Environmental Technologies Industries
Export.gov logo and link to Export.gov Environmental Technologies Industries

Finance

Financing Environmental Exports - A Guide to the Fundamentals and Sources
Chapter 4 - Variation in Financing by Type of Country



The need to provide credit to customers and the overall cost of providing credit to customers tend to vary from one country to another. In some parts of the world, importers have limited access to outside capital. In these cases, environmental exporters will be at a competitive advantage if they are able to provide financing to their customers. U.S. banks, however, are often reluctant to lend money to exporters who depend on repayment from customers in capital-constrained, high-risk countries. Environmental exporters may need to obtain commercial and political risk insurance policies to secure the bank loans that will enable them to provide financing to their customers.

United States

Access to Capital
Commercial finance for sales of environmental goods and services within the United States is usually much less an obstacle than it is for transactions crossing international boundaries. As capital markets in the United States are more highly liquid than in most other countries, it is comparatively easy for U.S. firms to obtain the money necessary for business transactions.

U.S. firms with U.S. customers can choose from several sources when they need to borrow money to provide credit to their customers or to increase their own working capital. [Working capital is the sum of cash, inventory, accounts receivable, and other current assets minus accounts payable, current portion of long-term debt, and other current liabilities.] Their options include:
Most loans to small- and medium-sized companies must be secured with some form of collateral. If a firm's primary customers are in the United States, potential lenders often accept accounts receivable as collateral because it is relatively easy to evaluate the creditworthiness of those customers who owe money to the potential borrower.

Many large U.S. customers have greater access to capital than do smaller producers of environmental goods and services. In these cases, it will often be unnecessary to provide credit to customers.

Access to Grants and Subsidies
Environmental protection remains an important priority in the United States, and many grants and subsidies are available for specific environmental projects. These subsidies may be available at the federal, state, or local level.


Some grants and contracts may be provided directly to firms producing environmental goods and services to develop certain technologies. In these cases, money may be paid directly to the firm to support research and development.

Other grants and subsidies are provided directly to the end-users of certain goods and services. These grants may take the form of credit enhancement, tax breaks, or rebates. Such programs generally make it easier for customers to purchase goods and services without requiring credit from the producer.

Grants and subsidies are sometimes provided to projects themselves in order to defray the additional costs that may be associated with environmentally friendly technologies. These grants may take the form of credit enhancement, tax breaks, or direct transfers of capital. The ability of municipalities to raise money cheaply through tax-free municipal bonds can be viewed as a form of subsidy as well. Again, such programs make it easier for customers to purchase goods and services without requiring credit from the producer.

Producers of environmental goods and services should be aware of grants and subsidies available to producers as well as those subsidies available to potential customers.

Industrialized Countries
Industrialized countries are often described as high-income countries where the gross national product (GNP) per capita is above a certain threshold, usually $10,000. Most of North America and Western Europe can be categorized as industrialized. With very few exceptions, member nations of the Organization for Economic Cooperation and Development (OECD) are considered industrialized countries. The OECD is a Paris-based intergovernmental organization. It provides its 29 member countries a forum in which governments can compare their experiences, discuss common problems, and seek solutions that can be applied within their own national contexts. Member nations share a common commitment to the principles of pluralistic democracy and the market economy. The OECD offers advice and makes recommendations to its members to help them define policies. On occasion, the OECD also arbitrates negotiations of multilateral agreements and establishes internationally recognized legal codes.
OECD Member Countries
Australia FranceJapanPoland
Austria GermanyKoreaPortugal
Belgium GreeceLuxembourg Spain
Canada Hungary MexicoSweden
Czech Republic IcelandThe NetherlandsSwitzerland
Denmark IrelandNew Zealand Turkey
Finland Italy NorwayUnited Kingdom
United States
Access to Capital
Although capital markets are well developed in these countries, they are often less well developed than U.S. capital markets are. Thus, it may be more difficult for firms in other industrialized countries to borrow the money necessary for business transactions.

Producers of environmental goods and services that are able to provide credit to customers at favorable terms will often be at a competitive advantage when exporting to industrialized countries. Such customer credit is more important when doing business outside the United States than it is when doing business within U.S. borders.

