Export

1
Export Import Financing

• Chapter Twenty
• Eiteman, Stonehill, Moffett

2
Trade payment terms

• cash in advance
• draft
• bill of exchange
• letter of credit (L/C)
• bankers acceptance
• consignment
• open account

3
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

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 bankers acceptance)
• draft (bill of exchange) accepted by bank

5
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

6
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 bankers acceptances)
• at discount to bank, acceptance dealer
• rate lower than prime

7
L/C - terms

• promise of payment issued by the importers bank
• binds the importers 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

8
L/C - advantages exporter

• reduces credit risk
• the banks 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

9
L/C - advantages importer

• reduces delivery risk
• contract stipulates delivery terms
• bank oversees customs procedures
• importer can contract for better terms
• exporters risk substantially reduced
• prepayment by importer goes to bank
• if the shipment is not satisfactory easier for
  importer to recover payment

10
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

11
L/C - types of L/Cs cont

• confirmed L/C by an other bank
• usually a bank in the exporters 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

12
Bankers acceptance

• acceptance of the draft by a bank
• bank substitutes its credit for importers 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

13
Bankers 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

14
Bankers 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

15
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

16
Mechanics of a trade - cont

• 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 importers bank (bankers acceptance)
• output inventories now change to receivables

17
Mechanics of a trade cont

• Bankers 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
• Bankers acceptance if transferable
• can be discounted
• sold at discount to a bank or broker
• then receivable becomes cash
• payable still on importers books

18
Mechanics of a trade cont

• Risk if BA discounted
• foreign exchange exposure exists
• from time contract agreed to
• until draft is accepted by the importers bank
• BA signed
• credit risk
• higher until draft accepted (BA signed)
• lower until BA discounted

19
Mechanics of a trade cont

• 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

20
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

21
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

22
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

23
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

24
Factoring

• firms that buy a firms 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 23.14 to 26.82 per year
• on top of this non-recourse fees can add to this

25
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

26
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

27
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