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Cross-border equipment financing
International leasing deals don’t always resemble domestic transactions but the result is essentially the same: you get to make your sales and your foreign customers get lease payment terms not available in their own countries.
When equipment vendors contact Mustang to inquire about international “leasing,” often they just mean their foreign customers are seeking some kind of payment terms. The solution may be a lease but it may also be some other kind of cross-border trade finance often with a lower cost and faster turnaround time.
International finance leases
Finance leases with terms up to five years may be feasible for eligible export transactions, but in countries where capital leases are regarded strictly as conditional sales agreements an international lease may closely resemble a straightforward equipment loan.
In these cases the only significant difference between an international lease and a cross-border loan may be in the wording of the credit documents. The financing structure, export credit insurance, political risk insurance, payment streams, and lease-end options (usually a one-dollar buyout) for finance leases and loans are virtually the same.
Synthetic leases, FMV leases, sale-leasebacks, and myriad other equipment leasing arrangements available in the developed economies are not practical for most international lease transactions. Challenges include due diligence, perfecting security interest in overseas collateral, different international leasing regulations, accounting principles, tariffs, and tax laws.
International operating leases
International leasing in the form of true leases or rental agreements may be feasible for exports of very large capital equipment with a long economic life, consistent with FAS 13 and IAS 17 international leasing guidelines.
As long as the international lease agreement contains a “hell or high water” clause, a cross-border operating lease’s payment stream can in principle be credit-insured and financed for up to five years.
Beyond mitigating nonpayment risks, credit and political risk insurance on an international lease may protect against a lessor’s inability to exercise its security interest in the collateral following a payment default or at the end of the lease term.
Export credit for small-ticket equipment
International leasing is available only for large-ticket deals. Financing of small-ticket equipment exports is structured differently from international leasing. Payment terms may need to be shorter, but offering any export credit terms at all can give vendors a powerful competitive advantage vs. insisting on cash in advance or letters of credit.
Equipment vendors play an active role in small-ticket export deals by extending credit terms directly to their international customers. This is made possible by protecting the vendor against virtually all nonpayment risks with an export credit insurance policy.
The vendor gets paid by financing its insured foreign receivables as soon as the equipment has shipped. Or, knowing they’re covered with export credit insurance, some vendors elect to carry their foreign receivables themselves. In any case, the vendor usually retains a small portion (typically 5-10%) of the foreign credit risk.
Mustang supports vendors every step of the way: helping them make credit decisions on their international customers, brokering their export credit insurance policies, and arranging financing for their foreign receivables.
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