Most loans to small and medium-sized companies must be secured with some form of collateral. Lenders are often hesitant to accept non-U.S. accounts receivable as collateral because it is so much more difficult to evaluate the creditworthiness of non-U.S. customers.

Several instruments are available to mitigate the risk of nonrepayment by importers or to guarantee that commercial lenders will be repaid even if the foreign accounts receivable prove uncollectible. These instruments can enable exporters to borrow the money necessary to offer credit to customers or increase their working capital. These instruments include:
Access to Grants and Subsidies
Industrialized countries provide many grants and subsidies for specific environmental projects. These grants vary from nation to nation. Industrialized countries do not tend to provide grants and subsidies for environmental protection in other industrialized countries.

Although other industrialized countries are unlikely to provide grants to U.S. firms for research and development (except in the case of U.S.-non-U.S. joint ventures or consortia), U.S. environmental exporters can still benefit from many grants and subsidies available to consumers or projects in other industrialized countries. These grants may take the form of credit enhancement, tax breaks, and direct transfers of capital. Such programs generally make it easier for customers to purchase goods and services without requiring credit from the producer.

Producers of environmental goods and services should be aware of the subsidies available to their potential customers.

Currency Risk
The currencies of most industrialized nations are relatively stable when compared with those of less developed countries. Still, U.S. exporters will always incur some foreign exchange risk if they permit customers to repay in currencies other than U.S. dollars.


Exporters requiring repayment in U.S. dollars may find it difficult to sell their products in some international markets. If potential customers are uncomfortable assuming the risk associated with dollar-denominated transactions, exporters should be aware of the various mechanisms for reducing international currency risk. Exporters accepting repayment in non-U.S. currencies usually need to adjust the price of their product to include the cost of currency risk mitigation (to the extent that such mechanisms are used) and a risk premium (to the extent the exporter is not completely sheltered from some of the currency risk).

Mechanisms available to reduce or eliminate currency risk include:
These mechanisms are readily available for the most commonly traded currencies such as Australian and Canadian dollars, British pounds, French and Swiss francs, German marks, and Japanese yen. It is more difficult and more expensive to use these mechanisms for currencies that are less commonly traded.

Political Risk
Although the U.S. political scene may appear dynamic and ever-changing to U.S. citizens, the country is very stable compared with much of the world. War, insurrection, and revolution are not immediate threats to U.S. security, and investors are relatively unconcerned about the government expropriating assets or nationalizing industries.

In most other industrialized nations, the political risks of investment and export activity are also quite minimal. Although some countries may change governments more frequently than others do, the essential political framework remains intact from regime to regime. Industrialized nations allow their currency to be convertible and rarely impose discriminatory exchange rates or limitations on the repatriation of profits.

Political risk insurance is readily available to importers, exporters, and lenders. In industrialized countries, this insurance is relatively inexpensive.

Some Sources of Political Risk Insurance in the G-7 Industrialized Countries
CanadaExport Development Corporation
FranceCompagnie Francais d'Assurance pour le Commerce Exterieur (COFACE)
GermanyHermes Kreditversicherungs AG (Hermes)
ItalySezione Spexiale per l'Assicurazione del Credito al'Esportazione (SACE)
JapanExport-Import Insurance Division of the International Trade Administration Bureau of the Ministry of International Trade and Industry (EID/MTI)
United KingdomExport Credit Guarantee Department (ECFD)
United States of AmericaOverseas Private Investment Corporation (OPIC), U.S. Export-Import (EX-IM) Bank


Many private companies provide commercial and political risk insurance for transactions in industrialized countries. A detailed list of such companies is available in the 1998 edition of Alternative Sources of Trade Financing published by the U.S. Department of Commerce's Trade Information Center. To order the guide, call 1-800-USA-TRADE.


Big Emerging Markets
Argentina
ASEAN (Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam)
Brazil
Chinese Economic Area (China, Hong Kong, Taiwan)
India
Mexico
Poland
South Africa
South Korea
Turkey
Other countries often referred to as emerging markets
Chile
Czech Republic

Israel
Kazakhstan
Persian Gulf States
Romania
Russia
Ukraine

Emerging Market Countries

Emerging markets are low- to mid-income countries that are rapidly undergoing the process of industrialization or the transition to market economies. They are considered emerging because of their frequently high rates of growth, industrial development, and openness to international trade and investment. The income per capita in most emerging markets is less than $10,000 per year.

