Financing
&
Methods of Payment
Chapter 8
Agenda
8.0 Introduction
8.1 Export financing methods/terms of payment
8.2 Payment / financing procedures
8.3 Countertrade
8.0 Introduction
Export Financing
Definition:
• Loans made for the shipping of products
outside a country or region.
• To enables businesses to bring their products all
over the world.
8.1 Export Financing Methods/
Terms of Payment
• 7 methods of receiving payment for products sold
abroad:
8.1.1 Consignment
8.1.2 Open Account
8.1.3 Documentary Collections
8.1.4 Letter of credit/ Documentary Credit
8.1.5 Cash on Delivery
8.1.6 Cash with Order
8.1.7 Long-term Financing
8.1.1 Consignment
• Demand for payment is usually made by
means of a clean draft( no documents
attached).
• Payment typically occurs after the products
have been resold by the buyer.
8.1.2 Open Account
• A term of payment in which no banks are
involved, only an agreement between seller
and buyer that payment will be made within an
agreed period of time.
• Banks become involved through wire transfers,
but no negotiations.
• Some procedure and methods as in domestic
trade.
• Normally be willing to use this method only when
he/ she has confidence in the creditworthiness
of the buyer.
8.1.3 Documentary Collections
• A collection, which is accompanied by
commercial documents.
• Means that the bank handles documents
according to the instructions received.
• This payment method is most often used in
international trade in the exchange of
merchandise for money.
• With this method, the goods are shipped to the
foreign country, but the documents are sent to
the buyer’s bank.
Cont..
DOCUMENTS AGAINST ACCEPTANCE
• When shipping documents are delivered to the
buyer by the collecting bank after the buyer
has accepted the draft for payment at a
certain maturity date.
DOCUMENTS AGAINST PAYMENT
• When documents are delivered to the buyer
upon payment of a draft.
8.1.4 Letter of credit/ Documentary Credit
• International trade procedure in which the
credit worthiness of an importer is substituted by
the guaranty of a bank for a specific
transaction.
• Under documentary credit arrangement also
called letter of credit arrangement, a bank
(usually in the importer’s country) undertakes to
pay for a shipment, provided the exporter
submits the required documents (such as a
clean bill of lading, certificate of insurance,
certificate of origin) within a specified period.
8.1.5 Cash on Delivery
• A transaction in which goods are paid for in
full cash or by certified check immediately
when they are received by the buyer.
8.1.6 Cash with Order
• Cash or part cash with order
• Cash in Advance/Prepayment occurs when a
buyer sends payment in the agreed currency
and through agreed method to a seller before
the product is manufactured and or shipped.
8.1.7 Long-term Financing
• Is a major project, large capital equipment
sales and special exports such as agricultural
commodities moving under government
programs may require long-tern financing.
• Allow the procedures to receive funds in the
near future while allowing the purchaser to
spread payments over several years.
8.2 Payment / Financing Procedures
There are 2 general categories :
8.2.1Letter of credit
8.2.2 Drafts or bills of exchange
8.2.1Letter of Credit
• Use of letters for financing export shipments
popular with exports.
• Arranging payment affords a high degree of
protection against the risk inevitably arising in
export business.
• A letter of credit is only as good as the bank
that issues it and it confirmed the bank that
confirms it.
• Except in their general form and phraseology,
letter o f credit very greatly.
Type of Letters of Credit
(a) Revocable and Irrevocable
• Ability of the establishing to revoke before
expired day.
• Revocable - changed or cancelled at any
time without notice to the beneficiary
Example : issuing bank’s client.
• Irrevocable – cannot be unilaterally cancelled
or amended by the importer.
• Privilege of revoking – temptation way
unscrupulous buyer.
b) Confirmed and Unconfirmed
•
The bank in the exporter’s country announces
its confirmation.
•
Words to the following effect are to be found
in the letter of credit.
•
If the credit does not require that drafts be
drawn, the wording
•
Will be adjusted but still must state that the
bank has added its
•
Confirmation to the credit.
(c) Clean and Documentary
•
Beneficiary clean draft or receipt for
funds.
•
Notifying
bank
against
drafts delivery of full set.
documentary
(d) Transferable and Nontransferable
• Transfer of all or part of the letter credit.
• Nontransferable may not be transferred by
the beneficiary.
• 3 main reasons why an exporter may request a
transferable letter credit :
(i) Beneficiary/exporter may actually be a
middlemen
(ii) Providing only a part know who the actual
supplier.
(iii) Buyer’s/importer’s agent.
(e) Assignment of Proceeds
•
The proceeds due to him or her to another
party.
•
The legal procedure similar to the assignment
of rights under any contract.
(f) Revolving letters of credit
•
Devised to meet the needs business
transactions are more or less regular and
continuous.
(i) Credit indicating the maximum amount to
negotiate fresh bills.
(ii) Credit providing for a specified maximum
payment.
•
Noncumulative revolving credit, cumulative,
credit unused shipment.
