Part V
Short-Term Asset and Liability Management
Subsidiaries
of MNC with
Excess Funds
Deposits
Provision
of Loans
Eurobanks in
Eurocurrency
Market
Deposits
Borrow
Funds
Borrow
Funds
Borrow Funds
Purchase
Securities
Provision
of Loans
Purchase
Securities
MNC
Parent
Borrow
Funds
International
Commercial
Paper Market
Borrow
Funds
Subsidiaries
of MNC with
Deficient Funds
Borrow Funds
19
Chapter
Financing International Trade
South-Western/Thomson Learning © 2003
Chapter Objectives
• To describe the methods of
payment for international trade;
• To explain common trade finance
methods; and
• To describe the major agencies that
facilitate international trade with export
insurance and/or loan programs.
C19 - 3
Payment Methods
for International Trade
• In any international trade transaction,
credit is provided by either
¤ the supplier (exporter),
¤ the buyer (importer),
¤ one or more financial institutions, or
¤ any combination of the above.
• The form of credit whereby the supplier
funds the entire trade cycle is known as
supplier credit.
C19 - 4
Payment Methods
for International Trade
Method  : Prepayments
• The goods will not be shipped until the buyer
has paid the seller.
• Time of payment : Before shipment
• Goods available to buyers : After payment
• Risk to exporter : None
• Risk to importer : Relies completely on
exporter to ship goods as ordered
C19 - 5
Payment Methods
for International Trade
Method  : Letters of credit (L/C)
• These are issued by a bank on behalf of the
importer promising to pay the exporter upon
presentation of the shipping documents.
• Time of payment : When shipment is made
• Goods available to buyers : After payment
• Risk to exporter : Very little or none
• Risk to importer : Relies on exporter to ship
goods as described in documents
C19 - 6
Payment Methods
for International Trade
Method  : Drafts (Bills of Exchange)
• These are unconditional promises drawn by
the exporter instructing the buyer to pay the
face amount of the drafts.
• Banks on both ends usually act as
intermediaries in the processing of shipping
documents and the collection of payment. In
banking terminology, the transactions are
known as documentary collections.
C19 - 7
Payment Methods
for International Trade
Method  : Drafts (Bills of Exchange)
• Sight drafts (documents against payment) :
When the shipment has been made, the draft
is presented to the buyer for payment.
• Time of payment : On presentation of draft
• Goods available to buyers : After payment
• Risk to exporter : Disposal of unpaid goods
• Risk to importer : Relies on exporter to ship
goods as described in documents
C19 - 8
Payment Methods
for International Trade
Method  : Drafts (Bills of Exchange)
• Time drafts (documents against acceptance) :
When the shipment has been made, the
buyer accepts (signs) the presented draft.
• Time of payment : On maturity of draft
• Goods available to buyers : Before payment
• Risk to exporter : Relies on buyer to pay
• Risk to importer : Relies on exporter to ship
goods as described in documents
C19 - 9
Payment Methods
for International Trade
Method  : Consignments
• The exporter retains actual title to the goods
that are shipped to the importer.
• Time of payment : At time of sale to third
party
• Goods available to buyers : Before payment
