Presentation on theme: "Financing International Trade"— Presentation transcript:
1 Financing International Trade C H A P T E R 19Financing International Trade
2 Chapter 19 Objectives This chapter will: A. Describe methods of payment for international tradeB. Explain common trade finance methodsC. Describe the major agencies that facilitate international trade with export insurance and/or loan programs
3 Chapter Overview A. Payment Methods for International Trade B. Trade Finance MethodsC. Agencies That Motivate International Trade
4 A. Payment Methods for International Trade 1. PrepaymentSame as cash in advancePayment usually by wire transferMethod offers exporter greatest degree of protectionUsually requested when1.) First time buyer2.) Danger of pre shipment cancellation3.) Importer country has high political risk
5 A. Payment Methods for International Trade 2. Letters of Credit ( L/C )a. an instrument issued by a bankb. on behalf of the importer (buyer)c. promising to pay the exporter(beneficiary) upon presentation ofd. shipping documents in compliance with the terms stipulated therein.e. In effect, the bank is substitutingits credit for that of the buyer.
6 A. Payment Methods for International Trade 3. Drafts (or bill of exchange)a. an unconditional promise drawn by one party, usually the exporter,b. instructing the buyer to pay the face amount of the draft upon presentation.c. draft represents the exporter’s formal demand for payment from the buyer.d. draft affords the exporter less protectionthan an L/C because the banks are not obligated to honor payments on the buyer’s behalf.
7 A. Payment Methods for International Trade 4. Consignmenta. exporter ships the goods to the importerwhile still retaining actual title to the merchandise.b. The importer has access to the inventory but does not have to pay for the goods until they have been sold to a third party.c. The exporter is trusting the importer to remit payment for the goods sold at that time.d. If the importer fails to pay, the exporter has limited recourse because no draft is involved and the goods have already been sold.
8 A. Payment Methods for International Trade 5. Open Accounta. The opposite of prepayment - the exporter ships the merchandise and expects the buyer to remit payment according to theagreed-upon terms.b. The exporter is relying fully upon the financial creditworthiness, integrity, and reputation of the buyer.c. method is used when the seller and buyer have mutual trust and a great deal of experience with each other.
9 B. Trade Finance Methods 1. Accounts Receivable Financinga. could take the form of an open account shipment or a time draftb. the bank will provide a loan to the exporter secured by an assignment of the account receivable.2. Factoring Receivablesthe exporter sells the accounts receivable without recourse.
10 B. Trade Finance Methods 3. Letters of Credit ( L/C )a. Types of Letters of Creditb. Use of Draftsc. Bill of Lading: Key Documentd. Commercial Invoice (currency)
12 B. Trade Finance Methods 4. Banker’s Acceptancebill of exchange, or time draft, drawn on and accepted by a bank. It is the accepting bank’s obligation to pay the holder of the draft at maturity.5. Working Capital Financing6. Medium-Term Capital Goods Financing (Forfaiting)similar to factoring in that the forfaiter (or factor)assumes responsibility for the collection of payment from the buyer, the underlying credit risk, and the risk pertaining to the countries Involved.
13 B. Trade Finance Methods 7. Countertradea. denotes all types of 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.b. Some types of countertrade, such as barter, have been in existence for thousands of years.c. Recently countertrade gained popularity andimportance.
15 Life Cycle of a TypicalBanker’s Acceptance (B/A)19.5
16 C. Agencies That Motivate International Trade 1. Export-Import Bank of the United Statesa. Established in 1934 with the original goal of facilitating Soviet-American trade.b. Its mission today is to finance and facilitate the export of American goods and servicesc. maintain the competitiveness of American companies in overseas markets.d. programs that are classified as1.) guarantees2.) loans3.) bank insurance4.) export credit insurance.
17 C. Agencies That Motivate International Trade 2. Private Export Funding Co. (PEFCO)a. is owned by a consortium of commercial banks and industrial companies.b. provides medium and long-term fixed rate financing to foreign buyers.3. Overseas Private Investment Corporation (OPIC)a self-sustaining federal agency responsible for insuring direct U.S. investments in foreign countries against the risks of currency inconvertibility, expropriation, and other political risks.