1. Financing Foreign Trade
International Financial Management
Dr. A. DeMaskey

2. Learning Objectives
What 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:
Contracts
contractual exchange between parties in two countries
description of goods
Prices
price quotations and terms in the contract should conform to published catalogues.
Documents
provides 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 merchandise
Commercial invoice
issued by the exporter and contains a precise description of the merchandise.
Insurance documents
must be as specified in the contract of sale and must be issued by insurance companies or their agents.
Consular invoices
issued in the exporting country by the consulate of the importing country
Packing lists
may be required so that the contents of containers can be identified

6. International Trade Risks
The Trade Transaction Timeline
Time and Events
Price
Quote
request
Export
contract
signed
Goods
are
shipped
Documents
are
accepted
Goods
are
received
Cash
settlement
of the
transaction
Negotiation
Backlog
Documents are
presented
Financing Period

7. Documentation of Foreign Trade Transactions
Function
Risk of noncompletion
Foreign exchange rate risk
Financing foreign trade
Key Documents
Letter of Credit
Bill of Lading
Draft

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/C
Bank’s L/C must contain specified maturity date
Bank’s commitment must have stated maximum amount
Bank’s obligation must arise only on presentation of specific documents and bank cannot be called on for disputed items
Bank’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 time
Confirmed vs. Unconfirmed
issued by one bank and confirmed by another bank
Advantages of L/Cs:
it reduces risk of default
a confirmed L/C helps secure financing
Disadvantages of L/Cs:
the fees charged
reduces the available credit of the importer

10. Relationships Among the Three Parties to a Letter of Credit
Beneficiary (exporter)
Applicant (importer)
Issuing Bank
The relationship between the issuing bank and the exporter is governed by the terms of the letter of credit, issued by that bank
The relationship between the importer and the issuing bank is governed by the terms of the application and agreement for the letter of credit
The relationship between the importer and the exporter is governed by the sales contract

11. Bill of Exchange
A 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 draft
Buyer is drawee of draft
Bank draft
Buyer’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 buyer
Must contain unconditional promise to pay
Must be payable on demand or at a fixed date
Must be payable to bearer

13. Types of Drafts Sight drafts Time drafts
which is payable on presentation to the drawee.
Time drafts
which 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 Acceptance
When a draft is accepted by a bank, it becomes a banker’s acceptance.
Example: Acceptance of $100,000 for exporter
Face amount of acceptance
Less 1.5% p.a. commission for 6 months
Amount received by exporter in 6 months
Less 7% p.a. discount rate for 6 months
Amount received by exporter at once
Exporter may discount the acceptance note in order to receive the funds up-front.

15. Bill of Lading
Bill 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 title
As a receipt the B/L indicates that the carrier has received the merchandise
As a contract the B/L indicates the obligation of the carrier to provide certain transportation
As 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/L
provides that the carrier deliver the merchandise to the designated consignee only.
An order B/L
directs 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
Discounting
Converting a trade draft into cash.
Factoring
Selling export receivables at a discount to a factor.
Expensive but may be of great value to the occasional exporter.
Forfaiting
Discounting at a fixed rate without recourse of medium-term export receivables denominated in fully convertible currencies.

18. Government Programs for Export Financing
Export Credit Insurance
Provides 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 Bank
Known as the Eximbank, it facilitates the financing of US exports through various loan guarantee and insurance programs.