Chapter 19 – Financing International Trade

Merchandise Trade – exports and imports of goods- the oldest and least risky form of international business
Supplier Credit the form of credit whereby the supplier funds the entire trade cycle
Payment Methods for International Trade 1) Prepayments2) Letters of Credit3) Drafts (Bills of Exchange) – Sight Drafts – Time Drafts4) Consignments5) Open Accounts
Prepayments the goods will not be shipped until the buyer has paid the seller- Time of payment: before shipment- Goods available to buyer: after payment- Risk to exporter: none- risk to importer: relies completely on exporter to ship goods as ordered
Letters of Credit (L/C) 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 buyer: after payment- Risk to exporter: Very little or none- Risk to importer: Relies on exporter to ship the goods described in the documents (Docs: invoice, bill of lading, insurance, etc)
Drafts (Bills of Exchange) 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 – transactions are known as documentary collections
Sight Drafts When the shipment has been made, the draft is presented to the buyer for payment(documents against payment)- Time of payment: on presentation of draft- Goods available to buyer: after payment- Risk to exporter: Disposal of unpaid goods- Risk to importer: relies on exporter to ship goods as described in the documents
Time Drafts When the shipment has been made, the buyer accepts (signs) the presented draft(documents against acceptance)- 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
Consignments the exporter retains actual title to the goods that are shipped to the importer- Time of payment: at time of sale by buyer to third party- Goods available to buyer: before payment- Risk to exporter: allows importer to sell inventory before paying exporter- Risk to importer: none
Open Accounts the exporter ships the merchandise and expects the buyer to remit payment according to the agreed-upon terms(“gentleman’s agreement”)- Time of payment: as agreed upon- Goods available to buyer: before payment- Risk to exporter: relies completely on buyer to pay account as agreed upon- Risk to importer: none
Financing International Trade 1) Accounts Receivable Financing2) Factoring (Cross-Border Factoring)3) Letters of Credit (L/C)4) Banker’s Acceptance5) Working Capital Financing6) Medium-Term Capital Goods Financing7) Countertrade
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- Factor acts as a collection agency- Sell at a discount (rate is somewhere between treasury rate and commercial rate)
Letters of Credit (L/C) 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- usually irrevocable
Standby L/C’s funded only if the buyer does not pay the seller as agreed upon
Transferable L/C’s 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
Banker’s Acceptance 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
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
Medium-Term Capital Goods Financing (Forfeiting) 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 forfeiting bank)
Countertrade 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 types: barter, compensation (product buy-back), and counter purchase- primary participants are governments and MNCs
Export-Import Bank of the US (Ex-Im Bank) A US government agency that aims to create domestic jobs by financing and facilitating the export of US goods and services and maintaining the competitiveness of US companies in overseas markets- it offers guarantees of commercial loans, direct loans, and export credit insurance
Private Export Funding Corporation (PEFCO) a private corporation that is owned by a consortium of commercial banks and industrial companies- provides medium and long-term fixed rate financing for foreign buyers through the issuance of long-term bonds
Overseas Private Investment Corporation (OPIC) a US government agency that assists US investors by insuring their overseas investments agains a broad range of political risks- also provides financing for overseas businesses through loans and loan guarantees

Leave a Reply

Your email address will not be published. Required fields are marked *