Multinational Financial
Management
Alan Shapiro
7th Edition
J.Wiley & Sons
Power Points by
Joseph F. Greco, Ph.D.
California State University, Fullerton
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CHAPTER 18
FINANCING FOREIGN
TRADE
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CHAPTER OVERVIEW:
I.
II.
III.
IV.
PAYMENT TERMS
DOCUMENTS
FINANCING TECHNIQUES
GOVERNMENT SOURCES OF
EXPORT FINANCING AND CREDIT
INSURANCE
V. COUNTERTRADE
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I.
PAYMENT TERMS
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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PAYMENT TERMS
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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PAYMENT TERMS
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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PAYMENT TERMS
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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PAYMENT TERMS
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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PAYMENT TERMS
4. Types of L/Cs
a. documentary
b. non-documentary
c. revocable
d. irrevocable
e. confirmed
f.
transferable
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PAYMENT TERMS
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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PAYMENT TERMS
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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PAYMENT TERMS
3. Types of Drafts
a. sight
b. time
c. clean (no documents needed)
d. documentary
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PAYMENT TERMS
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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PAYMENT TERMS
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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PAYMENT TERMS
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
II.
DOCUMENTS USED IN INT’L TRADE
A. Four most used documents
1. Bill of Lading (most
important)
2. Commercial Invoice
3. Insurance Certificate
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DOCUMENTS
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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DOCUMENTS
2.
Type of Bills
a. Straight
b. Order
c. On-board
d. Received-for-shipment
e. Clean
f.
Foul
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DOCUMENTS
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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DOCUMENTS
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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DOCUMENTS
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
III.
FINANCING TECHNIQUES
A.
Four Types:
1.
Bankers’ Acceptances
a. Creation: drafts accepted
b. Terms: Payable at
maturity to holder
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FINANCING TECHNIQUES
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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FINANCING TECHNIQUES
3.
Factoring
-firms sell accounts receivable to another firm
known as the factor.
a.
Discount charged by factor
b.
Non-recourse basis: Factor
assumes all payment risk.
c.
When used:
1.)
Occasional exporting
2.)
Clients geographically
dispersed.
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FINANCING TECHNIQUES
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
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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GOVERNMENT SOURCES OF
EXPORT FINANCING
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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GOVERNMENT SOURCES OF
EXPORT FINANCING
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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GOVERNMENT SOURCES OF
EXPORT FINANCING
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
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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COUNTERTRADE
B. When to Use Countertrade
1. With “soft-currency” developing
countries
2. When foreign contractor must
perform.
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