FINANCING FOREIGN TRADE

1. CHAPTER 12 FINANCING FOREIGN TRADE

2. CHAPTER OVERVIEW: • I. PAYMENT TERMS • II. DOCUMENTS • III. FINANCING TECHNIQUES • IV. GOVERNMENT SOURCES OF EXPORT FINANCING AND CREDIT INSURANCE • V. COUNTERTRADE

3. 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

4. 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

5. 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

6. 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

7. 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

8. PAYMENT TERMS • 4. Types of L/Cs • a. documentary • b. non-documentary • c. revocable • d. irrevocable • e. confirmed • f. transferable

9. 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)

10. PAYMENT TERMS • 2. Three Functions of Drafts • a. clear evidence of financial obliga- tion • b. reduced financing costs • c. provides negotiable and uncondi- • tional financial instrument • (ie. May be converted to a banker’s acceptance)

11. PAYMENT TERMS • 3. Types of Drafts • a. sight • b. time • c. clean (no documents needed) • d. documentary

12. 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

13. 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.

14. PAYMENT TERMS • 4. Benefits of Open Accounts: • a. greater flexibility in making • a trade • b. lower transactions costs • 5. Major disadvantage: • highly vulnerable to government currency controls.

15. 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 • 4. Consular Invoice

16. 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.

17. DOCUMENTS • 2. Type of Bills • a. Straight • b. Order • c. On-board • d. Received-for-shipment • e. Clean • f. Foul

18. 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.

19. 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.

20. DOCUMENTS • E. CONSULAR INVOICE • Local consulate in host country issues: • a visa for the exporter’s invoice. • requires fee to be paid to consulate.

21. III. FINANCING TECHNIQUES • III. FINANCING TECHNIQUES • A. Four Types: • 1. Bankers’ Acceptances • a. Creation: drafts accepted • b. Terms: Payable at maturity to holder

22. 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).

23. FINANCING TECHNIQUES • 3. Factoring • -firms sell accounts receivable to another firm known as the factor. • a. Discount charged by factor • b. Nonrecourse basis: Factor • assumes all payment risk. • c. When used: • 1.) Occasional exporting • 2.) Clients geographically dispersed.

24. 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

25. 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.

26. 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

27. 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.

28. 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.

29. 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.

30. COUNTERTRADE • B. When to Use Countertrade • 1. With “soft-currency” developing • countries • 2. When foreign contractor must • perform.