Solution Manual for Financial Accounting, 11th Edition by Robert Libby, Patri...
Customer financing in Brazil
1. 1
Contents
Financial markets 2
Know your customer 3
Prepayments received from the buyer 4
Granting payment terms with invoice 5
Bills of exchange as a financing instrument 5
Letter of credit, documentary credit 6
Medium or long-term credit for the buyer – buyer credit agreement 7
CustomerfinancinginBrazil
–GuideforaFinnishSMEexporter
2. 2
T
here are more than 100 banks operating
in Brazil. These include government-
owned development banks (of which
most important is O Banco Nacional do
Desenvolvimento Econômico e Social, BNDES),
government -owned commercial banks, large
private universal banks and subsidiaries of
foreign banks. However, almost 90% are
medium and small private banks, which are
often focused on niche market segments. The
largest privately owned banks in the country are
financially sound with strong balance sheets and
good profitability, while the large government-
owned banks have a reasonable stand-alone
financial strength and assumed access to
government support in case of need. The banks
in both of these groups have investment grade
ratings from at least one of the three main
international credit rating agencies. The group
of medium and small private banks is more
diverse, and some of these banks face serious
competitive challenges, weakening asset quality
and limited access to funding.
Bank credit in Brazil has been growing fast. As
a proportion of GDP, it has doubled in ten years.
After the global financial crisis credit growth
has slowed down somewhat, more in the
private banks than in their government -owned
competitors thus increasing the government-
owned banks’ market share. The bond market is
not very well developed.
Despite the improved access to credit, long-
term financing is still heavily dominated
by BNDES, although commercial banks are
gradually stepping into the market. Especially
some smaller companies have difficulties getting
long-term financing from the commercial banks.
In general, interest rates have been decreasing.
Although the Central Bank has raised the target
benchmark interest rate (Selic) in 2013, in the
past ten years the Selic rate has come down
more than 10 percentage points. Lower inflation
rate explains most of the decrease, but real
interest rates have come down significantly as
well. The Selic rate still stood at 10.0% in January
2014, making foreign currency interest rates
attractive at least to companies with revenues
in that currency. Increased competition has
decreased banks’ lending margins, which,
however, still remain high and borrowing from
the commercial banks is expensive. At the same
time BNDES funding is subsidized and offered at
low interest rates. Thus companies favor BNDES
funding, if it is available for them.
BNDES
Brazil’s National Development Bank (BNDES)
is the main financial support system in the
country for investments. All companies
registered and administered in Brazil are eligible
for BNDES financing, including subsidiaries of
foreign companies. Its offering is organized in
products, which have defined general rules of
applicable financial conditions and the operating
Financialmarkets
procedures. The products fall under financing
lines and programs. Lines are permanent in
nature and aimed at companies operating in
various sectors, while programs are temporary
and focused on a defined economic segment.
Lines and programs have additional and more
specific rules than products and these may
differ in e.g. maximum maturities and prizing
principles. Because BNDES is used as a tool for
the government’s economic policy, and a part of
the bank’s offering is structured as transitional
programs, the details of availability, conditions
and interest rates are subject to changes and
have to be checked with BNDES.
The minimum amount for direct financing from
BNDES is BRL 10 million. The interest rate of
direct financing includes three elements: BNDES
financing cost, BNDES basic remuneration and a
risk margin, although some lines and programs
may have a different cost structure all together.
Lines and programs use different bases for
3. 3
financing cost, however, most often this rate
falls below the Selic. The basic remuneration rate
is 2.5% at maximum but varies by line, program
or even the size of the borrower or the use of
the funds borrowed. The risk margin depends
on the borrower’s credit quality and under most
programs can be between 0% and 3.57% p.a.
The BNDES cost structure and level result in all-
in financing costs significantly below the rates at
commercial banks for much shorter maturities.
The majority of BNDES’s financing is indirect
and channeled through accredited financial
institutions. In these cases the borrower contacts
his own bank to negotiate the loan. The bank
analyses the credit risk and sets the terms in
compliance with the conditions determined by
the BNDES line or program. After making its own
credit decision, the bank contacts BNDES for
funding. The cost of the financing may once again
vary depending on the line or program, but in
principle it is composed of the following factors:
BNDES financing cost, BNDES basic remuneration
rate, BNDES financing intermediation rate and
the fee charged by the financial institution
granting the credit. The financing intermediation
rate is the fee that BNDES charges to cover the
risk of the intermediating commercial financial
institution, and the rate is fixed at 0.5% p.a.
Loans to companies with annual turnover of less
than BRL 90 million are exempted of the rate.
BNDES mainly finances locally sourced
investments and requires a 60% local content in
both value and weight. Under certain conditions,
the bank can also finance imported equipment
and machinery up to 60% of the import value.
