foreign trade financing.stbanking notes.ppt

8/20/2019 Foreign Trade Financing.stbanking notes.ppt

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Learning Objectives What are the key elements of an import or

export transaction?

What are the three key documents in importor export transactions?

What are some private sector export financing

sources? What are some public sector export financing

sources?


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International Trade Finance Trade financing shares a number of common

characteristics with traditional value chain

activities conducted by all firms. !ll companies must search out suppliers for

goods and services.

Must determine if supplier can provide products

at re"uired specifications and "uality.

!ll must be at an acceptable price and delivered

in a timely manner.


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Elements of an Import/Export

Transaction #very export sales transaction covers three basic

elements$

%ontracts& contractual exchange between parties in two countries

& description of goods

'rices

& price "uotations and terms in the contract should conform to published catalogues.

(ocuments

& provides shipping and delivery instructions


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Documentations in

Import/Export Transactions Bills of lading (B/L)

issued to the exporter by acommon carrier transporting the

merchandise Commercial invoice

issued by the exporter and containsa precise description of themerchandise.

Insurance documents must be as specified in the contract

of sale and must be issued byinsurance companies or theiragents.

Consular invoices issued in the exporting

country by the consulate of

the importing country Packing lists

may be re"uired so that thecontents of containers can be identified


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International Trade Risks

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

Time and Events

The Trade Transaction Timeline


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Documentation of Foreign

Trade Transactions

*ey (ocuments

+etter of %redit ,ill of +ading

(raft

Function

-isk of noncompletion

Foreign exchange rate

risk

Financing foreign trade


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Letter of Credit (L/C) ! letter of credit is a banks conditional promise to pay

issued by a bank at the re"uest of an importer in which the bank promises to pay an exporter upon presentation ofdocuments specified in the +/%.

The essence of a +/% is the promise of the issuing bank to pay against specific documents.

Issuing bank must receive a fee for issuing +/%

,anks +/% must contain specified maturity date

,anks commitment must have stated maximum amount ,anks obligation must arise only on presentation of specific

documents and bank cannot be called on for disputed items

,anks customer must have un"ualified obligation to reimburse bank on same condition of banks payment


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Letter of Credit (L/C) %ommercial +/%s are classified as$

Irrevocable vs. -evocable & irrevocable letters of credit are non0cancelable while its opposite can

be cancelled at any time

%onfirmed vs. 1nconfirmed& issued by one bank and confirmed by another bank

!dvantages of +/%s$ it reduces risk of default

a confirmed +/% helps secure financing (isadvantages of +/%s$

the fees charged

reduces the available credit of the importer


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Relationships Among the Three

Parties to a Letter of Credit

The relationship between

the issuing bank and the

exporter is governed b the

terms of the letter of credit!

issued b that bank

The relationship between

the importer and the issuing

bank is governed b the

terms of the application and

agreement for the letter of

credit

Beneficiary (eporter!

"pplicant(importer!

Issuing Bank

The relationship between the importer and the exporter

is governed b the sales contract


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Bill of Exchange

! draft 2 or bill of exchange 3,/#)2 is a writtenorder by an exporter instructing an importer or itsagent to pay a specified amount at a specifiedtime.

The party initiating the draft is the maker2 drawer2or originator while the counterpart is the drawee. Trade draft

& ,uyer is drawee of draft

,ank draft& ,uyers bank is drawee of draft


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Negotiable Instruments

If properly drawn2 drafts can become negotiable

instruments.

!s such they provide a convenient instrument for

financing the international movement of merchandise.

To become a negotiable instrument2 there are four

re"uirements$

& 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


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Types of Drafts

#ig$t 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 bank2 it becomes a%anker&s acceptance'

& When drawn on a business firm it becomes a tradeacceptance'


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Banker’s Acceptance When a draft is accepted by a bank2 it becomes a bankers

acceptance.

#xample$ !cceptance of 45662666 for exporter

"ace amount of acceptance

#ess $%&' p%a% commission for ( months

)mount received b exporter in ( months

#ess *' p%a% discount rate for ( months

)mount received b exporter at once

#xporter may discount the acceptance note in

order to receive the funds up0front.


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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 receipt2 a contract and adocument of title

& !s a receipt the ,/+ indicates that the carrier has received the

merchandise

& !s a contract the ,/+ indicates the obligation of the carrier to

provide certain transportation& !s a document of title2 the ,/+ is used to obtain payment or

written promise of payment before the merchandise is released to

the importer


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Characteristics of the Bill of Lading

! straig$t B/L provides that the carrier deliver the merchandise to the

designated consignee only. !n order B/L

directs the carrier to deliver the goods to the order of adesignated party2 usually the shipper.

! ,/+ is usually made payable to the order of theexporter.


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Additional Financing Techniques

Used in International Trade (iscounting

%onverting a trade draft into cash.

Factoring 7elling export receivables at a discount to a factor.

#xpensive but may be of great value to the occasionalexporter.

Forfaiting (iscounting at a fixed rate without recourse of medium0

term export receivables denominated in fully convertiblecurrencies.


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Government Programs for

Export Financing #xport %redit Insurance

'rovides assurance to the exporter or the exporters bank

that an insurer will pay should the foreign customerdefault.

In the 17 the Foreign %redit Insurance !ssociation 3F%I!)

provides this type of insurance.

#xport0Import ,ank *nown as the #ximbank2 it facilitates the financing of 17

exports through various loan guarantee and insurance

programs.