] Cf. Pommert, B. (2015), p. 250

[14] Cf. Pommert, B. (2015), p. 242

[15] Cf. Beck, T. R. (2014), pp. 7-10

[16] Cf. Royer, I. (2013), p. 262

[17] See AGA Portal (2016), http://www.agaportal.de/pages/portal/index.html

[18] Cf. Büter, C. (2013), p. 401