FINANCING FOREIGN
TRADE
CHAPTER 11
FINANCING FOREIGN
TRADE
CHAPTER OVERVIEW:
I.
II.
III.
IV.
V.
PAYMENT TERMS
DOCUMENTS
FINANCING TECHNIQUES
GOVERNMENT SOURCES OF EXPORT
FINANCING AND CREDIT INSURANCE
COUNTERTRADE
FINANCING FOREIGN TRADE
I. PAYMENT TERMS
A. Five Principal Means:
1. Cash in advance
2. Letter of Credit
3. Drafts
4. Consignment
5. Open Account
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B. Cash in Advance
1. Minimal risk to exporter
2. Used where there is
a. Political unrest
b. Goods made to order
c. New unfamiliar customer
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C. Letter of Credit (L/C)
1. A letter addressed to seller
a. written and signed by
buyer’s bank
b. promising to honor seller’s
drafts.
c. Bank substitutes its own
commitment
d. Seller must conform to terms
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2. Advantages of an L/C to Exporter
a. eliminates credit risk
b. reduces default risk
c. payment certainty
d. prepayment risk protection
e. financing source
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3. Advantages of L/C to Importer
a. shipment assured
b. documents inspected
c. may allow better sales terms
d. relatively low-cost financing
e. easy cash recovery if
discrepancies
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4. Types of L/Cs
a. documentary
b. non-documentary
c. revocable
d. irrevocable
e. confirmed
f.
transferable
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D.
DRAFTS
1. Definition:
- unconditional order in writing
- exporter’s order for importer to
pay
- at once (sight draft) or
- in future (time draft)
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2. Three Functions of Drafts
a. clear evidence of financial obligation
b. reduced financing costs
c. provides negotiable and unconditional financial instrument
(ie. May be converted to a
banker’s acceptance)
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4. Types of Drafts
a. sight
b. time
c. clean (no documents needed)
d. documentary
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E.
CONSIGNMENT
1. Exporter = the consignor
2. Importer = the consignee
3. Consignee attempts to sell
goods to a third party; keeps
some profit, remits rest to
consignor.
4. Use: Between affiliates
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F.
OPEN ACCOUNT
1. Creates a credit sale
2. To importer’s advantage
3. More popular lately because
a. major surge in global trade
b. credit information improved
c. more global familiarity with
exporting.
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4.
5.
Benefits of Open Accounts:
a. greater flexibility in making
a trade
b. lower transactions costs
Major disadvantage:
highly vulnerable to government
currency controls.
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II.
DOCUMENTS USED IN INT’L TRADE
A. Four most used documents
1. Bill of Lading (most important)
2. Commercial Invoice
3. Insurance Certificate
4. Consular Invoice
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B. Bill of Lading
Three functions:
1. Acts as a contract to carry
the goods.
2. Acts as a shipper’s receipt
3. Establishes ownership over
goods if negotiable type.
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2.
Type of Bills
a. Straight
b. Order
c. On-board
d. Received-for-shipment
e. Clean
f.
Foul
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C.
COMMERCIAL INVOICE
Purpose:
1. Lists full details of goods shipped
2. Names of importer/exporter given
3. Identifies payment terms
4. List charges for transport and
insurance.
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D.
INSURANCE
1. Two Categories:
a. Marine: transport by sea
b. Air: transport by air
2. Insurance Certificate
issued to show proof of insurance
3. All shipments insured today.
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E.
CONSULAR INVOICE
Local consulate in host country issues
a visa for the exporter’s invoice.
Requires fee to be paid to consulate.
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III. FINANCING TECHNIQUES
A. Four Types:
1. Bankers’ Acceptances
a. Creation: drafts accepted
b. Terms: Payable at
maturity to holder
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2. Discounting
a. Converts exporters’ drafts to cash
minus interest to maturity and
commissions.
b. Low cost financing with few fees
c. May be with (exporter still liable)
or without recourse(bank takes
liability for nonpayment).
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3. Factoring
-firms sell accounts receivable to
another firm known as the factor.
a. Discount charged by factor
b. Nonrecourse basis: Factor
assumes all payment risk.
c. When used:
1.) Occasional exporting
2.) Clients geographically
dispersed.
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4. Forfaiting
a. Definition:
discounting at a fixed rate without
recourse of medium-term
accounts receivable denominated
in a fully convertible currency.
b. Use: Large capital purchases
c. Most popular in W. Europe
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IV.
GOVERNMENT SOURCES OF EXPORT
FINANCING AND CREDIT INSURANCE
A.
Export-Import Bank of the U.S.
-known as Ex-Im Bank
-finances and facilitates U.S.
exports only.
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1. Ex-Im Bank Programs:
a. Direct loans to exporters
b. Intermediate loans to exporters
c. Loan guarantees
d. Preliminary commitments
e. Political and commercial insurance
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B.
Private Export Funding Corporation
(PEFCO)
1. Finances large sales from private
sources
2. May purchase loans of U.S.
importers
3. ExIm Bank provides loan
guarantees.
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C.
Foreign Credit Insurance Association
(FCIA)
1. Offers commercial and political
risk insurance
2. When insured, exporter often
able to obtain financing faster.
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V.COUNTERTRADE
A. Three Specific Forms:
1. Barter
direct exchange in kind
2. Counterpurchase
sale/purchase of unrelated
goods but with currencies
3. Buyback
repayment of original
purchase through sale of a
related product.
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B. When to Use Countertrade
1. With “soft-currency” developing
countries
2. When foreign contractor must
perform.