Access to Capital
Credit is usually tight in emerging markets. Capital markets are not very well developed, and local firms rely heavily on foreign capital. Firms in emerging markets will often find it quite difficult and expensive to borrow the money necessary for business transactions.


Producers of environmental goods and services that are able to provide credit to customers are usually at a competitive advantage when exporting to emerging markets. Customers in emerging markets are often willing to pay a very high premium for goods sold on credit.

Many U.S. lenders are hesitant to accept accounts receivable as collateral when those accounts are in emerging markets. Creditworthiness can be hard to establish, and lenders unfamiliar with emerging markets are uncomfortable with the inherent political and currency risks.

As with industrialized countries, several instruments are available to mitigate the risk of nonrepayment by importers or to guarantee that commercial lenders will be repaid even if the foreign accounts receivable prove uncollectible. These instruments can enable exporters to borrow the money necessary to offer credit to customers or increase their working capital.

Not surprisingly, these techniques tend to be more expensive for mitigating risks in emerging markets than they are for risks in industrialized countries. These techniques include the following:
Although credit is important for many potential customers in emerging markets, many opportunities do not require exporters to extend credit at all. Subsidiaries of large multinational companies can often pay in advance or offer cash -n-delivery. Development projects supported by multilateral development banks come with their own financing and do not require exporters to provide additional credit.

Access to Grants and Subsidies
In emerging market countries, grants and subsidies may be available for specific environmental projects, goods, and services. These grants may take the form of credit enhancement, tax breaks, and direct transfers of capital. While some of these grants are funded by the local government, others are funded by donor countries or multilateral development bodies such as the Global Environment Facility. Such programs will generally make it easier for customers to purchase goods and services without requiring credit from the producer.

Producers of environmental goods and services should be aware of subsidies available to potential customers.

Currency Risk
The currencies of most emerging markets are much less stable than those of industrialized countries. Rapid changes in inflation, interest rates, and global perceptions of a country's economic prospects can yield very volatile exchange rates. Because of this volatility, many potential customers are not prepared to assume the risk associated with dollar-denominated transactions.

U.S. exporters choosing to accept payment in an emerging market currency can consider the following methods of mitigating the inherent currency risk:

Although these methods are available for most emerging market currencies, they come at a cost. It can be quite expensive to use these mechanisms for certain currencies that are not commonly traded in international markets.

Political Risk
Emerging market countries generally have a much shorter political track record than industrialized countries do. Free-market reforms may be a recent phenomenon, and political or social unrest may threaten security. This is particularly true in some of the former Soviet Republics where disaffected citizens may seek to restore communist leadership or military control. Even in countries that appear to be relatively stable, the political climate may change quite unexpectedly as was the case in Indonesia following the currency crisis in 1997.

Though most emerging market countries have committed to liberal policies regarding currency conversion and the repatriation of profits, investors cannot be guaranteed that these policies will be honored. Many investors regard war, insurrection, revolution, expropriation, and nationalization as distinct possibilities.

Fortunately, political risk insurance is readily available to importers, exporters, and lenders. This insurance is more expensive in emerging markets than it is in industrialized countries.
Case Study: IPTE - Short-Term Credit Insurance

International Product and Technology Exchange (IPTE), of Piscataway, New Jersey, has a number of international customers located in markets where local banks charge prohibitively high interest rates for letters of credit and short-term obligations payable in 360 days or less. To facilitate credit to these customers, IPTE wanted to obtain open account, unsecured credit on 180-day repayment terms.

To secure the open account, IPTE procured a short-term export credit insurance policy from the Export-Import (Ex-Im) Bank. This insurance policy covered nonrepayment for both political and commercial risks of default. The Ex-Im Bank charged IPTE an insurance premium of 1.5 percent of the value of the receivables insured.

With Ex-Im Bank insurance policies to guarantee repayment, IPTE can now assign its international receivables to a local commercial bank and receive credit at an interest rate of the six-month London Inter-Bank Offering Rate plus 0.5 percent to 1.5 percent.