• Risk to exporter : Allows importer to sell
inventory before paying exporter
• Risk to importer : None
C19 - 10
Payment Methods
for International Trade
Method  : Open Accounts
• The exporter ships the merchandise and
expects the buyer to remit payment according
to the agreed-upon terms.
• Time of payment : As agreed upon
• Goods available to buyers : Before payment
• Risk to exporter : Relies completely on buyer
to pay account as agreed upon
• Risk to importer : None
C19 - 11
Trade Finance Methods
 Accounts Receivable Financing
¤
An exporter that needs funds immediately
may obtain a bank loan that is secured by
an assignment of the account receivable.
 Factoring (Cross-Border Factoring)
¤
The accounts receivable are sold to a third
party (the factor), that then assumes all the
responsibilities and exposure associated
with collecting from the buyer.
C19 - 12
Trade Finance Methods
 Letters of Credit (L/C)
¤
¤
¤
These are issued by a bank on behalf of
the importer promising to pay the exporter
upon presentation of the shipping
documents.
The importer pays the issuing bank the
amount of the L/C plus associated fees.
Commercial or import/export L/Cs are
usually irrevocable.
C19 - 13
Trade Finance Methods
 Letters of Credit (L/C)
¤
¤
The required documents typically include a
draft (sight or time), a commercial invoice,
and a bill of lading (receipt for shipment).
Sometimes, the exporter may request that
a local bank confirm (guarantee) the L/C.
C19 - 14
Sample Letter of Credit (Confirmation)
Advice Number: BA000000094
Amount:
April 17, 2002
Issue Bank Ref: 1234/LMC/5678
US$:
Advice Date: 21 March 2002
Beneficiary: ABC Company, Inc.
Applicant: XYZ Company, Inc.
Expire Date: 21 July 2002
5278 S. Motorized Blvd
25 Rising Sun Way
Detroit, MI 48210
Tokyo, Japan 120-113
000-000-0000
+000-0000-0000
We have been requested to advise you of the following letter of credit issued by: First Bank of Japan
123 Cherry Blossom Dr
Tokyo, Japan
Please be guided by its terms and conditions and by the following:
Credit is available by negotiation of your draft(s) in duplicate at sight for 100% of invoice value drawn
on us accompanied by the following documents:
1. Signed commercial invoice, one (1) original and three (3) copies.
2. Full set ocean bills of lading consigned to the order of First Bank of Japan, Japan notify applicant
and marked freight collect.
3. Packing list, two (2) copies.
Evidencing Shipment of: 20,000 motorized tooth brushes FOB San Francisco
Shipment From: Detroit, MI through San Francisco, CA
Shipment To: Tokyo, Japan
Partial Shipments not allowed. All banking charges outside Japan are for beneficiary's account.
Documents must be presented within 21 days from BILL date.
At the request of our correspondent, we confirm this credit and engage with you that all drafts drawn
under and in compliance with the terms of this credit will be duly honored by us.
Please examine this instrument carefully. If you are unable to comply with the terms or conditions,
please communicate with your buyer to arrange for an amendment.
Sincerely,
http://www.tradenet.gov/...
Jill Moneybags
Account Manager
International Banking Group • Jack and Jill Bank Corp. • P.O. Box 1234 • Detroit, MI 48201 C19 - 15
Documentary Credit Procedure
 Sale Contract
Buyer
(Importer)
Seller
(Exporter)
 Deliver Goods




