FINANCING FOREIGN TRADE

1
Chapter 18

• FINANCING FOREIGN TRADE

2
Types of Risk

• Preshipment - Shipment - Postshipment

3
(No Transcript)
4
INCOTERMS
EXPORTERS LOADING DOCK
Port Entry
SHIP
Transport
Production Process
To Port
Ex Works
FAS
FOB
5
Shipment Risks
Ocean Freight is most common mode of transport
LOADED SHIP
PERILS OF THE SEA
Port Of Departure
Port Of Arrival
6
(No Transcript)
7
Post-Shipment Risk
IMPORTERS WAREHOUSE
CUSTOMS
Port Of Arrival
FINAL PYMT
Transit to Importer
8
Pre-shipment Risks
Port Entry
Contract
LOADING SHIP
Transport
Production Process
To Port
PORT
EXPORT CUSTOMS
Initial Contact
9
PAYMENT TERMS

• I. PAYMENT TERMS
• A. Four Principal Means
• 1. Cash in advance
• 2. Letter of Credit
• 3. Drafts
• 4. Open Account

10
PAYMENT TERMS

• B. Cash in Advance
• 1. Minimal risk to exporter
• 2. Used where there is
• a. Political unrest
• b. Goods made to order
• c. New and unfamiliar customer

11
PAYMENT TERMS

• C. Letter of Credit (L/C)
• 1. A letter addressed to seller
• a. written and signed by buyers bank
• b. promising to honor sellers drafts.
• c. Bank substitutes its own commitment
• d. Seller must conform to terms

12
PAYMENT TERMS

• 2. Advantages of an L/C to Exporter
• a. eliminates credit risk
• b. pre-shipment (cancellation of the order)
  risk protection

13
PAYMENT TERMS

• 3. Advantages of L/C to Importer
• a. shipment assured
• b. documents inspected
• c. may allow better sales terms
• d. relatively low-cost financing
• e. easy cash recovery if discrepancies

14
PAYMENT TERMS

• 4. Types of L/Cs
• a. documentary
• b. irrevocable
• c. confirmed

15
PAYMENT TERMS

• D. DRAFTS
• 1. Definition
• - unconditional order in writing
• - exporters order for importer to pay
• - at once (sight draft) or
• - in future (time draft)

16
PAYMENT TERMS

• 2. Three Functions of Drafts
• a. clear evidence of financial obligation
• b. reduced financing costs
• c. Can be a financial product for investors
• (i.e. May be converted to a bankers
  acceptance)

17
PAYMENT TERMS

• 3. Types of Drafts
• a. sight
• b. time

18
PAYMENT TERMS

• F. OPEN ACCOUNT
• 1. Creates a credit sale
• 2. To importers advantage
• 3. More popular lately because
• a. major surge in global trade
• b. credit information improved
• c. more global familiarity with exporting

19
PAYMENT TERMS

• 4. Benefits of Open Accounts
• a. greater flexibility in making a trade
• b. lower transactions costs
• 5. Major disadvantage
• highly vulnerable to government currency
  controls.

20
DOCUMENTS

• II. DOCUMENTS USED IN INTL TRADE
• A. Three most used documents
• 1. Bill of Lading (most important)
• 2. Commercial Invoice
• 3. Insurance Certificate

21
DOCUMENTS

• B. Bill of Lading
• Three functions
• 1. Acts as a contract to carry the goods.
• 2. Acts as a shippers receipt
• 3. Establishes ownership over goods if
  negotiable type.

22
DOCUMENTS

• C. COMMERCIAL INVOICE
• Purpose
• 1. Lists full details of goods shipped
• 2. Names of importer/exporter given
• 3. Identifies payment terms
• 4. List charges for transport and insurance.

23
DOCUMENTS

• D. INSURANCE
• 1. Marine Insurance Policy
• covers sea as well as air transport
• 2. Insurance Certificate issued to show proof
  of insurance

24
SHORT-TERM FINANCING TECHNIQUES

• III. FINANCING TECHNIQUES
• A. Four Types
• 1. Bankers Acceptances
• a. Creation drafts accepted
• b. Terms Payable at maturity to
  holder

25
SHORT-TERM FINANCING TECHNIQUES

• 2. Discounting
• a. Converts exporters drafts to cash
• minus interest to maturity and
• commissions.
• b. Low cost financing with few fees
• c. May be with (exporter still liable) or
  without recourse(bank takes
• liability for nonpayment).

26
SHORT-TERM FINANCING TECHNIQUES

• 3. Factoring
• firms sell accounts receivable to another firm
  known as the factor.
• a. Discount charged by factor
• b. Non-recourse basis Factor assumes all
  payment risk.
• c. When used
• 1.) Occasional exporting
• 2.) Clients geographically dispersed.

27
SHORT-TERM FINANCING TECHNIQUES

• 4. Forfaiting
• a. Definition
• discounting at a fixed rate without
  recourse for medium-term accounts receivable
  
• b. Use Large capital purchases
• c. Most popular in W. Europe

28
GOVERNMENT SOURCES

• IV. GOVERNMENT SOURCES OF EXPORT
• FINANCING AND CREDIT INSURANCE
• A. Export-Import Bank of the U.S.
• -known as Ex-Im Bank
• -finances and facilitates U.S. exports
  only.

29
GOVERNMENT SOURCES

• 1. Ex-Im Bank Programs
• a. Direct loans to exporters
• b. Intermediate loans to exporters
• c. Loan guarantees
• d. Preliminary commitments
• e. Political and commercial insurance

30
GOVERNMENT SOURCES

• Restrictions
• At least 51 U.S. content
• No armaments
• Must be environmentally friendly

31
COUNTERTRADE

• V. COUNTERTRADE
• A. Three Specific Forms
• 1. Barter
• direct exchange in kind
• 2. Counterpurchase
• sale/purchase of unrelated goods but with
  currencies
• 3. Buyback
• repayment of original purchase through sale
  of a related product

32
COUNTERTRADE

• B. When to Use Countertrade
• 1. with developing countries with
  soft- currency
• 2. when tariffs or quotas prevent
• trade