By offering short-term financing to its customers, IPTE has been able to compete globally in the solar energy business.

Less Developed Countries

Less developed countries are usually defined as countries in which the gross national product per capita is below a certain threshold, often $1,000. Most of these countries are eligible to receive long-term loans at zero interest from the International Development Association (IDA), the part of the World Bank serving the world's poorest nations. These countries are home to over 3 billion people, a third of whom survive on incomes of $1 per day or less.

Access to Capital
Credit is scarce in less developed countries (LDCs). Capital markets, if present at all, are not very well developed. Very little foreign direct investment flows into less developed countries, and, with the exception of the multilateral development banks, most financial institutions in industrialized countries do not provide loans to any other than the largest and most secure entities in the less developed countries. Firms are often capital constrained.

Customers in less developed countries are often willing to pay a very high premium for goods sold on credit. And the exporter who can provide credit at the best terms has a distinct competitive advantage.

In general, U.S. lenders do not accept accounts receivable as collateral when those accounts are in less developed countries. Factor and forfait houses are not usually interested in purchasing LDC accounts receivable. Export credit agencies such as the U.S. Export-Import Bank, however, will provide export credit insurance for transactions involving creditworthy customers in less developed countries.

Potential exporters to less developed countries may be wise to pursue actively the many opportunities that do not require exporters to extend credit at all: subsidiaries of large multinational companies, development projects supported by multilateral development banks, and aid projects supported by donor governments.

Access to Grants and Subsidies
In less developed countries, environmental grants and subsidies may be available from donor countries and multilateral development bodies such as the Global Environment Facility. Such programs may take the form of subsidized loans for developers of environmental projects or direct transfers of capital earmarked
for large environmental infrastructure projects. Grants and subsidies can make it easier for customers to purchase goods and services without requiring credit from the producer. Producers of environmental goods and services should be aware of subsidies available to potential customers.

Currency Risk
The currencies of less developed countries are considered highly unstable. Rapid changes in inflation and interest rates can yield very volatile exchange rates, and political leaders will sometimes resort to currency devaluations. Because of this volatility, many potential customers are not prepared to assume the risk associated with dollar- denominated transactions.

U.S. exporters should be very careful before agreeing to accept payment in the currency of a less developed country. Though currency hedging and cash flow swaps can be arranged for almost any currency on earth, the risk mitigation strategies can be prohibitively expensive with the more obscure currencies.

When considering transactions with entities in less developed countries, exporters should also investigate the extent to which the government may limit cash flowing out of the country to repay exporters.

Political Risk
Less developed countries are considered to have very high levels of political risk. Many LDCs have not instituted the free-market reforms that promote international investment and liberalize trade. Revolutions and military dictatorships are commonplace in many of the world's poorest countries. Investors feel they have ample reason to be concerned about insurrection, revolution, expropriation, and nationalization.

Fortunately, political risk insurance is available to importers, exporters, and lenders. Not surprisingly, this
insurance is more expensive in less developed countries than it is elsewhere in the world.
Less Developed Countries Eligible for Concessional Loans from IDA

AfghanistanDjiboutiKrygyz RepublicSao Tome and Principe
AlbaniaDominicaLaos Senegal
ArmeniaEgyptLesothoSierra Leone
AzerbaijanEquatorial GuineaLiberiaSolomon Islands
BangladeshEritrea MadagascarSomalia
Benin Ethiopia Malawi Sri Lanka
BhutanFYR MacedoniaMaldivesSt Lucia
BoliviaGambiaMali St. Vincent
Bosnia-HerzegovinaGeorgiaMauritaniaSudan
Burkina-FasoGhanaMoldovaTajikistan
BurundiGrenadaMongoliaTanzania
Central African RepublicGuineaMozambiqueTogo
Cameroon Guinea-BissauMyanmar Tonga
Cape VerdeGuyanaNepalUganda
ChadHaitiNicaraguaVanuatu
ChinaHondurasNigerVietnam
ComorosIndiaNigeriaYemen (Republic of)
CongoKenyaPakistan Zaire
Cote d'IvoireKiribati RwandaZambia
SamoaZimbabwe


Contact Us  About ITA  ITA Site Map  Privacy Statement
U.S.Department of Commerce    International Trade Administration