Presentation on theme: "Financing Foreign Trade"— Presentation transcript:
1 Financing Foreign Trade International Financial ManagementDr. A. DeMaskey
2 Learning ObjectivesWhat are the key elements of an import or export transaction?What are the three key documents in import or export transactions?What are some private sector export financing sources?What are some public sector export financing sources?
3 International Trade Finance Trade financing shares a number of common characteristics with traditional value chain activities conducted by all firms.All companies must search out suppliers for goods and services.Must determine if supplier can provide products at required specifications and quality.All must be at an acceptable price and delivered in a timely manner.
4 Elements of an Import/Export Transaction Every export sales transaction covers three basic elements:Contractscontractual exchange between parties in two countriesdescription of goodsPricesprice quotations and terms in the contract should conform to published catalogues.Documentsprovides shipping and delivery instructions
5 Documentations in Import/Export Transactions Bills of lading (B/L)issued to the exporter by a common carrier transporting the merchandiseCommercial invoiceissued by the exporter and contains a precise description of the merchandise.Insurance documentsmust be as specified in the contract of sale and must be issued by insurance companies or their agents.Consular invoicesissued in the exporting country by the consulate of the importing countryPacking listsmay be required so that the contents of containers can be identified
6 International Trade Risks The Trade Transaction TimelineTime and EventsPriceQuoterequestExportcontractsignedGoodsareshippedDocumentsareacceptedGoodsarereceivedCashsettlementof thetransactionNegotiationBacklogDocuments arepresentedFinancing Period
7 Documentation of Foreign Trade Transactions FunctionRisk of noncompletionForeign exchange rate riskFinancing foreign tradeKey DocumentsLetter of CreditBill of LadingDraft
8 Letter of Credit (L/C)A letter of credit is a bank’s conditional promise to pay issued by a bank at the request of an importer in which the bank promises to pay an exporter upon presentation of documents specified in the L/C.The essence of a L/C is the promise of the issuing bank to pay against specific documents.Issuing bank must receive a fee for issuing L/CBank’s L/C must contain specified maturity dateBank’s commitment must have stated maximum amountBank’s obligation must arise only on presentation of specific documents and bank cannot be called on for disputed itemsBank’s customer must have unqualified obligation to reimburse bank on same condition of bank’s payment
9 Letter of Credit (L/C) Commercial L/C’s are classified as: Irrevocable vs. Revocable –irrevocable letters of credit are non-cancelable while its opposite can be cancelled at any timeConfirmed vs. Unconfirmedissued by one bank and confirmed by another bankAdvantages of L/Cs:it reduces risk of defaulta confirmed L/C helps secure financingDisadvantages of L/Cs:the fees chargedreduces the available credit of the importer
10 Relationships Among the Three Parties to a Letter of Credit Beneficiary (exporter)Applicant (importer)Issuing BankThe relationship between the issuing bank and the exporter is governed by the terms of the letter of credit, issued by that bankThe relationship between the importer and the issuing bank is governed by the terms of the application and agreement for the letter of creditThe relationship between the importer and the exporter is governed by the sales contract
11 Bill of ExchangeA draft, or bill of exchange (B/E), is a written order by an exporter instructing an importer or its agent to pay a specified amount at a specified time.The party initiating the draft is the maker, drawer, or originator while the counterpart is the drawee.Trade draftBuyer is drawee of draftBank draftBuyer’s bank is drawee of draft
12 Negotiable Instruments If properly drawn, drafts can become negotiable instruments.As such they provide a convenient instrument for financing the international movement of merchandise.To become a negotiable instrument, there are four requirements:Must be written and signed by buyerMust contain unconditional promise to payMust be payable on demand or at a fixed dateMust be payable to bearer
13 Types of Drafts Sight drafts Time drafts which is payable on presentation to the drawee.Time draftswhich allows a delay in payment.it is presented to the drawee who accepts it with a promise to pay at some later date.When a time draft is drawn on a bank, it becomes a banker’s acceptance.When drawn on a business firm it becomes a trade acceptance.
14 Banker’s AcceptanceWhen a draft is accepted by a bank, it becomes a banker’s acceptance.Example: Acceptance of $100,000 for exporterFace amount of acceptanceLess 1.5% p.a. commission for 6 monthsAmount received by exporter in 6 monthsLess 7% p.a. discount rate for 6 monthsAmount received by exporter at onceExporter may discount the acceptance note in order to receive the funds up-front.
15 Bill of LadingBill of Lading (B/L) is issued to the exporter by a common carrier transporting the merchandise.It serves the purpose of being a receipt, a contract and a document of titleAs a receipt the B/L indicates that the carrier has received the merchandiseAs a contract the B/L indicates the obligation of the carrier to provide certain transportationAs a document of title, the B/L is used to obtain payment or written promise of payment before the merchandise is released to the importer
16 Characteristics of the Bill of Lading A straight B/Lprovides that the carrier deliver the merchandise to the designated consignee only.An order B/Ldirects the carrier to deliver the goods to the order of a designated party, usually the shipper.A B/L is usually made payable to the order of the exporter.
17 Additional Financing Techniques Used in International Trade DiscountingConverting a trade draft into cash.FactoringSelling export receivables at a discount to a factor.Expensive but may be of great value to the occasional exporter.ForfaitingDiscounting at a fixed rate without recourse of medium-term export receivables denominated in fully convertible currencies.
18 Government Programs for Export Financing Export Credit InsuranceProvides assurance to the exporter or the exporter’s bank that an insurer will pay should the foreign customer default.In the US the Foreign Credit Insurance Association (FCIA) provides this type of insurance.Export-Import BankKnown as the Eximbank, it facilitates the financing of US exports through various loan guarantee and insurance programs.