financing foreign trade

FINANCING FINANCING FOREIGN TRADEFOREIGN TRADE

CHAPTER 12

CHAPTER OVERVIEW:CHAPTER OVERVIEW:

I.I. PAYMENT TERMSPAYMENT TERMS

II.II. DOCUMENTSDOCUMENTS

III.III. FINANCING TECHNIQUESFINANCING TECHNIQUES

IV.IV. GOVERNMENT SOURCES OF EXPORT GOVERNMENT SOURCES OF EXPORT FINANCING AND CREDIT FINANCING AND CREDIT

INSURANCEINSURANCE

V.V. COUNTERTRADECOUNTERTRADE



A.A. Five Principal Means:Five Principal Means:

1.1. Cash in advanceCash in advance

2.2. Letter of CreditLetter of Credit

3.3. DraftsDrafts

4.4. ConsignmentConsignment

5.5. Open AccountOpen Account

PAYMENT TERMSPAYMENT TERMS

B.B. Cash in AdvanceCash in Advance

1.1. Minimal risk to exporterMinimal risk to exporter

2.2. Used where there isUsed where there is

a. a. Political unrestPolitical unrest

b.b. Goods made to orderGoods made to order

c.c. New unfamiliar customerNew unfamiliar customer


C.C. Letter of Credit (L/C)Letter of Credit (L/C)1.1. A letter addressed to sellerA letter addressed to seller

a.a. written and signed by written and signed by buyer’s bankbuyer’s bank

b.b. promising to honor seller’spromising to honor seller’sdrafts. drafts.

c.c. Bank substitutes its ownBank substitutes its owncommitmentcommitment

d.d. Seller must conform to Seller must conform to termsterms


2.2. Advantages of an L/C to ExporterAdvantages of an L/C to Exporter

a.a. eliminates credit riskeliminates credit risk

b.b. reduces default riskreduces default risk

c.c. payment certaintypayment certainty

d.d. prepayment risk protectionprepayment risk protection

e.e. financing sourcefinancing source


3.3. Advantages of L/C to ImporterAdvantages of L/C to Importer

a.a. shipment assuredshipment assured

b.b. documents inspecteddocuments inspected

c.c. may allow better sales termsmay allow better sales terms

d.d. relatively low-cost financingrelatively low-cost financing

e.e. easy cash recovery if easy cash recovery if discrepanciesdiscrepancies


4.4. Types of L/CsTypes of L/Cs

a.a. documentarydocumentary

b.b. non-documentarynon-documentary

c.c. revocablerevocable

d.d. irrevocableirrevocable

e.e. confirmedconfirmed

f.f. transferabletransferable


D.D. DRAFTSDRAFTS

1.1. Definition:Definition:

- unconditional order in writing- unconditional order in writing

- exporter’s order for importer - exporter’s order for importer to to pay pay

- at once (sight draft) or- at once (sight draft) or

- in future (time draft)- in future (time draft)


2.2. Three Functions of DraftsThree Functions of Drafts

a.a. clear evidence of financial clear evidence of financial obliga-obliga- tiontion

b.b. reduced financing costsreduced financing costs

c.c. provides negotiable and provides negotiable and uncondi-uncondi-

tional financial instrumenttional financial instrument

(ie. May be converted to a (ie. May be converted to a banker’s acceptance)banker’s acceptance)


3.3. Types of DraftsTypes of Drafts

a.a. sightsight

b.b. timetime

c.c. clean (no documents needed)clean (no documents needed)

d.d. documentarydocumentary


E.E. CONSIGNMENTCONSIGNMENT

1.1. Exporter = the consignorExporter = the consignor

2.2. Importer = the consigneeImporter = the consignee

3.3. Consignee attempts to sellConsignee attempts to sell

goods to a third party; keeps goods to a third party; keeps some profit, remits rest to some profit, remits rest to

consignor.consignor.

4.4. Use: Between affiliatesUse: Between affiliates


F.F. OPEN ACCOUNTOPEN ACCOUNT

1.1. Creates a credit saleCreates a credit sale

2.2. To importer’s advantageTo importer’s advantage

3.3. More popular lately becauseMore popular lately because

a.a. major surge in global trademajor surge in global trade

b.b. credit information improvedcredit information improved

c.c. more global familiarity with more global familiarity with exporting.exporting.


4.4. Benefits of Open Accounts:Benefits of Open Accounts:

a.a. greater flexibility in makinggreater flexibility in making

a tradea trade

b.b. lower transactions costslower transactions costs

5.5. Major disadvantage:Major disadvantage:

highly vulnerable to highly vulnerable to government government currency currency controls.controls.

II.II. DOCUMENTSDOCUMENTS

II.II.DOCUMENTS USED IN INT’L TRADEDOCUMENTS USED IN INT’L TRADE

A.A. Four most used documentsFour most used documents

1. Bill of Lading (most 1. Bill of Lading (most important)important)

2. Commercial Invoice2. Commercial Invoice

3. Insurance Certificate3. Insurance Certificate

4. Consular Invoice4. Consular Invoice

DOCUMENTSDOCUMENTS

B.B. Bill of LadingBill of Lading

Three functions:Three functions:

1.1. Acts as a contract to carry Acts as a contract to carry the goods.the goods.

2.2. Acts as a shipper’s receiptActs as a shipper’s receipt

3. 3. Establishes ownership Establishes ownership overover

goods if negotiable type.goods if negotiable type.

