Buyer Credit Guarantee
Buyer Credit Guarantee
A Buyer Credit Guarantee is a security to the lender in case of a credit risk caused by a foreign buyer, the buyer's bank or country. The exporter receives payment in cash for goods sold on credit, while the credit risks are transferred from the exporter to the lender and further to Finnvera. The guarantee covers commercial risks and/or political/sovereign risks. The coverage will be decided on a transaction basis.
- Commercial risks mean the borrower’s inability or unwillingness to pay.
- Political risks are risks connected with the borrower’s country. These risks are beyond the lender’s and the borrower’s control. Political risks include restrictions on transfer of the credit currency, rescheduling of debts, war and insurrection.
A Buyer Credit Guarantee can be used for various medium/long-term credit arrangements in connection with financing of the export of capital goods. Such arrangements include buyer credits for individual transactions, bank-related and project-related credit lines, ship financing, as well as forfaiting and leasing.
The guarantee can also be used for short-term exports if the buyer provides the exporter with a transferable credit instrument, e.a. bill of exchange or promissory note as payment.
As an official export credit agency Finnvera can’t grant guarantees with a risk period of less than 2 years (manufacturing period + repayment period) to the following markets:
- Austria, Bulgaria, Belgium, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Italy, Ireland, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, United Kingdom, Australia, Canada, Iceland, Japan, New Zealand, Norway, Switzerland, USA
The European Commission has granted Finnvera a special permission extension that allows Finnvera to grant guarantees with a risk period of less than two years for export transactions to Western industrial countries. The special permission is valid until the end of 2025.
Terms and conditions of the Buyer Credit Guarantee
The guarantee is granted to the lender. The export transaction must meet the requirement of Finnish interest.
The borrower may be either the buyer or the buyer’s bank. Finnvera analyses the borrower’s creditworthiness before making the guarantee decision. The borrower’s creditworthiness is generally assessed on the basis of credit reports and the buyer’s financial statements. The creditworthiness of the borrower’s country is assessed by following the economic and political developments in the country.
For exports to the EU Member States and to other Western industrialised countries, Finnvera can normally grant guarantees only if the payment period is two years or longer.
Long-term Buyer Credit Guarantee
Deliveries of machines and equipment and other large deliveries often require that the exporter is able to arrange long-term financing for the foreign buyer. The lender is a domestic or foreign financial institution that grants the buyer or the buyer’s bank a credit for financing the export transaction. A delivery contract is concluded between the exporter and the buyer, and the financing agreement is signed between the lender and the buyer or the buyer’s bank. The lender and Finnvera sign a Buyer Credit Guarantee agreement, which protects the lender against credit risks that may materialize.
Regulations concerning bribery and environmental assessment are taken into consideration when handling the guarantee applications. In case of heavily indebted poor countries (HIPCs), guarantees are only granted for projects that have a positive effect on the social or economic development in the countries involved.
A Buyer Credit Guarantee can also be granted in the currency of the buyer’s or borrower’s country. In this context, local currencies refer to currencies other than those of Western industrialised member countries of the OECD. The guarantee is granted to the lender in the buyer’s country. The guarantee can be considered only to certain countries in better country risk categories. For the buyer, the guarantee eliminates the exchange rate risk after the disbursement of the credit.
Short-term Buyer Credit Guarantee
A short-term Buyer Credit Guarantee can be granted for a single transaction or delivery, but the guarantee is normally used for continuous exports, and it is valid until further notice. A prerequisite for the guarantee is that a transferable debt instrument, such as an accepted
bill of exchange or a promissory note, is obtained from the buyer.
After having assessed the buyer’s creditworthiness, Finnvera sets the credit limit, i.e. the maximum amount of debt instruments that the bank can purchase from the exporter while covered by the guarantee. The guarantee agreement is signed by the financing bank and Finnvera. No contractual relation exists between the exporter and Finnvera. The bank is not authorised to sell the debt instruments it has purchased from the exporter to a third party.
Short-term Buyer Credit Guarantees can normally only be granted for exports to countries with political risk, i.e. not to the EU Member States or other Western industrialised countries.
Guarantee costs
Long-term Buyer Credit Guarantee
The guarantee premium is charged as a flat fee on the principal of the credit. The premium depends on factors such as the creditworthiness of the borrower and the borrower’s country, the risk period and the securities provided.
Finnvera charges handling fees for the processing of the guarantee application and the subsequent guarantee.
Short-term Buyer Credit Guarantee
The guarantee premium is charged as a flat fee on the principal of the debt instrument. The premium depends on factors such as the credit period, the creditworthiness of the borrower’s country, and securities provided for the credit. Depending on the case, the borrower’s creditworthiness may also affect the premium.
A handling fee is charged for granting the credit limit. A handling fee may also be charged for changes made to the guarantee.
LCF guarantee
Finnvera’s Guarantee Programme for Local Currency Financing (LCF) can be utilized when the financing of the export transaction takes place in the buyers country and is denominated in the local currency.
By launching its LCF Guarantee Programme, Finnvera enables buyers to reduce their exposure to foreign exchange fluctuations. The product is therefore well suited for sectors where revenues are denominated mainly in the local currency, ie. investments in infrastructure.
An LCF Guarantee is based on terms and conditions of the Buyer Credit Guarantee supplemented with additional conditions. In this context, local currencies denote currencies other than those of high-income OECD countries. The OECD Consensus also applies to the LCF Guarantee.
An LCF Guarantees can be considered on case by case basis to selected countries with sufficiently developed financial and foreign exchange markets. The currency of the target country must be convertible for current account transactions. The target country´s legislation must allow for the LCF procedure.
Claiming indemnification
The beneficiary of the export credit guarantee, i.e. the Guarantee Holder, usually the exporter or the bank, submits a claim for indemnification based on an export credit guarantee with a signed written application. The applicant may also be the transferee of an indemnity right.
