international trade finacing
TRANSCRIPT
International Trade, International Trade, Instruments and Instruments and
InstitutionsInstitutions
Kanchan Kandel
BBA
Foreign trade transaction
We understand “Trade” as something wherein goods are sold in return of some goods or money.
In international trade, there is always dilemma to importer and exporter who would like to do business with one another.
Importer is always feared of not receiving the goods or receiving goods with different qualities so they want to pay after the goods received.
In other hand, exporters also fear of not receiving the payment in time or not at all, so they want payment before the delivery of goods.
Foreign trade transaction
Because of the distance between two, it is not possible to simultaneously hand over goods with one and accept payment with other.
To address these fundamental dilemmas of being unwilling to trust a stranger in a foreign land is solved by using a high respected bank as intermediary or guarantor.
Payment method for Payment method for international tradeinternational trade
PrepaymentLetter of creditDraft (sight/time)ConsignmentOpen account
Prepayment Prepayment It is also known as advance payment. Under this method, the exporter will not ship the
goods until the buyer has remitted payment to the exporter.
This method affords the supplier the greatest degree of protection, and it is normally requested of the first time buyer whose creditworthiness is unknown.
DraftDraftA draft is the instrument normally used in
international commerce to effect payment. A draft is simply an order written by an
exporter (seller) instructing an importer (buyer) or its agent to pay a specified amount of money at a specified time.
Thus, it is the exporter’s formal demand for payment from the importer.
The person or business initiating the draft is known as the maker, drawer, or originator. Normally, this is the exporter.
DraftDraftThe party to whom the draft is addressed
is the drawee. Normally, this is the importer.
Draft can be: Sight draft : A sight draft is payable on
presentation to the draweeTime Draft: A time draft, also called a
usance draft, allows a delay in payment.
Consignment Consignment Under a consignment arrangement, the
exporter ships the goods to the importer while still retaining actual title itself (exporter).
The importer has the access to the inventory but does not have to pay for the goods until they have been sold to a third party.
If the importer fails to pay, the exporter has limited recourse because no draft is involved and the goods have already been sold.
Due to this nature, consignment is popular for subsidiary companies trading with the parent company. [email protected]
Open AccountOpen Accountif there is good relationship between
importer and exporter, they may choose open account for transaction.
In open account, importer open account in exporter firm. The value of goods shipped is added to this account.
An exporter send invoice at the end of each month or after each transaction. This method save collection fees as well as cost of letter of credit.
The financing of The financing of international tradeinternational trade
Short term financing
Account receivable financing
Factoring
Letter of credit
Banker’s acceptance
Trust received loan
Long term financing
Forfaiting
Buyer credit
Government Financing
Countertrade (it is fall on both category)
Account receivable Account receivable financingfinancing
Exporter can easily provide credit to the importer if there is good relationship between importer and exporter.
After providing credit, if exporter needs fund immediately, it may choose to finance from bank, known as account receivable financing.
Bank provide loan to the exporter on the base of account receivable. Bank has provide loan to the exporter so in case of buyer fails to pay the exporter is still responsible for repaying loan to the bank.
FactoringFactoringExporter can sell their account receivable to
a specialized third party or firm, known as factor.
Factor can purchase receivable in Non-recourse or recourse basis.
Non- recourse means that factor will take the credit, political, foreign exchange risk of receivable it purchases.
Recourse means that the factor can give back receivable that are not collected.
Letter of Credit – A Letter of Credit – A ConceptConcept
A letter of credit is a document that a financial institution or similar party issues to a seller of goods or services which provides that the issuer will pay the seller for goods or services the seller delivers to a third-party buyer.
The document serves essentially as a guarantee to the seller that it will be paid by the issuer of the letter of credit regardless of whether the buyer ultimately fails to pay.
Letters of credit are used primarily in international trade for large transactions between a supplier in one country and a customer in another
Parties involved in letter of credit
ApplicantIssuing bankAdvising bankBeneficiaryConfirming bankNegotiating bank
Step-by-step process:
Buyer and seller agree to conduct business. The seller wants a letter of credit to guarantee payment.
Buyer applies to his bank for a letter of credit in favor of the seller.
Buyer's bank approves the credit risk of the buyer, issues and forwards the credit to its correspondent bank (advising or confirming). The correspondent bank is usually located in the same geographical location as the seller (beneficiary).
Advising bank will authenticate the credit and forward the original credit to the seller (beneficiary).
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1. Sales Contract
3. Request to advice and, if applicable, confirm letter of credit
2. Letter of credit application
ISSUING BANK
ADVISING/CONFIRMINGBANK
SELLER BUYER
4. Advice of letter of credit
Step in Import letter of credit
Cont…Cont…Seller (beneficiary) ships the goods, then
verifies and develops the documentary requirements to support the letter of credit. Documentary requirements may vary greatly depending on the perceived risk involved in dealing with a particular company.
Seller presents the required documents to the advising or confirming bank to be processed for payment.
Advising or confirming bank examines the documents for compliance with the terms and conditions of the letter of credit and credit seller account.
