Engineering Export: Why Long Deferred Payment Terms Require Forfaiting and Export Credit Agency Cover

The key difference between engineering export and ordinary commodity export is the timing of settlements. According to the U.S. Commercial Service guide "Extending Credit to Foreign Buyers," for standard goods — consumer, chemical, agricultural, and spare parts — normal commercial terms of settlement range from 30 to 180 days.

For machines and equipment built for a specific project, deferred payment is measured in years.

Each stage carries its own risk and requires a separate instrument. This structure takes the transaction beyond the scope of standard trade finance instruments designed for a short cycle.

The engineering market has significant volume. According to the German Machine Tool Builders' Association, in 2025 China overtook Germany for the first time and became the world's largest machine tool exporter, increasing shipments by 13% to EUR 8.6 billion. Global machine tool exports in 2025 totaled about EUR 41.4 billion.

According to the China Federation of Machinery Industry, China's engineering product exports in the first half of 2026 reached USD 559.33 billion, up 20% year on year. Construction equipment exports for January–August 2026 amounted to USD 46.614 billion, up 20.8% (data from the China Construction Machinery Association and China Customs).

Beyond growing volume, a shift in position within the global chain plays an important role. A few years ago, equipment for large projects was supplied mainly by European and Japanese manufacturers with well-established export financing schemes. As of 2026, the supplier is increasingly a Chinese company.

This changes the structure of the transaction: the banking chain, the availability of export credit agency cover, and the willingness of forfaiters to work with a new seller profile become different.

The need for special instruments is created not by volume but by the specifics of settlement. Since payments are tied to the stages of manufacturing, installation, and commissioning, at this gap ordinary working capital financing instruments cease to work, and the need arises for forfaiting and export credit agency cover.

What Makes an Engineering Transaction Special

1. Forfaiting applies to tenors from 6 months to 5–8 years, in certain cases up to 11 years. This is incomparable to factoring, where the typical tenor is 90–180 days. When deferred payment is measured in years, the seller bears not only the cost of waiting but also credit, interest, and currency risk for the entire period.

2. At each stage, risk falls on different participants:

- before the advance payment, the seller bears the risk of the buyer's readiness;

- at the manufacturing stage — the risk of project stoppage, while the equipment has not yet become a liquid asset;

- after shipment, the classic credit risk of the buyer begins.

3. Uniqueness of the asset. Equipment manufactured for a specific project has a narrow secondary market. It cannot be sold on an exchange like copper or aluminum. It is difficult to resell to another buyer like a universal component. This limits the value of the equipment as collateral.

4. Retentions and performance guarantees reduce the amount to be received and affect the financing structure. The buyer withholds part of the payment until the commissioning certificate is signed or until the warranty period expires.

For the seller, this means that even after shipment and the start of installment payments, part of the amount remains conditional. It depends on whether the buyer confirms that the equipment meets the stated parameters. This part is either not financed at all or financed on separate terms, so the seller has to factor it into the calculation of available financing.

What Forfaiting Covers

Forfaiting is the non-recourse purchase of debt (without the right of recourse to the seller). The one who buys the debt (the forfaiter) assumes the risk of non-payment and can no longer return to the exporter with a demand to return the money if the buyer fails to pay.

As a rule, such debt is formalized by a negotiable instrument — a bill of exchange or a promissory note. Rights under such an instrument transfer together with the instrument itself, rather than through a separate complex assignment procedure. This simplifies further resale of the debt and reduces legal risks for the one who buys it.

Forfaiting transactions are governed by the ICC Uniform Rules for Forfaiting (URF 800), which entered into force on January 1, 2013. The rules apply if the parties expressly state in the agreement that their forfaiting transaction is subject to URF 800.

The document covers the primary market (sale of debt by the exporter) and the secondary market (resale of the asset between financial institutions). It includes key provisions: non-recourse (Article 4), terms of transactions on the primary and secondary markets, documentation requirements, payments, and obligations of the parties.

The discount is the key parameter of a forfaiting transaction. The forfaiter pays the exporter the face value of the bill less interest for the entire period until maturity.

In addition to the discount, there may be a commitment fee (about 1% per annum for the waiting period) and an option fee (up to 1% of the face value).

The credit tenor is the main factor determining the cost. The longer the tenor, the higher the discount: interest accrues over the entire period, and risk accumulates. Therefore, forfaiting applies to transactions from 6 months to 5–8 years, where ordinary working capital instruments do not work.

Nominally, the discount is borne by the exporter, but the actual distribution of cost depends on the negotiating position. The exporter can build the cost of forfaiting into the contract price and pass it on to the buyer.

The main constraint is not the project but the bank. The forfaiter buys not the risk of the equipment buyer but the risk of the bank that (provided a bank guarantee of payment under the bill) or guaranteed it.

If there is no bank in the buyer's country ready to provide an aval or guarantee for this debt, forfaiting does not launch. Regardless of how good the project is, how reliable the buyer is, and how high-quality the equipment is, without a guarantor bank the transaction does not proceed.

When preparing the contract, the first thing to check is not the buyer but the availability in their country of a bank ready to provide a guarantee and having a free limit for it.

