C H A P T E R 19

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C H A P T E R 19

• Financing International Trade

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Chapter 19 Objectives

• This chapter will
• A. Describe methods of payment for international
  trade
• B. Explain common trade finance methods
• C. Describe the major agencies that facilitate
  international trade with export insurance and/or
  loan programs

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Chapter Overview

• A. Payment Methods for International Trade
• B. Trade Finance Methods
• C. Agencies That Motivate International Trade

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A. Payment Methods for International Trade

• 1. Prepayment
• Same as cash in advance
• Payment usually by wire transfer
• Method offers exporter greatest degree of
  protection
• Usually requested when
• 1.) First time buyer
• 2.) Danger of pre shipment cancellation
• 3.) Importer country has high political risk

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A. Payment Methods for International Trade

• 2. Letters of Credit ( L/C )
• a. an instrument issued by a bank
• b. on behalf of the importer (buyer)
• c. promising to pay the exporter
• (beneficiary) upon presentation of
• d. shipping documents in compliance with the
  terms stipulated therein.
• e. In effect, the bank is substituting
• its credit for that of the buyer.

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A. Payment Methods for International Trade

• 3. Drafts (or bill of exchange)
• a. an unconditional promise drawn by one
  party, usually the exporter,
• b. instructing the buyer to pay the face
  amount of the draft upon presentation.
• c. draft represents the exporters formal
  demand for payment from the buyer.
• d. draft affords the exporter less protection
• than an L/C because the banks are not
  obligated to honor payments on the buyers
  behalf.

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A. Payment Methods for International Trade

• 4. Consignment
• a. exporter ships the goods to the importer
• while still retaining actual title to the
  merchandise.
• b. The importer has access to the inventory but
  does not have to pay for the goods until they
  have been sold to a third party.
• c. The exporter is trusting the importer to
  remit payment for the goods sold at that time.
• d. If the importer fails to pay, the exporter
  has limited recourse because no draft is
  involved and the goods have already been sold.

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A. Payment Methods for International Trade

• 5. Open Account
• a. The opposite of prepayment - the exporter
  ships the merchandise and expects the buyer to
  remit payment according to the
• agreed-upon terms.
• b. The exporter is relying fully upon the
  financial creditworthiness, integrity, and
  reputation of the buyer.
• c. method is used when the seller and buyer
  have mutual trust and a great deal of
  experience with each other.

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B. Trade Finance Methods

• 1. Accounts Receivable Financing
• a. could take the form of an open account
  shipment or a time draft
• b. the bank will provide a loan to the exporter
  secured by an assignment of the account
  receivable.
• 2. Factoring Receivables
• the exporter sells the accounts receivable
  without recourse.

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B. Trade Finance Methods

• 3. Letters of Credit ( L/C )
• a. Types of Letters of Credit
• b. Use of Drafts
• c. Bill of Lading Key Document
• d. Commercial Invoice (currency)

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Documentary Credit Procedure

• 19.3

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B. Trade Finance Methods

• 4. Bankers Acceptance
• bill of exchange, or time draft, drawn on and
  accepted by a bank. It is the accepting banks
  obligation to pay the holder of the draft at
  maturity.
• 5. Working Capital Financing
• 6. Medium-Term Capital Goods Financing
  (Forfaiting)
• similar to factoring in that the forfaiter (or
  factor)
• assumes responsibility for the collection of
  payment from the buyer, the underlying credit
  risk, and the risk pertaining to the countries
  Involved.

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B. Trade Finance Methods

• 7. Countertrade
• a. denotes all types of foreign trade
  transactions in which the sale of goods to one
  country is linked to the purchase or exchange of
  goods from that same country.
• b. Some types of countertrade, such as barter,
  have been in existence for thousands of years.
• c. Recently countertrade gained popularity and
• importance.

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Bankers Acceptance

• 19.4

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Life Cycle of a Typical Bankers Acceptance (B/A)

• 19.5

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C. Agencies That Motivate International Trade

• 1. Export-Import Bank of the United States
• a. Established in 1934 with the original goal
  of facilitating Soviet-American trade.
• b. Its mission today is to finance and
  facilitate the export of American goods and
  services
• c. maintain the competitiveness of American
  companies in overseas markets.
• d. programs that are classified as
• 1.) guarantees
• 2.) loans
• 3.) bank insurance
• 4.) export credit insurance.

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C. Agencies That Motivate International Trade

• 2. Private Export Funding Co. (PEFCO)
• a. is owned by a consortium of commercial
  banks and industrial companies.
• b. provides medium and long-term fixed rate
  financing to foreign buyers.
• 3. Overseas Private Investment Corporation
  (OPIC)
• a self-sustaining federal agency responsible
  for insuring direct U.S. investments in foreign
  countries against the risks of currency
  inconvertibility, expropriation, and other
  political risks.