Import financing is only available when there are
no alternatives produced locally. The importer
has to prove this lack of domestic alternatives
with specific certificates, and there are a few
exceptions of imported products that cannot be
financed.
Because of the local content rules, Brazilian
companies that want to purchase imported
goods do not typically have access to BNDES
financing. Because of the high cost of domestic
commercial credit, the companies may benefit
from international financing arrangements.
The exporter has a crucial role in helping the
companies to find financing abroad, especially
when selling to companies without existing
relationships with international banks. Below we
provide information on the possible financing
solutions and what should be taken into account
when arranging financing for a customer.
Knowyourcustomer
A
s important as it is to know your
domestic clients, it is especially important
to know your customer abroad even if
the payment terms for the customer would not
include a credit. Convenient way to check the
basic information and the creditworthiness of
your customer is to order a credit information
report on the buyer. Various financing
institutions, such as Finnvera plc, also utilize
credit information reports as part of analyzing
foreign companies. These reports are provided
by for example Suomen Asiakastieto Oy and
Dun & Bradstreet. When arranging an export
transaction and a credit to a foreign buyer, the
exporter should be prepared for that financing
institutions require information on the buyer,
one of the most important part being recent
financials or annual report. If the buyer is not
prepared to deliver this information, it is always
a negative sign for the financiers. The larger the
credit, the more extensive are the requirements
on the quality and usually also the quantity of
the information.
When arranging financing to the buyer via a
bank or simply applying for a guarantee to
secure your payments, Finnvera and the bank
conduct an analysis on the buyer to determine
the creditworthiness of the counterparty. In
a smaller transaction (up to EUR 600,000),
a credit information report can be sufficient
for Finnvera, but it should not be older than 3
months. In case the report contains enough
information (which usually means recent
financials) Finnvera can make a decision about
granting a guarantee based solely on that. If
the information is not sufficient, Finnvera relies
on the exporter to deliver more information
on the buyer if there is no information publicly
available.
4. 4
Prepaymentsreceived
fromthebuyer
W
hen delivering capital intensive
goods, usually a prepayment for a
part or for the whole value of the
transaction is received from the buyer. If a
prepayment is received from the customer, one
should take into account that the buyer may
require a security for the payment for example
in the form of a bond/guarantee. If a guarantee
is required from a bank, the first contact
point is your own bank. In case the exporting
company is small or medium sized, Finnvera
may assist in the process by offering a counter
guarantee for the bank advancing the bond.
Finnvera can also cover the exporter from the
risk of unfair calling of the bond or calling for
political reasons as the bond required is usually
on demand, which means that the bank does
not comprehensively look through the validity
of the calling before the execution.
If the received prepayment does not cover all
of the manufacturing costs before the delivery,
a quantifiable risk arises for the exporter. What
happens if the buyer cancels the deal during
the manufacturing period? A letter of credit
(documentary credit) can protect the exporter
from the risk. If a letter of credit is issued by the
buyer’s bank before the manufacturing of the
goods has begun, the exporter is on the safe
side if for some reason the buyer would want
to cancel the deal. The exporter should turn
to his house bank for advice when wishing to
use letter of credit as a payment method and
security. Letters of credit can also be used to
arrange financing for your customer, to which
we will address later on in this presentation. The
pricing of this product depends for example on
the creditworthiness of the issuing bank (the
buyer’s bank), the length of the manufacturing
period and possible credit period. However in
Brazil, at least from Finnvera’s point of view, the
letters of credit in import transactions do not
seem to be very popular.
If the goods imported are tailor-made and
difficult to sell forward due to the initial
customer, for reason or another, refusing
them, Finnvera can also grant cover for the
manufacturing period. Finnvera cover is called
a credit risk guarantee for the manufacturing
period and it covers the incurred costs,
excluding the margin for the exporter if the
transaction is cancelled. The cover is usually for
90% of the costs.
Manufacturing Costs Credit
Guarantee for manufacturing
costs (pre-delivery risks)
Manufacturing of goods Payment granted to a foreign Buyer
Guarantee for post-
delivery credit risks
5. 5
Grantingpaymentterms
withinvoice
E
xporter may offer its customers post-
delivery payment terms with a simple
invoice. In the case of consumer goods,
often the payment terms granted to the buyer
are usually maximum 180 days, depending on
the products. In some fields of business they
may be even longer. However, it is not advisable
to grant unnecessarily long or unconventional
terms on a certain business field. Exporter
may cover itself from the arising commercial
and political risks by insuring its receivables.
Finnvera or the private credit insurers (for
example Atradius Credit Insurance or Euler
Hermes) may grant credit receivable guarantees
to Finnish exporters dealing with Brazilian
buyers for continuing trade (credit insurance
limit) or for a single transaction.
