Export & Import Financing
Chapter Twenty
Eiteman, Stonehill, & Moffett
July 17, 2016
Chapter 20 - Trade financing
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Trade payment terms
 cash in advance
 draft
 bill of exchange
 letter of credit (L/C)
 bankers acceptance
 consignment
 open account
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Cash in advance
 Advantages
 least risky alternative
 risk is shifted entirely to the importer
 Disadvantages
 may be non-competitive, lose business
 preferred if goods made to order
 for purpose of financing the production
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Draft - bill of exchange
 issued and signed by the exporter (drawer)
 unconditional orders to pay (for the importer)
 on demand (sight draft)
 at a specified time in the future (time draft)
 fixes the amount of manner of payment
 time draft becomes an acceptance
 when accepted by drawee (exporter)
 L/C (promise of banker’s acceptance)
 draft (bill of exchange) accepted by bank
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Draft - types of drafts
 documentary drafts
 drafts which require supporting
documentation
 bills of lading, invoices, etc.
 drafts accompanying trades are
documentary
 non documentary (clean)
 non-commercial transactions
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Drafts - mechanics
 a draft extends credit
 receivable to the exporter
 payable to the importer
 exporter gives control of goods to importer
 for the signature on draft
 contract between exporter and importer
only
 transferable (usually banker’s acceptances)
 at discount to bank, acceptance dealer
 rate lower than prime
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L/C - terms
 promise of payment issued by the
importer’s bank
 binds the importer’s bank to pay determining
 currency of payment
 timing of payment
 amount of payment
 binds the exporter to deliver a certain product
 quantity of goods
 quality of goods
 delivery date for goods
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L/C - advantages exporter
 reduces credit risk
 the bank’s reputation is on line
 reduces political risk
 banking system is tied into the political
system
 reduces pre-shipment risk
 contracted terms for delivery of goods
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L/C - advantages importer
 reduces delivery risk
 contract stipulates delivery terms
 bank oversees custom’s procedures
 importer can contract for better terms
 exporter’s risk substantially reduced
 prepayment by importer goes to bank
 if the shipment is not satisfactory easier
for importer to recover payment
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L/C - types of L/Cs
 documentary L/Cs
 L/Cs which require supporting documentation
 bills of lading, invoices, etc.
 majority of L/Cs are documentary
 non documentary (clean)
 non-commercial transactions
 irrevocable L/C
 cannot be revoked except by mutual consent
 revocable (rarely used) better than nothing
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L/C - types of L/Cs con’t
 confirmed L/C by an other bank
 usually a bank in the exporter’s country
 obligates both banks to honor the obligation
 unconfirmed L/C- obligates issuing bank
 transferable L/C
 right to transfer, must be contracted
 transfer of L/C and supporting documents
 assignment
 assigning part of the proceeds to another party
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Banker’s acceptance
 acceptance of the draft by a bank
 bank substitutes its credit for importer’s credit
 if transferable - creates a negotiable instrument
 may discount this to the exporter
 resell in secondary markets
 terms
 maturities 30, 60, 90 days
 bank profits from
 fee on L/O, discount on acceptance
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Banker’s acceptance - hold
 PV of 1,000,000 usd
 less 2% annual commission
 less 9.7% wacc
1,000,000 usd
P0 
. usd
0.25
0.25  972,29555
102
.
 1097
.
 exporter gets BA and holds to term
 exporter hedges transaction exposure
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Banker’s acceptance - discount
 PV of 1,000,000 usd
 less 2% commission per annum
 less 10.4% discount per annum
1,000,000 usd
P0 
0.25
0.25  970,750.65 usd
102
.
 1104
.
 exporter gets BA and discounts
 exporter gets into exchange market
now
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Mechanics of a trade
 few weeks after contract
 goods, price, quantity, quality
 production of goods financed by
 increase in input inventories, by payables
 labor inputs by accruals
 result an increase in output inventories
 payables, accruals must be paid
 payment financed by short-term financing
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Mechanics of a trade - con’t
 goods shipped
 output inventories still carried as assets
 goods, bill of lading, draft sent
 L/C sent to exporter
 delivery of goods
 goods, bill of lading, draft at customs
 time draft accepted
 by importer (acceptance)
 by importer’s bank (bankers acceptance)
 output inventories now change to receivables
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Mechanics of a trade con’t
 Banker’s acceptance may be transferable
 can be held by exporter for payment
 receivable stays on exporters books
 payable stays on importers books
 must hedge transaction exposure if it exists
 Banker’s acceptance if transferable
 can be discounted
 sold at discount to a bank or broker
 then receivable becomes cash
 payable still on importers books
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Mechanics of a trade con’t
 Risk if BA discounted
 foreign exchange exposure exists
 from time contract agreed to
 until draft is accepted by the importer’s
bank
 BA signed
 credit risk
 higher until draft accepted (BA signed)
 lower until BA discounted
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Mechanics of a trade con’t
 Risk if L/C held to maturity
 foreign exchange exposure exists
 from time contract agreed to
 L/C matures
 credit risk
 higher until draft accepted (L/C issued)
 lower until L/C matures
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Consignment
 exporter retains title to good shipped
 importer gains possession, but not title
 very risky
 easy for importer to default on this type
of arrangement
 terms
 whatever the importer sells is paid for
 goods not sold returned
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open account
 most flexible
 importer receives goods - a payable
 acceptance by importer sufficient
 reduces bank charges
 risky - no bank guarantee on
payment
 importer and exporter need to have a
good stable relationship
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Documents of trade
 bill of lading B/L
 contract between exporter and carrier
 straight B/L - consigns good to importer
 order B/L - transferable
 often serves as collateral for L/C
 on board B/L - on board being shipped
 received-for-shipment B/L
 received, but not shipped
 clean B/L - goods(externally) look
undamaged
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Other documents
 commercial invoice
 full description of merchandise
 insurance
 open (floating) prearrangement with
insurer to cover shipments made
 requires an insurance certificate which
must conform to information on B/L
 consular invoice
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Factoring
 firms that buy a firm’s receivables at
discount
 non-recourse basis - factor assumes all risk
 recourse - exporter assumes risk
 factoring fees can run from 1.75 to 2 % per
month
 compounded from 23.14 to 26.82 % per year
 on top of this non-recourse fees can add to this
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Export financing
 export-import banks
 finance exports of goods and services
 subsidy to try to create new markets for exports
 these are not market driven
 very bureaucratic & often political
 export-credit insurance
 low cost credit insurance
 lowers the cost of borrowing by reducing risk
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Countertrade
 barter
 direct exchange of goods between two parties
 counter purchase - parallel barter
 continued sale and purchase of goods
 Finland frequently sold manufactured goods for
raw materials (oil) with the former Soviet Union
 buyback
 repayment of exports made by the sale of
related product
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Payment terms
 evolving instruments of international
trade
 these instruments and methods are used
to
 facilitate trade by exploiting comparative
advantage
 reduce risk
 who
 how much
 its cost
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