1. Export & Import Financing
Chapter Twenty
Eiteman, Stonehill, & Moffett
April 16, 2017
Chapter Trade financing

2. Chapter 20 - Trade financing
Trade payment terms
cash in advance
draft
bill of exchange
letter of credit (L/C)
bankers acceptance
consignment
open account
April 16, 2017
Chapter Trade financing

3. Chapter 20 - Trade financing
Cash in advance
Advantages
least risky alternative
risk is shifted entirely to the importer
Disadvantages
may be non-competitive, lose business
preferred if goods made to order
for purpose of financing the production
April 16, 2017
Chapter Trade financing

4. Draft - bill of exchange
issued and signed by the exporter (drawer)
unconditional orders to pay (for the importer)
on demand (sight draft)
at a specified time in the future (time draft)
fixes the amount of manner of payment
time draft becomes an acceptance
when accepted by drawee (exporter)
L/C (promise of banker’s acceptance)
draft (bill of exchange) accepted by bank
April 16, 2017
Chapter Trade financing

5. Chapter 20 - Trade financing
Draft - types of drafts
documentary drafts
drafts which require supporting documentation
bills of lading, invoices, etc.
drafts accompanying trades are documentary
non documentary (clean)
non-commercial transactions
April 16, 2017
Chapter Trade financing

6. Chapter 20 - Trade financing
Drafts - mechanics
a draft extends credit
receivable to the exporter
payable to the importer
exporter gives control of goods to importer
for the signature on draft
contract between exporter and importer only
transferable (usually banker’s acceptances)
at discount to bank, acceptance dealer
rate lower than prime
April 16, 2017
Chapter Trade financing

7. Chapter 20 - Trade financing
L/C - terms
promise of payment issued by the importer’s bank
binds the importer’s bank to pay determining
currency of payment
timing of payment
amount of payment
binds the exporter to deliver a certain product
quantity of goods
quality of goods
delivery date for goods
April 16, 2017
Chapter Trade financing

8. L/C - advantages exporter
reduces credit risk
the bank’s reputation is on line
reduces political risk
banking system is tied into the political system
reduces pre-shipment risk
contracted terms for delivery of goods
April 16, 2017
Chapter Trade financing

9. L/C - advantages importer
reduces delivery risk
contract stipulates delivery terms
bank oversees custom’s procedures
importer can contract for better terms
exporter’s risk substantially reduced
prepayment by importer goes to bank
if the shipment is not satisfactory easier for importer to recover payment
April 16, 2017
Chapter Trade financing

10. Chapter 20 - Trade financing
L/C - types of L/Cs
documentary L/Cs
L/Cs which require supporting documentation
bills of lading, invoices, etc.
majority of L/Cs are documentary
non documentary (clean)
non-commercial transactions
irrevocable L/C
cannot be revoked except by mutual consent
revocable (rarely used) better than nothing
April 16, 2017
Chapter Trade financing

11. L/C - types of L/Cs con’t
confirmed L/C by an other bank
usually a bank in the exporter’s country
obligates both banks to honor the obligation
unconfirmed L/C- obligates issuing bank
transferable L/C
right to transfer, must be contracted
transfer of L/C and supporting documents
assignment
assigning part of the proceeds to another party
April 16, 2017
Chapter Trade financing

12. Chapter 20 - Trade financing
Banker’s acceptance
acceptance of the draft by a bank
bank substitutes its credit for importer’s credit
if transferable - creates a negotiable instrument
may discount this to the exporter
resell in secondary markets
terms
maturities 30, 60, 90 days
bank profits from
fee on L/O, discount on acceptance
April 16, 2017
Chapter Trade financing

13. Banker’s acceptance - hold
PV of 1,000,000 usd
less 2% annual commission
less 9.7% wacc
exporter gets BA and holds to term
exporter hedges transaction exposure
April 16, 2017
Chapter Trade financing

14. Banker’s acceptance - discount
PV of 1,000,000 usd
less 2% commission per annum
less 10.4% discount per annum
exporter gets BA and discounts
exporter gets into exchange market now
April 16, 2017
Chapter Trade financing

