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Chapter 18

Chapter 18. FINANCING FOREIGN TRADE. Types of Risk. Preshipment - Shipment - Postshipment. INCOTERMS. EXPORTER’S LOADING DOCK. Port Entry. SHIP. Transport. Production Process. To Port. Ex Works. FAS. FOB. Shipment Risks. Ocean Freight is most common mode of transport.

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Chapter 18

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  1. Chapter 18 FINANCING FOREIGN TRADE

  2. Types of Risk • Preshipment - Shipment - Postshipment

  3. INCOTERMS EXPORTER’S LOADING DOCK Port Entry SHIP Transport Production Process To Port Ex Works FAS FOB

  4. Shipment Risks Ocean Freight is most common mode of transport LOADED SHIP PERILS OF THE SEA Port Of Departure Port Of Arrival

  5. Post-Shipment Risk IMPORTER’S WAREHOUSE CUSTOMS Port Of Arrival Transit to Importer FINAL PYMT

  6. Pre-shipment Risks Port Entry Contract LOADING SHIP Transport Production Process To Port PORT EXPORT CUSTOMS Initial Contact

  7. PAYMENT TERMS • I. PAYMENT TERMS • A. Four Principal Means: • 1. Cash in advance • 2. Letter of Credit • 3. Drafts • 4. Open Account

  8. 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 and unfamiliar customer

  9. 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

  10. PAYMENT TERMS • 2. Advantages of an L/C to Exporter • a. eliminates credit risk • b. pre-shipment (cancellation of the order) risk protection

  11. 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

  12. PAYMENT TERMS • 4. Types of L/Cs • a. documentary • b. irrevocable • c. confirmed

  13. 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)

  14. PAYMENT TERMS • 2. Three Functions of Drafts • a. clear evidence of financial obligation • b. reduced financing costs • c. Can be a financial product for investors • (i.e. May be converted to a banker’s acceptance)

  15. PAYMENT TERMS • 3. Types of Drafts • a. sight • b. time

  16. 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

  17. 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.

  18. DOCUMENTS • II. DOCUMENTS USED IN INT’L TRADE • A. Three most used documents • 1. Bill of Lading (most important) • 2. Commercial Invoice • 3. Insurance Certificate

  19. 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.

  20. 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.

  21. DOCUMENTS • D. INSURANCE • 1. Marine Insurance Policy • covers sea as well as air transport • 2. Insurance Certificate issued to show proof of insurance

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

  23. SHORT-TERMFINANCING 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).

  24. SHORT-TERMFINANCING 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.

  25. SHORT-TERMFINANCING TECHNIQUES • 4. Forfaiting • a. Definition: • discounting at a fixed rate without recourse for medium-term accounts receivable • b. Use: Large capital purchases • c. Most popular in W. Europe

  26. GOVERNMENT SOURCES • 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.

  27. GOVERNMENT SOURCES • 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

  28. GOVERNMENT SOURCES Restrictions: At least 51% U.S. content No armaments Must be environmentally friendly

  29. 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 developing countries with “soft- currency” • 2. when tariffs or quotas prevent • trade

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