Financing the International Trade Financing the International Trade Export-Import FinancingExport-Import Financing

Functions of Financing the trade:Functions of Financing the trade:

Managing the risk of completion of the transaction.Managing the risk of completion of the transaction.

Protection against foreign exchange rate risk.Protection against foreign exchange rate risk.

A measure of financing the transaction.A measure of financing the transaction.

Solve the dilemma of Solve the dilemma of seller maintaining the legal right to seller maintaining the legal right to titletitle until paid & until paid & buyer reluctant to paybuyer reluctant to pay until receiving the until receiving the merchandise .merchandise .

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Financing the International Trade Financing the International Trade Export-Import Financing (con...)Export-Import Financing (con...)

Types and Mechanisms of Financing:Types and Mechanisms of Financing:

Letter of Credit (L/C):Letter of Credit (L/C):Issued by a Issued by a importer bankimporter bank at the at the request of an request of an importerimporter. . Importer bankImporter bank promises to pay promises to pay the the exporterexporter upon receiving of required document upon receiving of required document specified in L/C.specified in L/C.

Types of L/C:Types of L/C:

IrrevocableIrrevocable (can not be canceled without consent of all (can not be canceled without consent of all parties) v.s. parties) v.s. RevocableRevocable (can be canceled or amended (can be canceled or amended before payment).before payment).

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Export-Import Financing (con...)Export-Import Financing (con...)ConfirmedConfirmed (both banks of importer and exporter have (both banks of importer and exporter have

obligated to pay) v.s. obligated to pay) v.s. Unconfirmed Unconfirmed (only obligation of (only obligation of issuing banks).issuing banks).

Revolving (valid for more than one transaction) v.s. non-Revolving (valid for more than one transaction) v.s. non-revolving (only good for one transaction).revolving (only good for one transaction).

Cumulative revolving (amount that is not used can be Cumulative revolving (amount that is not used can be added together) v.s. non-cumulative (amount which is not added together) v.s. non-cumulative (amount which is not used can not add together).used can not add together).

Issuers of L/C: L/Cs can be issued by foreign bank and Issuers of L/C: L/Cs can be issued by foreign bank and confirmed by local bank or confirmed by third party. confirmed by local bank or confirmed by third party.

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Export-Import Financing (con...)Export-Import Financing (con...) It can be issued only by local bank or issued by foreign It can be issued only by local bank or issued by foreign

bank with no confirmation from domestic bank.bank with no confirmation from domestic bank.

Draft: Bill of Exchange (B/E): Draft: Bill of Exchange (B/E): Order written by an Order written by an exporterexporter to be paid a specific amount of money by the to be paid a specific amount of money by the importerimporter or importer bank at a specific period of time. or importer bank at a specific period of time.

Party who initiates the draft is called Party who initiates the draft is called DrawerDrawer or or Originator (Usually exporter).Originator (Usually exporter).

Party the draft being written for is Party the draft being written for is DraweeDrawee (usually (usually importer). If drawee is buyer, draft is called trade draft, importer). If drawee is buyer, draft is called trade draft, if it is bank, it is called bank draft.if it is bank, it is called bank draft.

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Export-Import Financing (con...)Export-Import Financing (con...)Conditions for Draft:Conditions for Draft:

It must be in writing and signed by a drawer.It must be in writing and signed by a drawer.

It must contain an unconditional promise to pay a definite It must contain an unconditional promise to pay a definite sum of money to drawer at a specific time.sum of money to drawer at a specific time.

It could be written to order or bearer with receiving bank It could be written to order or bearer with receiving bank or person being a holder in due course.or person being a holder in due course.

Types of draft:Types of draft: Sight DraftSight Draft, , Time DraftTime Draft, Clean Draft, , Clean Draft, Documentary DraftDocumentary Draft

Bill of Lading (B/L): Bill of Lading (B/L): Composed of merchandise receiptComposed of merchandise receipt, , contract (obligation of career)contract (obligation of career), , documents of titledocuments of title

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Export-Import Financing (con...)Export-Import Financing (con...)Types of B/L:Types of B/L:

Straight B/LStraight B/L: Carrier delivers the merchandise to the : Carrier delivers the merchandise to the designated person when paid in advance or designated person when paid in advance or Order B/LOrder B/L; ; grant the title to the specified person.grant the title to the specified person.

Clean B/L:Clean B/L: Merchandise received by the carrier must be Merchandise received by the carrier must be in a good condition v.s in a good condition v.s Foul B/LFoul B/L merchandise could have a merchandise could have a margin of damage.margin of damage.

Other Financing related Documents:Other Financing related Documents:

Commercial Invoice: Price , financial terms, shipping Commercial Invoice: Price , financial terms, shipping condition such as FOB, FAS, C&F and CIF.condition such as FOB, FAS, C&F and CIF.

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Export-Import Financing (con...)Export-Import Financing (con...) Public and Private Financing agencies:Public and Private Financing agencies:

Export Credit Insurance: Credit for export and insurance for default importer.

Foreign Credit Insurance Association (FCIA)

Export Import Bank

Private Export Funding Corporation (PEFCO)

Overseas Private Insurance Corporation. (OPIC)

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http://www.usmcoc.org/naftafor.html

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