(g) Deferred payment credit
• Exporter will paid at specified dates after
shipment.
• Single shipment will paid by number of payment.
• Substantial difference between a usance credit
by negotiation and one
• By acceptance or deferred credit.
• Recent court cases have indicated only
obligation of the book to honor
• Pay at maturity and not before.
(h) Standby letter of credit
•
•
Used to finance the movement of goods.
Specifically, a standby letter of credit is an
obligation to the beneficiary the issuing bank
of the following.
(i) To repay money borrowed by or advanced
to the account party
(ii) To make payment on the account of any
evidence of indebtedness undertaken by
the account party.
(iii) To make payment on account of any
default by the account party in the
performance of a contractual obligation.
8.2.2 Drafts
• An unconditional order in writing prepared by
one (drawer) and addressed to another
(drawee)
• The draft is drawn by the beneficiary under the
term of authorization in the letter of credit and
in strait conformance with the condition stated.
• The draft have to include as the name of the
issuing bank.
• Draft (in some countries) is said to be drawn to
the account of the bank or buyer.
(I) Acceptance
• ‘Acceptance’ frequently used connection
with a draft, or bill of exchange.
• The exporter can grant credit to the importer
with out losing the protection of a letter of
credit.
• More easily negotiated or discounted if
countersigned by the bank.
(II) Delivering Document
• The most important element beside the amount
to be collected is the statement of document
are to be delivered against the acceptance of
the draft (D/A) or against payment at the draft
(D/P).
• When a draft is drawn d/p, the drawee may
secure the document of title only when the
amount shown on the face of the draft.
Types of Draft
(a) Clean or Documentary Draft
•
Accompanied by the relevant document
needed to complete the export transaction.
•
Clean draft is one no document attached
and is usually handed to a bank for
collection in a foreign country.
•
Open account, the sale of stoke and bonds
payment for services.
(b) Sight or Usance
•
Drawn to be payable either at sight or at
some specified future time.
•
Name implies, sight draft supposed to paid
first seen by the drawee.
•
Some countries is customary drawee to delay
payment of sight draft until the merchandise.
(c) Time or Date Draft (Usance Draft)
•
Time or date draft are used where the
seller/exporter is wiling to extend credit to the
buyer/importer.
•
Great advantage to the drawee of a date
draft is date on which the draft should be
paid is known.
(d) With or Without Recourse
• With recourse means parches by a banker
other financial institution of draft.
• The purchases draft or bills of exchange
assumes full responsibility for payment,
discharges his obligation as guarantor and
consignees.
• With recourse means exact opposite.
• Consignee fails for any original drawer of the
draft.
8.3 Countertrade
• Definition
Countertrade is exchange goods or services
that are paid for, in whole or part, with other
goods or services.
• Each party is both buyer and seller at the
same time.
• Appeals to buyers in countries that short of
foreign hard currencies.
Types of Countertrade
8.3.1 Pure Barter
8.3.2 Clearing arrangements
8.3.4 Counter purchase
8.3.5 Switch trading
8.3.6 Buy-back
8.3.7 Offsets
8.3.1 Pure Barter
• Simple direct exchange without money
• For example:
Product A
Company A
Product B
Company B
• Online barter is now operating in the U.S. and
can be expected to develop internationally.
8.3.2 Clearing Arrangements
• 2 countries agree to exchange a number of
products, some not easily sold on open
market, for a specified period.
• Both parties agree on the quantities and
values to be exchanged and final settlement
date for surpluses must be cleared up.
• Transactions between governments –
clearing accounts
• Transactions between organizations –
evidence accounts
8.3.3 Counter Purchase
•
Sale of goods and services to a country by
a company that promises to make a future
purchase of a specific product from the
country. For example:
Volkswagen
promises to •
purchase
specific product
from country B in
the future
Country A
•
Sell of goods and services
East Germany
Country B
The products ‘purchased’ are not related to
the original exporter’s product line.
8.3.4 Switch Trading
• One party agree in a barter or counter
purchase arrangement has goods that the
other does not want.
• This kind of goods will sold for the exporter to
some third party by a specialist called a switch
trader.
Company
A
Engine
Company
B
Coffee
Switch
Specialist
Sells to others
8.3.5 Buy Back
• Also called compensation agreement.
• A company agrees to supply technical
knowledge to build a plant, or builds the
plant or licenses the use of trademark, in
exchange for the production output. For
example:
technology, equipment, training,
Country A
or other services.
Plant
agrees to give a certain percentage of the plant's
output as partial payment for the contract.
output
8.3.6 Offsets
• Seller assist in or arrange for the marketing of products
produced by the buyer.
• Similar to counter purchase, but different because
offset involved the industry and parties.
• Seller will provides benefit to buyer because ‘seller’s’
purchase of components from the ‘buyer’ to be used in
producing the seller’s products which want sold to
buyer. For example:
Company
A
sell products and assist Company B marketing the products
sell components to be used in producing seller’s products
Company
B