What Export Credit Agency Cover Provides

Export credit agency instruments cover those areas that are inaccessible to commercial financing. The main structures:

Agencies operate within a common international agreement — the Arrangement on Officially Supported Export Credits, which operates under the auspices of the OECD. The document is called a "gentlemen's agreement": it is not an OECD act, but participants voluntarily comply with its rules.

The current edition is July 2023, applied from July 15, 2023. It includes reforms to modernize the Arrangement and the CIRR (Commercial Interest Reference Rate) reform.

The purpose of the Arrangement is to prevent unlimited subsidized competition: exporters must compete on the quality and price of the goods, not on the most favorable government support terms.

Three practical limitations of cover:

1. Country classification. Each country belongs to one of eight risk categories (0–7), where 7 is maximum risk and 0 is developed financial markets. The category determines the terms of cover and the level of the minimum premium: the higher the risk, the more expensive the cover.

Category 0 means that market prices apply rather than minimum premiums. Classification is carried out by the OECD country risk experts group based on an econometric model that takes into account macroeconomic data and countries' payment experience. Revisions occur several times a year.

2. National content requirement. Support is provided only if a certain share of national production is present. The specific threshold varies by country and may be subject to negotiation.

For example, according to the official policy of the U.S. EXIM on content for medium- and long-term transactions, the total level of support is the lesser of two values: 85% of the value of all eligible goods and services in the export contract or 100% of U.S. content in those goods and services, whichever is less. This is the strictest threshold among OECD countries.

In EU countries, the situation is different. According to an explanation by the Chamber of Industry and Commerce of Trier (IHK Trier), Germany previously required 49% German content, but in 2025 moved to a more flexible approach, assessing not the share of supplies but the company's "footprint" in Germany (employment, R&D, tax contributions).

With a fragmented supply chain, calculating this share is not easy: components come from different countries, and determining what part of the value was created within the exporting country becomes a separate task.

3. Cover percentage. Export risk insurance rarely covers 100% of losses. The remainder stays with the lender or exporter. This means that part of the non-payment risk remains with the seller or bank, and it must either be built into the price or covered by other instruments.

How Instruments Combine into a Single Transaction

In practice, engineering export is rarely financed by a single instrument. It is always a set tied to the stages of the transaction. The reason: each stage carries its own risk, and each risk requires its own instrument.

1. Tender stage: tender guarantee. When an exporter participates in a tender, the buyer requires confirmation of seriousness of intent. A bank or export credit agency issues a tender guarantee — an obligation to pay the buyer a certain amount if the exporter wins the tender but refuses to sign the contract.

At this stage, the equipment does not yet exist, but the risk has already arisen.

2. Manufacturing stage: pre-shipment risk insurance or advance payment financing. After the contract is signed, production begins. Pre-shipment risk insurance protects the exporter from losses if production stops or the buyer refuses the contract before shipment.

An alternative is an advance payment from the buyer, which covers part of the manufacturing costs. The advance is usually secured by a bank guarantee of return.

3. After shipment: buyer credit or forfaiting of bills. When the equipment is shipped, the classic credit risk of the buyer arises. Two paths are possible here:

the bank provides a loan to the buyer, who uses it to pay the exporter, and the agency covers the non-payment risk;

forfaiting: the exporter sells bills avalized by the buyer's bank to a forfaiter without recourse.

4. Installment stage: exporter's exit from the transaction. If the forfaiter is ready to buy the debt, the exporter exits the transaction early and no longer bears the risk. If not, the exporter waits for payments throughout the entire installment period.

Such a combination means that financing is discussed before the contract is signed, not after the equipment is manufactured. The export credit agency needs to be engaged at an early stage in order to structure the transaction taking into account cover requirements and avoid delays.

Conclusions

The decision on financing engineering export begins at the contract negotiation stage. 3 things need to be clarified in advance:

whether there is a bank in the buyer's country ready to provide a guarantee and having a limit for it;

what the terms of export credit agency cover are for this destination;

whether there is an instrument for insuring the manufacturing stage.

If at least one of the conditions is not met — no guarantor bank, the agency does not cover this destination, no prepayment — the transaction is structurally unfinanceable. Equipment by itself does not serve as sufficient collateral.

FAQ

What is the key difference between forfaiting and factoring for an equipment exporter?

Factoring is suitable for regular, short trade flows and usually retains the right of recourse. Forfaiting is designed for one-off large transactions with capital goods, the tenor is measured in years, and the debt is bought without recourse. For an equipment exporter with multi-year installments, factoring is inapplicable due to tenor.

Who bears the risk at the manufacturing stage?

Before equipment shipment, the risk is borne by the exporter. This stage can be covered by pre-shipment risk insurance, but its availability depends on the agency's country policy and national content requirements. Without insurance, the exporter either finances the stage at its own expense or seeks a higher advance payment in the contract.

Why, despite agency cover, may the exporter still not receive payment?

Agency cover closes political risk and the buyer's credit risk, but not commercial disputes. If the buyer refuses to pay, citing non-compliance of the equipment with technical requirements, this is a dispute under the contract, and it is not included in the insurance cover. The exporter needs to ensure that the equipment complies with the contract terms and retain full acceptance documentation.