Request
for Credit
Documents
& Claim for
Payment
Present
Documents
Deliver
Letter of
Credit
Importer’s Bank
(Issuing Bank)
 Present
Documents
 Payment
Exporter’s Bank
(Advising Bank)
 Send Credit
C19 - 16
Trade Finance Methods
 Letters of Credit (L/C)
¤
Variations include
- standby L/Cs : funded only if the buyer
does not pay the seller as agreed upon
- transferable L/Cs : the first beneficiary
can transfer all or part of the original L/C
to a third party
- assignments of proceeds under an L/C :
the original beneficiary assigns the
proceeds to the end supplier
C19 - 17
Trade Finance Methods
 Banker’s Acceptance (BA)
¤
¤
This is a time draft that is drawn on and
accepted by a bank (the importer’s bank).
The accepting bank is obliged to pay the
holder of the draft at maturity.
If the exporter does not want to wait for
payment, it can request that the BA be sold
in the money market. Trade financing is
provided by the holder of the BA.
C19 - 18
Trade Finance Methods
 Banker’s Acceptance (BA)
¤
¤
The bank accepting the drafts charges an
all-in-rate (interest rate) that consists of the
discount rate plus the acceptance
commission.
In general, all-in-rates are lower than bank
loan rates. They usually fall between the
rates of short-term Treasury bills and
commercial papers.
C19 - 19
Life Cycle of a Typical Banker’s Acceptance
Importer
2. Apply
for L/C
10. Sign
Promissory
Note to Pay
14. Pay
Face Value
of BA
1. Purchase
Order
5. Ship
Goods
11.
Shipping
Documents
Exporter
6.
Shipping
Documents
& Time
Draft
4. L/C
Notification
9. Pay
Discounted
Value of
BA
8. Pay Discounted Value of BA
3. L/C
Importer’s
Exporter’s
Bank
Bank
7. Shipping Documents
&
12. BA
1 - 7 : Prior to BA
16. Pay Face Value of BA Time Draft
8 - 13 : When BA
is created
Money Market
Investor
14 - 16 : When BA
13. Pay Discounted Value of BA
matures
15. Present BA at Maturity
C19 - 20
Trade Finance Methods
 Working Capital Financing
¤
Banks may provide short-term loans that
finance the working capital cycle, from the
purchase of inventory until the eventual
conversion to cash.
C19 - 21
Trade Finance Methods
 Medium-Term Capital Goods Financing
(Forfaiting)
¤ The importer issues a promissory note to
the exporter to pay for its imported capital
goods over a period that generally ranges
from three to seven years.
¤ The exporter then sells the note, without
recourse, to a bank (the forfaiting bank).
C19 - 22
Trade Finance Methods
 Countertrade
¤
¤
¤
These are foreign trade transactions in
which the sale of goods to one country is
linked to the purchase or exchange of
goods from that same country.
Common countertrade types include barter,
compensation (product buy-back), and
counterpurchase.
The primary participants are governments
and multinationals.
C19 - 23
Online Application
• Need more help on financing your trade?
Visit:
¤ the U.S. Business Advisor at
http://www.business.gov/busadv/index.cfm
¤ the U.S. Small Business Administration at
http://www.sbaonline.sba.gov/
¤ the Los Angeles Area Chamber of
Commerce at http://www.tradeport.org/
¤ America's Business Funding Directory at
http://www.businessfinance.com/
C19 - 24
Agencies that Motivate
International Trade
• Due to the inherent risks of international
trade, government institutions and the
private sector offer various forms of
export credit, export finance, and
guarantee programs to reduce risk and
stimulate foreign trade.
C19 - 25
Agencies that Motivate
International Trade
Export-Import Bank of the U.S. (Ex-Imbank)
• This U.S. government agency aims to
create jobs by financing and facilitating
the export of U.S. goods and services and
maintaining the competitiveness of U.S.
companies in overseas markets.
• It offers guarantees of commercial loans,
direct loans, and export credit insurance.
C19 - 26
http://www.exim.gov/
http://www.exim.gov/
C19 - 27
Agencies that Motivate
International Trade
Private Export Funding Corporation (PEFCO)
• PEFCO is a private corporation that is
owned by a consortium of commercial
banks and industrial companies.
• In cooperation with Ex-Imbank, PEFCO
provides medium- and long-term fixed-rate
financing for foreign buyers through the
issuance of long-term bonds.
C19 - 28
Online Application
• Find out more about the PEFCO and its
programs at http://www.pefco.com/.
C19 - 29
Agencies that Motivate
International Trade
Overseas Private Investment Corporation
(OPIC)
• OPIC is a U.S. government agency that
assists U.S. investors by insuring their
overseas investments against a broad
range of political risks.
• It also provides financing for overseas
businesses through loans and loan
guaranties.
C19 - 30
http://www.opic.gov/
http://www.opic.gov/
C19 - 31
Agencies that Motivate
International Trade
• Beyond insurance and financing, the U.S.
has tax provisions that encourage
international trade.
• The FSC Repeal and Extraterritorial
Income Exclusion Act of 2000, which
replaced the 1984 Foreign Sales
Corporation provisions in response to
WTO concerns, excludes certain
extraterritorial income from the definition
of gross income for U.S. tax purposes.
C19 - 32
Impact of International Trade Financing
Decisions on an MNC’s Value
Trade Financing Decisions
m

E CFj , t  E ER j , t 
n 
 j 1

Value =  

t
1  k 
t =1 



E (CFj,t ) = expected cash flows in currency j to be received
by the U.S. parent at the end of period t
E (ERj,t ) = expected exchange rate at which currency j can
be converted to dollars at the end of period t
k
= weighted average cost of capital of the parent
C19 - 33
Chapter Review
• Payment Methods for International Trade
¤
¤
¤
¤
¤
Prepayments
Letters of Credit
Sight Drafts and Time Drafts
Consignments
Open Accounts
C19 - 34
Chapter Review
• Trade Finance Methods
¤
¤
¤
¤
¤
¤
¤
Accounts Receivable Financing
Factoring
Letters of Credit
Banker’s Acceptances
Working Capital Financing
Medium-Term Capital Goods Financing
(Forfaiting)
Countertrade
C19 - 35
Chapter Review
• Agencies that Motivate International Trade
¤
¤
¤
¤
Export-Import Bank of the U.S.
Private Export Funding Corporation
Overseas Private Investment Corporation
Other Considerations
• Impact of International Trade Financing on
an MNC’s Value
C19 - 36