Cont….Cont….If the documents are correct, the advising or
confirming bank will claim the funds by:Debiting the account of the issuing bank.Waiting until the issuing bank remits, after
receiving the documents.Reimburse on another bank as required in
the credit.Advising or confirming bank will forward the
documents to the issuing bank.Issuing bank will examine the documents for
compliance. If they are in order, the issuing bank will debit the buyer's account.
Issuing bank then forwards the documents to the buyer. [email protected]
Step in import letter of Step in import letter of creditcredit
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7. Payment 9. Forward Document and Debit Buyer account
8. Send documents and Debit Issuing bank
SELLER
ADVISING/CONFIRMING BANK ISSUING
BANK
BUYER5. Ship the goods
6. Present documents
10. Reimbursement
Type of L/CType of L/C• Revocable L/C : It may be amended or
cancelled by the opening bank at any moment and without prior notice to the seller
• Irrevocable L/C : In this case it is not possible to revoked or amended a credit without the agreement of the issuing bank, the confirming bank, and the beneficiary.
• Confirmed L/C : It is a special type of L/c in which another bank apart from the issuing bank has added its guarantee
• The cost of confirming by two banks makes it costlier.
Cont…Cont…Sight or Term(Usane): Letters of credit can
permit the beneficiary to be paid immediately upon presentation of specified documents (sight letter of credit), or at a future date as established in the sales contract (term/usance letter of credit).
Cont…..Cont…..Financing opportunities, such as pre-shipment
finance secured by a letter of credit and/or discounting of accepted drafts drawn under letters of credit, are available in many countries.
Bank expertise is made available to help complete trade transactions successfully.
Payment for the goods shipped can be remitted to your own bank or a bank of your choice.
Cont…Cont…To the importer:
• Payment will only be made to the seller when the terms and conditions of the letter of credit are complied with.
• The importer can control the shipping dates for the goods being purchased.
• Cash resources are not tied up.
Risk in L/cRisk in L/cFraud Risks: The payment will be obtained for
nonexistent or worthless merchandise against presentation by the beneficiary of forged or falsified documents. Sometime Credit itself may be forged.
Sovereign and Regulatory Risks: Performance of the Documentary Credit may be prevented by government action outside the control of the parties.
Legal Risks: Possibility that performance of a Documentary Credit may be disturbed by legal action relating directly to the parties and their rights and obligations under the Documentary Credit
Force Majeure and Frustration of Contract: Performance of a contract including an obligation under a Documentary Credit relationship is prevented by external factors such as natural disasters or armed conflicts. [email protected]
Cont…Cont…Risks to the Applicant:Non-delivery of GoodsShort Shipment Inferior QualityEarly /Late ShipmentDamaged in transitForeign exchangeFailure of Bank viz Issuing bank / Collecting BankRisks to the Issuing Bank:Insolvency of the ApplicantFraud Risk, Sovereign and Regulatory Risk and
Legal Risks. [email protected]
Risk to the:Risk to the:Beneficiary:Failure to Comply with Credit ConditionsFailure of, or Delays in Payment from, the Issuing
BankAdvising Bank: The Advising Bank’s only
obligation if it accepts the Issuing Bank’s instructions is to check the apparent authenticity of the Credit and advising it to the Beneficiary.
Confirming Bank: If Confirming Bank’s main risk is that, once having paid the Beneficiary, it may not be able to obtain reimbursement from the Issuing Bank because of insolvency of the Issuing Bank or refusal of the Issuing Bank because of a dispute as to whether or not payment should have been made under the Credit. [email protected]
Banker’ AcceptanceBanker’ AcceptanceIn L/C will the exporter present time draft along
with shipping documents to its local bank, and the exporter’s bank send the time draft along shipping documents to the importer’s bank. The importer’s bank accepts the draft, thereby creating the banker acceptance.
If the exporter does not want to wait until the specified date to receive payment, it can sold the banker’s acceptance in the money market at discount.
Benefit to exporterBenefit to exporterThe exporter does not need to worry about the
credit risk of the importer.The exporter faces little exposure to political risk
or to exchange controls imposed by a government because banks normally are allowed to meet their payment commitments even if control could prevent an importer from paying,
Exporter can sell the banker’s acceptance at a discount before payment is due and thus obtain funds up front from the issuing bank.
Benefit to ImporterBenefit to ImporterBanker’s acceptance by providing greater
access to foreign markets when purchasing supplies and other product.
Due to the documents presented along with the banker’ acceptance, the importer is assured that goods have been shipped.
It allows the importer to pay at a later date, the importer’s payment is financed until the maturity date of the banker’s acceptance.
Benefit to Bank Benefit to Bank The bank accepting the drafts benefits in that it
earns a commission for creating an acceptance.
Trust Received loanTrust Received loanTrust Receipt (TR) is a type of short-term import
loan to provide the buyer with financing to settle goods imported under Letter of Credit where title of goods is held by the bank.
Under a TR arrangement, the Bank retains title to the goods but allows the buyer to take possession of the goods on trust for resale before paying the Bank on TR due date
Medium and long term Medium and long term financingfinancing
Buyer creditGovernment FinancingForfaitingCountertrade (it is fall on both category)
Buyer CreditBuyer CreditWhen expensive capital equipment is being
purchased an exporter sometime arranges for a financial institutions to grant credit to the importer, known as buyer credit.
