You found a new C&I loan prospect and have an opportunity to grow your portfolio and help a new client at the same time. Then you realize the prospect has a sizable percentage of sales to foreign customers. That means foreign accounts receivable! To give them the amount of financing required, you know you’ll need to loan on the foreign accounts. You get that sinking feeling and begin to realize that maybe this deal won’t happen after all. Oh well, you can always keep prospecting and maybe help the next one?
In the words of ESPN Gameday’s Lee Corso, “Not so fast my friend!”.
The problem with foreign a/r
In the US, securing financing is possible because of liens filed under the UCC. Article 9 specifically deals with securing various types of collateral like accounts receivable. This means that there is a standard set of legal principles that make filing liens and securing loans a standard process.
Outside the US however, each foreign country has its own legal system. As a result, a lender would have to file and perfect a lien in the country where each of the borrower’s customers are located. Needless to say, this would be expensive and difficult. Practically speaking, it’s too much trouble to do this so foreign accounts are usually excluded from financing unless enough extra collateral can be taken, an export loan guarantee or a trade credit insurance policy is in place.
With a trade credit insurance policy, you won’t have to walk away from your loan opportunity. Read on for 6 ways that I can help you get this loan across the finish line with trade credit insurance. (For help managing a loan that is secured by credit insurance, click here).
1. The credit insurance policy replaces the need for foreign liens
Instead of researching the legal requirements then filing and perfecting a lien in each country, substitute a credit insurance policy. The credit insurance policy and the creditworthiness of the insurance company become the source of repayment on the insured accounts. (More on repayment sources below.). As the policy beneficiary, the bank is paid on all claim settlements so you control the cash to apply to the outstanding loan balance.
2. Insured foreign accounts are eligible for financing
By insuring foreign accounts, they become eligible for borrowing. In a borrowing base line of credit, often times, the additional availability is a key to providing the amount of working capital needed by the client. There is no need to exclude foreign accounts when insured.
3. Provides bank with additional repayment source
Usually, the account debtor pays their outstanding invoices as the first source of repayment. When an insured account defaults, the credit insurance policy, through the claim settlement, becomes the next source of repayment. Rarely are other sources required but they are still there (personal guarantees, other collateral etc.).
4. Use same advance rate as domestic accounts
Insured foreign accounts are eligible at the same advance rate as domestic accounts; typically 85%. You, the lender can control this of course in line with market competition and credit due diligence. In rare cases when it’s important to maximize leverage and availability on the asset, I’ve seen a 90% advance because often the credit insurance policy covers 90% of a loss (be sure to understand the policy structure). Be very careful not to over-advance though, even with insured accounts.
5. Helps capital allocation requirements
Although most loan officers aren’t concerned with regulatory considerations when making individual loans, the credit and financial management teams in the bank certainly are. Using credit insurance can help meet the capital allocation requirements and risk mitigation formulas required under Basel III and other banking regulations. On a strategic level, having insured assets is a plus to the bank as a whole.
6. Gives borrower operational benefits
Unlike export loan guarantee products, trade credit insurance policies provide your borrower with operational benefits to help them grow their business and reduce cost. These include services that help avoid payment risk, recover overdue payments and mitigate bad debt risk, while securing the bank at the same time.
Conclusion
Next time an opportunity with foreign accounts comes up, instead of taking extra collateral, walking away from the deal or excluding them from the borrowing base, call me to talk about how credit insurance can help.
Do you have other examples of loans involving foreign accounts? Did you use credit insurance? Please share in the comments section.
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