In the case of a single transaction, for example
in delivering machinery, the payment terms
can be longer depending on the equipment and
the amount of the transaction. In those cases
it is advisable not to have bullet–type payment
terms. For an exporter it is important to keep
in mind that when insuring receivables with
Finnvera, the guarantee does not automatically
include financing for the amount. In other words
the exporter acts as a bank for the buyer in case
that only insurance has been granted.
If credit insurance has been acquired to cover
the transaction/s, it is possible to negotiate with
your bank about discounting the receivables.
These discussions are conducted by the exporter
with its bank. When the trade is continuous
in its nature (usually consumables), in many
cases it is possible to transfer the rights of the
indemnification under the guarantee agreement
to the discounting bank. This way the exporter
does not have to wait for the full payment from
the buyer. Sometimes this is also possible in
the case of a single transaction. Especially with
single transactions, it is essential to discuss
with your bank about the possibility to discount
the receivables as early as possible. Sometimes
when direct discounting is not possible in a
single transaction, the exporter has applied for a
loan from the bank and kept it in its own balance
sheet to be able to offer more favorable terms
for the buyer.
Finnveras pricing for the short-term guarantees
(payment terms less than 2 years) can be found
on our website (www.finnvera.fi/eng). As an
example, if the payment term is less than 90
days, the guarantee premium is in the range of
0.4%–0.75% flat counted from the amount of
the invoice and the cover is for 90%. Other costs
include ordering the credit information report
(EUR 150) if Finnvera acquires it, and the handling
fee which starts from EUR 150 (for guarantees
up to EUR 600,000) to a few thousand euros
depending on the size of the transaction. If
possible, any costs arising from different
variations of granting favorable payment terms
for a buyer should be carried by the buyer.
Billsofexchangeasa
financinginstrument
B
ills of exchange can be a useful instrument
in granting payment terms to a buyer
in Brazil especially as the shipment can
be done by sea. This is important because the
delivered equipment stays in the warehouse of
the port and the buyer receives the documents
that entitle him to acquire the goods only if the
buyer has paid or accepted a bill of exchange (or
a series of bills) in his own bank. Your own bank
will advise you about using the bills of exchange
in transactions with your customer. The exporter
will issue a bill of exchange which the buyer will
accept and confirm. The payment terms granted
to a buyer can be short (for example 90 days)
or very long (several years). If the maturity of
the credit is longer and there is a single delivery,
the exporter usually issues a series of bills
of exchange, which are payable for example
semi-annually. The bills of exchange can be
discounted, which means that the exporter
receives majority of the amount when the
equipment is delivered. One of the advantages
of bills of exchange is that the documentation is
relatively simple, and because of that they can
be used in smaller scale transactions as well.
Your bank can be of help when preparing an
indication about a financing scheme under bills
of exchange and to make sure that the costs
from the financing are transferred to the buyer.
The bills of exchange can be guaranteed by the
buyer’s bank to take care of the obligations
under the agreement if the buyer itself will not.
Finnvera can also grant a buyer credit guarantee
for the discounting bank (the exporter’s bank) to
guarantee the payment. Usually banks require
some sort of guarantee on behalf of the buyer if
the bills of exchange are to be discounted.
If the payment terms granted or a buyer credit
arranged to the buyer exceeds two years in
maturity, Finnvera has to follow the OECD-
rules when guaranteeing the transaction. In
short this means that for example a bullet
repayment cannot be executed with Finnvera’s
participation. The main rules are that the
prepayment should be at least 15% and the
credit maximum 85% of the export contract
value. Repayments have to be made every
6 months (the period can be shorter as well)
and the installments shall be equal. Finnvera’s
prerequisite for participation in a transaction
is so called Finnish interest, which means that
generally the Finnish content should be at
least one third of the total amount guaranteed
when delivery is to Brazil. Local content can be
financed up to 30% of the export contract value,
if any. In a transaction with maturity of less
than two years, a satisfactory level of Finnish
interest is usually achieved when the exporter is
registered in Finland.
6. 6
Letterofcredit,documentarycredit
L
etter of credit or documentary credit as a
payment method is secure to the exporter
if the conditions are set correctly and the
exporter is able to deliver the product within
the agreed period of time. Letter of credit can
be used to hedge against the risk of the buyer’s
country and the buyer’s credit risk, and can
be a tool with which to arrange a credit to the
purchaser as well. Letter of credit as a method
of payment should be agreed already in a sales
contract and your bank can help in defining the
terms and conditions of the letter of credit (for
example a draft can be included in the trade
agreement).
The reimbursement to the exporter is done
against a set of documents consisting of for
example a bill of lading, by the exporter’s bank.
The documentation required should be such
that the exporter is able to provide it to his
bank without any possibility for the buyer to
intervene. Buyer will consult their own bank
about the issuance of the letter of credit on
agreed terms and conditions. After reviewing
the creditworthiness of the buyer, the buyer’s
bank issues the letter of credit on behalf of the
buyer, and when this information reaches the
exporter’s bank, the exporter will be notified.