By arranging the credit for the importer, the exporter is ultimately paid cash up front, and the financial intermediaries bear most of the default risk of the importer.
ForfaitingForfaitingForfaiting is a method of trade finance that
allows exporters to obtain cash by selling their medium-term foreign accounts receivable at a discount on a “without recourse”
A forfaiter is a specialized finance firm or a department in a bank that performs non-recourse export financing through the purchase of medium-term trade receivables.
The forfaiter will deduct interest (discount) in advance for the whole period of credit and disburse the net proceeds immediately
ForfaitingForfaiting1. Sales agreement between Importer and exporter2. Importer prepared the promissory notes and summit
to bank. In most case importer bank which is located in importer country.
3. Importer bank signed (make guarantee or avalled) on promissory notes and send back to importer
4. Importer forward guaranteed Notes to exporter.5. Exporter exchange guaranteed notes with cash from
forfaiting bank (generally this notes are cashed at discount due to early received of cash and interest earn on early received will compensate the discount.
ForfaitingForfaiting5. Exporter shipped the goods6. Forfaiting bank either sells the notes to
investor in money market or waits until the maturity.
7. At maturity, forfaiting bank present notes to importer bank.
8. Importer bank inform importer about arrived of notes and debit his/her account.
9. Importer bank pay or credit the forfaiting account
Step involved in forfeitingStep involved in forfeiting
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4. Deliver Guarantee Notes 7 Ship the goods
1. Sales contract
2. Notes send for guarantee
3 Guaranteed notes return
9 Payment made
Exporter
Importer bankImporter
6 Cash payment
5 Present guarantee Notes
Forfeiting bank
8 Notes Present
10 Payment made
CountertradeCountertradeThe term countertrade denotes all type of
foreign transaction in which sales of goods to the country is linked to the purchase or exchange of goods from the same country.
Countertrade may or may not involve money in the transaction but there is guarantee of two ways commodity flow.
Popular countertrade are:BarterSwitch tradingCounter purchasedOffset Buyback [email protected]
BarterBarterThe simplest form of countertrade is involved
the direct exchange of goods or services from one country for the goods or services of another.
Trade is balance in the sense that the value of what is being imported equal to the value of what is being exported.
Although money is not involved, money may be the base that determines the value of the goods
Switching Switching Switching trading involves a third party, a switch
trader, who facilitates the eventual clean of an imbalance of trade, between two parties to a bilateral clearing agreement.
For example, Nepal and China might agree to exchange Nepalese tea for Chinese garment during the coming year; at the time of delivery value of Nepalese tea exceeds the value of Chinese garments.
Now Nepalese exporter has two alternatives to settle this balancing figure.
SwitchingSwitchingFirst, Nepalese exporter can used this
balancing value to purchase other goods from china or from other third country say India with the help of switch trader or
Second, it can directly sells this credit to switch trade in cash. Later on switch trader used this balancing value to purchase goods from china.
CounterpurchasedCounterpurchased Barter require a double action of wants in
that two parties in the transaction must each want what the other party has to provide, and want it at the same time and in the same amount.
Because of these difficulties, there is another form of countertrade, called counterpurchase. Counter purchased is agreement between seller and buyer either to:
CounterpurchaseCounterpurchaseMake purchase from a company
nominated by the buyer, later buyer settle up the company it has nominated.
Take product from the buyer in future, that is the seller accept credit in term of product.
OffsetOffsetAn Offset is a requirement of an importing
country that the price of its import be offset in some way by the exporter.
In offset, there might be contract between importer and exporter, where exporter, purchase raw material from Importer Company or country, in return exporter may supply finished goods.
In other case exporter agree to purchase goods in the importers country, to increase its imports from that country, to transfer technology to the country or to conduct additional direct foreign investment in the country [email protected]
BuybackBuybackIn this agreement, the seller of the capital
equipment agrees to buy the product made with the equipment it supplies.
This form of countertrade is common with capital equipment used in mining and manufacturing.
Buyback can be exits in three ways:Exporter receive product, directly from the factory
that was constructed and these product are similar to exporter industry.
Exporter received, resultant product that are unrelated to the exports industry. [email protected]
BuybackBuybackMix of resultant product and other product of the
countryA famous example of a buyback is the
agreement by several western European countries to supply the Soviet Union with pipe, compressor, controls, and other equipment necessary to build natural gas pipeline from the Soviet Union to Western Europe. The payment for the pipeline was natural gas delivered through the pipeline to Western Europe over the course of several years.
Practices in NepalPractices in Nepal Short term financing: Banker’s Acceptance
(In case of Time L/C) TR Loan: This is Trust Receipt Loan under
which a Bank allows the importer (its customer) to get the goods released from the Transporter and sell it for repaying to the Bank. The term of such loans vary from 30 days to 180 days.
Pre-shipment financing (Loans given to exporter to produce goods for the export)
Post – Shipment Financing (Loans or discount made after the shipment
