FINANCING FOREIGN TRADE

CHAPTER 11

FINANCING FOREIGN TRADE

CHAPTER OVERVIEW: I. PAYMENT TERMS II. DOCUMENTS III. FINANCING TECHNIQUES IV. GOVERNMENT SOURCES OF

EXPORT FINANCING AND CREDIT INSURANCE

V. COUNTERTRADE

FINANCING FOREIGN TRADE

I. PAYMENT TERMSA. Five Principal Means:

1. Cash in advance2. Letter of Credit3. Drafts4. Consignment5. Open Account

FINANCING FOREIGN TRADE

B. Cash in Advance1. Minimal risk to exporter2. Used where there is

a. Political unrestb. Goods made to orderc. New unfamiliar

customer

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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’sdrafts.

c. Bank substitutes its owncommitment

d. Seller must conform to terms

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2. Advantages of an L/C to Exporter

a. eliminates credit riskb. reduces default riskc. payment certaintyd. prepayment risk protectione. financing source

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3. Advantages of L/C to Importera. shipment assuredb. documents inspectedc. may allow better sales termsd. relatively low-cost financinge. easy cash recovery if

discrepancies

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4. Types of L/Csa. documentaryb. non-documentaryc. revocabled. irrevocablee. confirmedf. transferable

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D. DRAFTS1. 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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2. Three Functions of Draftsa. clear evidence of financial obliga-tionb. reduced financing costsc. provides negotiable and uncondi-tional financial instrument(ie. May be converted to a banker’s acceptance)

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4. Types of Draftsa. sightb. timec. clean (no documents

needed)d. documentary

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E. CONSIGNMENT1. Exporter = the consignor2. Importer = the consignee3. Consignee attempts to sell

goods to a third party; keeps some profit, remits rest

to consignor.4. Use: Between affiliates

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F. OPEN ACCOUNT1. Creates a credit sale2. To importer’s advantage3. More popular lately because

a. major surge in global tradeb. credit information improvedc. more global familiarity with

exporting.

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4. Benefits of Open Accounts:a. greater flexibility in

makinga trade

b. lower transactions costs5. Major disadvantage:

highly vulnerable to government currency controls.

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II. DOCUMENTS USED IN INT’L TRADE

A. Four most used documents1. Bill of Lading (most

important)2. Commercial Invoice3. Insurance Certificate4. Consular Invoice

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B. Bill of LadingThree functions:1. Acts as a contract to carry the goods.2. Acts as a shipper’s receipt3. Establishes ownership overgoods if negotiable type.

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2. Type of Billsa. Straightb. Orderc. On-boardd. Received-for-shipmente. Cleanf. Foul

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C. COMMERCIAL INVOICEPurpose:1. Lists full details of goods shipped2. Names of importer/exporter

given3. Identifies payment terms4. List charges for transport and

insurance.

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D. INSURANCE1. Two Categories:

a. Marine: transport by seab. Air: transport by air

2. Insurance Certificateissued to show proof of

insurance3. All shipments insured today.

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E. CONSULAR INVOICELocal consulate in host country

issuesa visa for the exporter’s invoice.

Requires fee to be paid to consulate.

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III. FINANCING TECHNIQUESA. Four Types:

1. Bankers’ Acceptancesa. Creation: drafts

acceptedb. Terms: Payable at maturity to holder

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2. Discountinga. Converts exporters’ drafts to cash

minus interest to maturity and commissions.

b. Low cost financing with few feesc. May be with (exporter still liable)

or without recourse(bank takesliability for nonpayment).

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3. Factoring-firms sell accounts receivable to another firm known as the factor.a. Discount charged by factorb. Nonrecourse basis: Factor

assumes all payment risk.c. When used:

1.) Occasional exporting2.) Clients geographically

dispersed.

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4. Forfaitinga. Definition:

discounting at a fixed rate without

recourse of medium-term accounts receivable denominated in a fully convertible currency.

b. Use: Large capital purchasesc. Most popular in W. Europe

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IV. GOVERNMENT SOURCES OF EXPORTFINANCING 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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1. Ex-Im Bank Programs:a. Direct loans to exportersb. Intermediate loans to

exportersc. Loan guaranteesd. Preliminary commitmentse. Political and commercial

insurance

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B. Private Export Funding Corporation(PEFCO)1. Finances large sales from private

sources2. May purchase loans of U.S.

importers3. ExIm Bank provides loan guarantees.

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C. Foreign Credit Insurance Association(FCIA)1. Offers commercial and political

risk insurance2. When insured, exporter often

able to obtain financing faster.

FINANCING FOREIGN TRADEV. COUNTERTRADE

A. Three Specific Forms:1. Barter

direct exchange in kind2. Counterpurchase

sale/purchase of unrelatedgoods but with currencies

3. Buybackrepayment of original

purchase through sale of a related product.

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B. When to Use Countertrade1. With “soft-currency”

developingcountries

2. When foreign contractor must

perform.