DOCUMENTSDOCUMENTS

2.2. Type of BillsType of Bills

a.a. StraightStraight

b.b. OrderOrder

c.c. On-boardOn-board

d.d. Received-for-shipmentReceived-for-shipment

e.e. CleanClean

f.f. FoulFoul

DOCUMENTSDOCUMENTS

C.C. COMMERCIAL INVOICECOMMERCIAL INVOICE

Purpose:Purpose:

1.1. Lists full details of goods Lists full details of goods shippedshipped

2.2. Names of importer/exporter Names of importer/exporter givengiven

3.3. Identifies payment termsIdentifies payment terms

4.4. List charges for transport and List charges for transport and insurance.insurance.

DOCUMENTSDOCUMENTS

D.D. INSURANCEINSURANCE

1.1. Two Categories:Two Categories:

a.a. Marine: transport by seaMarine: transport by sea

b.b. Air: transport by airAir: transport by air

2.2. Insurance CertificateInsurance Certificate

issued to show proof of issued to show proof of insuranceinsurance

3.3. All shipments insured today.All shipments insured today.

DOCUMENTSDOCUMENTS

E.E. CONSULAR INVOICECONSULAR INVOICE

Local consulate in host country Local consulate in host country issues:issues:

a visa for the exporter’s invoice.a visa for the exporter’s invoice.

requires fee to be paid to consulate.requires fee to be paid to consulate.



A.A. Four Types:Four Types:

1.1. Bankers’ AcceptancesBankers’ Acceptances

a. Creation: drafts accepteda. Creation: drafts accepted

b. Terms: Payable at b. Terms: Payable at maturity to holder maturity to holder

FINANCING TECHNIQUESFINANCING TECHNIQUES

2.2. DiscountingDiscounting

a.a. Converts exporters’ drafts to Converts exporters’ drafts to cash minus interest to maturity cash minus interest to maturity and and commissions.commissions.

b.b. Low cost financing with few feesLow cost financing with few fees

c.c. May be with (exporter still liable) May be with (exporter still liable) or without recourse(bank takesor without recourse(bank takes

liability for nonpayment).liability for nonpayment).


3.3. FactoringFactoring-firms sell accounts receivable to -firms sell accounts receivable to another firm known as the factor. another firm known as the factor.a.a. Discount charged by factorDiscount charged by factorb.b. Nonrecourse basis: FactorNonrecourse basis: Factor

assumes all payment risk.assumes all payment risk.c.c. When used:When used:

1.)1.) Occasional exportingOccasional exporting2.)2.) Clients geographically Clients geographically dispersed.dispersed.


4.4. ForfaitingForfaiting

a.a. Definition:Definition:

discounting at a fixed rate discounting at a fixed rate without recourse of medium-term without recourse of medium-term accounts receivable denominated accounts receivable denominated in a fully convertible currency.in a fully convertible currency.

b.b. Use: Large capital purchasesUse: Large capital purchases

c.c. Most popular in W. EuropeMost popular in W. Europe

IV.IV. GOVERNMENT SOURCES GOVERNMENT SOURCES OF EXPORT FINANCINGOF EXPORT FINANCING

IV.IV. GOVERNMENT SOURCES OF GOVERNMENT SOURCES OF EXPORTEXPORT FINANCING AND FINANCING AND

CREDIT CREDIT INSURANCEINSURANCE

A.A. Export-Import Bank of the U.S.Export-Import Bank of the U.S.

-known as Ex-Im Bank-known as Ex-Im Bank

-finances and facilitates U.S. -finances and facilitates U.S. exports only. exports only.

GOVERNMENT SOURCES OF GOVERNMENT SOURCES OF EXPORT FINANCINGEXPORT FINANCING

1.1. Ex-Im Bank Programs:Ex-Im Bank Programs:

a.a. Direct loans to exportersDirect loans to exporters

b.b. Intermediate loans to exportersIntermediate loans to exporters

c.c. Loan guaranteesLoan guarantees

d.d. Preliminary commitmentsPreliminary commitments

e.e. Political and commercial Political and commercial insuranceinsurance


B.B. Private Export Funding CorporationPrivate Export Funding Corporation

(PEFCO)(PEFCO)

1.1. Finances large sales from privateFinances large sales from private

sourcessources

2.2. May purchase loans of U.S. May purchase loans of U.S. importersimporters

3.3. ExIm Bank provides loan ExIm Bank provides loan guarantees.guarantees.


C.C. Foreign Credit Insurance Foreign Credit Insurance AssociationAssociation

(FCIA)(FCIA)

1.1. Offers commercial and politicalOffers commercial and political

risk insurancerisk insurance

2.2. When insured, exporter oftenWhen insured, exporter often

able to obtain financing faster.able to obtain financing faster.

V.V. COUNTERTRADECOUNTERTRADEV.V. COUNTERTRADECOUNTERTRADE

A.A. Three Specific Forms:Three Specific Forms:1.1. BarterBarter

direct exchange in kinddirect exchange in kind2.2. CounterpurchaseCounterpurchase

sale/purchase of unrelatedsale/purchase of unrelatedgoods but with currenciesgoods but with currencies

3.3. BuybackBuybackrepayment of original repayment of original

purchase through sale of a purchase through sale of a related product.related product.

COUNTERTRADECOUNTERTRADE

B.B. When to Use CountertradeWhen to Use Countertrade

1.1. With “soft-currency” With “soft-currency” developingdeveloping

countriescountries

2.2. When foreign contractor mustWhen foreign contractor must

perform.perform.

financing foreign trade

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