LEARNING UNIT 18: FINANCING INTERNATIONAL TRADE
Video
Activity
Text
Additional reading and references
LEARNING OUTCOMES
On completion of this learning unit, you should be able to
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describe common methods of payment for international trade
explain how each method of payment can be beneficial for the following parties: (1) an exporter, (2) an importer and (3)
a bank
identify common trade finance methods
describe the major agencies that facilitate international trade
18.1 OVERVIEW OF THE UNIT
International trade constitutes a substantial portion of the activities of most MNCs. The financing of trade-related working
capital requires large amounts of funds as well as the use of specialised markets and instruments. It is vital therefore that the
financial managers of MNCs understand the institutions and documentary procedures involved in international trade. This
unit describes and analyses the various means of payments, sources of credit, techniques and procedures associated with
international trade.
Chapter 17 of the prescribed text is your required reading. In order to achieve the learning outcomes of this learning unit, you
are required to read through the following three subheadings of the chapter:
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Payment methods for international trade
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Trade finance methods
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Government agencies for international trade
Introduction to international trade
https://www.youtube.com/watch?v=cIM5SdLI58g
Introduction to letters of credit
https://www.youtube.com/watch?v=CeZ8sJanRNE
18.2
ACTIVITIES
18.2.1 Self-test
Do the self-test questions for chapter 17.
Answers to the self-test questions are provided at the end of the prescribed textbook.
18.2.2
Case study: Assessment of international trade financing
Study the case "Blades, PLC: Assessment of international trade financing" and answer the questions that follow it.
Suggested answers are provided below:
1.
No, Blades would not receive payment before it delivers roller blades to Sports Equipment Inc. and Major Leagues Inc. if
banks in Thailand issue a time draft on the retailers’ behalf. The usual time of payment under a time draft is the maturity
of the draft, and Blades relies on the retailers to pay the drafts at maturity.
No, the banks issuing the time drafts do not guarantee payment on behalf of the Thai retailers if they default on the
payment. The draft merely represents Blades’ formal demand for payment from the buyer and affords Blades less
protection than a letter of credit, since the banks are not obliged to honour payments on the buyer’s behalf.
2.
Blades should suggest to Sports Gear Inc. that its bank issue a letter of credit on its behalf. In a letter of credit, the bank
is substituting its credit for that of the buyers, and Blades would be assured of receiving payment from the issuing bank
as long as it presents the necessary documents in accordance with the L/C. The issuing bank is then obliged to honour
drawings under the L/C. On the other hand, Sports Gear Inc. does not have to pay for the goods until shipment has been
made and documents are presented in good order.
3.
Blades could contact the ECGD, which provides insurance protection against the risk of nonpayment by foreign buyers.
4.
Blades could use accounts receivable financing and factoring using its accounts receivable in the UK. Using accounts
receivable financing, Blades could obtain a loan from a bank that would be secured by an assignment of the accounts
receivable. Using factoring, Blades could sell the UK accounts receivable to a factor. Either approach is probably available
to Blades if it decides to use a UK bank. However, it could also attempt to conduct accounts receivable financing through
the factoring of its UK receivables using a bank in Thailand. Thai banks may consider the assignment of foreign receivables
less attractive than the assignment of domestic receivables and may require high interest rates (accounts receivable
financing) or discount the receivables heavily (factoring).
5.
Blades could inquire whether its UK bank has a correspondent bank in Thailand. In that case, the Thai bank may be willing
to accept a letter of credit issued by Blades’ UK bank on Blades’ behalf.
6.
A merchant bank is likely to be able to provide these services as well as a factoring company. It is unlikely that a bank
would not be able to provide this form of financing.
18.3
REFLECTION
Before you continue to the next learning unit, reflect on the following questions:
a.
b.
Can you confirm you have achieved the learning outcomes of this learning unit?
What did you find difficult? Why do you think you found it difficult? Do you understand it now or do
you need more help? What are you going to do about it?
c. Will you be able to use the skills you learnt in this learning unit in your professional life?
d. Go to online student resources and test yourself on your understanding of the learning unit.
18.4
CONCLUSION
At the end of chapter 17 is a summary of the concepts you have learnt. The next learning unit is on short-term financing.