15. Chapter 20 - Trade financing
Mechanics of a trade
few weeks after contract
goods, price, quantity, quality
production of goods financed by
increase in input inventories, by payables
labor inputs by accruals
result an increase in output inventories
payables, accruals must be paid
payment financed by short-term financing
April 16, 2017
Chapter Trade financing

16. Mechanics of a trade - con’t
goods shipped
output inventories still carried as assets
goods, bill of lading, draft sent
L/C sent to exporter
delivery of goods
goods, bill of lading, draft at customs
time draft accepted
by importer (acceptance)
by importer’s bank (bankers acceptance)
output inventories now change to receivables
April 16, 2017
Chapter Trade financing

17. Mechanics of a trade con’t
Banker’s acceptance may be transferable
can be held by exporter for payment
receivable stays on exporters books
payable stays on importers books
must hedge transaction exposure if it exists
Banker’s acceptance if transferable
can be discounted
sold at discount to a bank or broker
then receivable becomes cash
payable still on importers books
April 16, 2017
Chapter Trade financing

18. Mechanics of a trade con’t
Risk if BA discounted
foreign exchange exposure exists
from time contract agreed to
until draft is accepted by the importer’s bank
BA signed
credit risk
higher until draft accepted (BA signed)
lower until BA discounted
April 16, 2017
Chapter Trade financing

19. Mechanics of a trade con’t
Risk if L/C held to maturity
foreign exchange exposure exists
from time contract agreed to
L/C matures
credit risk
higher until draft accepted (L/C issued)
lower until L/C matures
April 16, 2017
Chapter Trade financing

20. Chapter 20 - Trade financing
Consignment
exporter retains title to good shipped
importer gains possession, but not title
very risky
easy for importer to default on this type of arrangement
terms
whatever the importer sells is paid for
goods not sold returned
April 16, 2017
Chapter Trade financing

21. Chapter 20 - Trade financing
open account
most flexible
importer receives goods - a payable
acceptance by importer sufficient
reduces bank charges
risky - no bank guarantee on payment
importer and exporter need to have a good stable relationship
April 16, 2017
Chapter Trade financing

22. Chapter 20 - Trade financing
Documents of trade
bill of lading B/L
contract between exporter and carrier
straight B/L - consigns good to importer
order B/L - transferable
often serves as collateral for L/C
on board B/L - on board being shipped
received-for-shipment B/L
received, but not shipped
clean B/L - goods(externally) look undamaged
April 16, 2017
Chapter Trade financing

23. Chapter 20 - Trade financing
Other documents
commercial invoice
full description of merchandise
insurance
open (floating) prearrangement with insurer to cover shipments made
requires an insurance certificate which must conform to information on B/L
consular invoice
April 16, 2017
Chapter Trade financing

24. Chapter 20 - Trade financing
Factoring
firms that buy a firm’s receivables at discount
non-recourse basis - factor assumes all risk
recourse - exporter assumes risk
factoring fees can run from 1.75 to 2 % per month
compounded from to % per year
on top of this non-recourse fees can add to this
April 16, 2017
Chapter Trade financing

25. Chapter 20 - Trade financing
Export financing
export-import banks
finance exports of goods and services
subsidy to try to create new markets for exports
these are not market driven
very bureaucratic & often political
export-credit insurance
low cost credit insurance
lowers the cost of borrowing by reducing risk
April 16, 2017
Chapter Trade financing

26. Chapter 20 - Trade financing
Countertrade
barter
direct exchange of goods between two parties
counter purchase - parallel barter
continued sale and purchase of goods
Finland frequently sold manufactured goods for raw materials (oil) with the former Soviet Union
buyback
repayment of exports made by the sale of related product
April 16, 2017
Chapter Trade financing

27. Chapter 20 - Trade financing
Payment terms
evolving instruments of international trade
these instruments and methods are used to
facilitate trade by exploiting comparative advantage
reduce risk
who
how much
its cost
April 16, 2017
Chapter Trade financing