The exporter’s bank can confirm the issued
letter of credit at the exporter’s request and
review the documents. This is advisable because
the banks are seasoned with reviewing the
documentation, and when a letter of credit
is confirmed, the bank also carries the risk
involved with it along with the commercial
and political risks from the buyer’s bank and
country. If a letter of credit is confirmed by
the exporter’s bank, it means that from the
exporter’s point of view the credit risk is
transferred to exporter’s own bank. Letter of
credit may be “at sight” or “avista”, which
means that the buyer’s bank has to pay the
agreed amount to the exporter’s bank upon
submission of the agreed documents. The
buyer’s bank will then recover the funds from
the buyer. Letter of credit can also be used as a
tool to arrange financing for the buyer (deferred
payment L/C), and the exporter’s bank can
discount the purchase price to the exporter at
delivery. At the request of the exporter’s bank,
Finnvera may participate in covering the risk
arising from the issuing bank.
Stand-by letter of credit is, in fact, a bank
guarantee in the form of a letter of credit.
Often, it is used in a continuous short-term
transactions by simply invoicing the customer.
If the buyer fails to fulfill its obligations the
exporter can notify this to his bank and receive
the payment from the buyer’s bank (on
demand). In a stand-by letter of credit scheme
the buyer’s bank guarantees the payment on
behalf of the buyer the same way as in ordinary
letter of credit and the exporter’s bank can
guarantee the payment on behalf of the buyer’s
bank by confirming the stand-by letter of credit.
exporter buyer
confirming
bank
issuing
bank
finnvera
Delivery contract
with a requirement of
irrevocable L/C as a
term of payment
Request to
confirm L/C
Request to
issue L/C
Confirmation
of L/C
Letter
of Credit
Guarantee
7. 7
Mediumorlong-termcreditforthe
buyer–buyercreditagreement
I
n the case of supplying capital goods, it is
possible to arrange an export credit for the
buyer. In general, credit agreements are
possible instruments only for larger deliveries
of capital goods due to the relatively heavy
documentation. Usually in these cases the
transaction size is around ten million euros or
more, depending slightly about the bank that
arranges the documentation. However, there
are some options for organizing smaller buyer
credits as well. One suitable option in Brazil
would be using the services of a financing
institution called Northstar Europe S.A., which
is of Canadian background and has a branch
in Brazil as well. Northstar is able to conclude
transactions ranging from EUR 500,000 to EUR 5
million with maturities up to five years.
It is important to contact your bank as early as
possible about arranging buyer credits to Brazilian
clients. Your bank can assist in what to do and
how the transaction should be organized. Your
bank will also contact Finnvera when needed
but in the early stages you as an exporter may
do it yourself as well. Northstar has indicated
that they prefer exporters to contact them
directly. Commencing negotiations with potential
financiers should be conducted as early as
possible for the analysis of the transaction will
take some time, depending usually on the size of
the transaction. Also, the preliminary discussions
give insight to what type of arrangement would
be suitable in each specific case.
exporter lender
finnvera
foreign buyer/
Buyer’s bank
Credit funds 85%
Delivery Cash payment 15% Buyer Credit Buyer Credit
Guarantee
8. goods
Total sale
price
Payment
time
single/
continuous
trade
Buyer’s
credit
quality
financing
solutions
and first
contact
points
Capital goods Raw materials, consumer goods,
spare parts etc. non-capital goods
At least MEUR 10/20
Over 2 years Aprox. 1-2
years
At least approx.
1 years
At most 6 months
Single Continuous
Buyer credit
• Finnvera
• Exporter’s
bank
Supplier credit
/ open account
transaction
• Finnvera
Buyer credit +
bank guarantee
or re-financing to
the buyer’s bank
• Finnvera
• Exporter’s bank
Letter of Credit
• Exporter’s bank
Avalised Bill of
Exchange
• Exporter’s bank
Bill of Exchange
• Finnvera
• Exporter’s bank
Invoice
(open account
transaction)
• Finnvera
• Private credit
insurer
Stand-by
Letter of
Credit
• Exporter’s
bank
Bank
guarantee
• Exporter’s
bank
Strong Weak Strong WeakWeakStrong
At most MEUR 10/20
At most approx. 1 year
All the solutions that work with weak credit quality, are also applicable for strong counterparties.
8
9. 9
Finnvera provides domestic small and medium sized enterprises (SMEs) with loans,
guarantees and venture capital investments and operates closely together with various
Finnish and international banks. Finnvera also provides export credit guarantees and
financing for export credits. Finnvera plc is a specialized financing company owned by
the state of Finland and is the official Export Credit Agency (ECA) of Finland.
www.finnvera.fi