Description
It describes financial aspects and concepts related to international trade.Terms like payment methods,credit,bill of exchange,leter of credit etc are explained in detail. It also explains the role of EXIM Bank, PEFCO, OPIC in promoting international trade.
Financing International Trade
International Financial
Management
Payment Methods
for International Trade
? In any international trade transaction, credit is
provided by either
? the supplier (exporter),
? the buyer (importer),
? one or more financial institutions, or
? any combination of the above.
? The form of credit whereby the supplier funds
the entire trade cycle is known as supplier
credit.
Payment Methods
for International Trade
Method O : Prepayments
? The goods will not be shipped until the
buyer has paid the seller.
? Time of payment : Before shipment
? Goods available to buyers : After payment
? Risk to exporter : None
? Risk to importer : Relies completely on
exporter to ship goods as ordered
Payment Methods
for International Trade
Method O : Letters of credit (L/C)
? These are issued by a bank on behalf of the
importer promising to pay the exporter upon
presentation of the shipping documents.
? Time of payment : When shipment is made
? Goods available to buyers : After payment
? Risk to exporter : Very little or none
? Risk to importer : Relies on exporter to ship
goods as described in documents
Payment Methods
for International Trade
Method O : Drafts (Bills of Exchange)
? These are unconditional promises drawn
by the exporter instructing the buyer to
pay the face amount of the drafts.
? Banks on both ends usually act as
intermediaries in the processing of
shipping documents and the collection of
payment. In banking terminology, the
transactions are known as documentary
collections.
Payment Methods
for International Trade
Method O : Drafts (Bills of Exchange)
Sight drafts (documents against
payment) : When the shipment has
been made, the draft is presented to
the buyer for payment.
• Time of payment : On presentation of draft
• Goods available to buyers : After payment
• Risk to exporter : Disposal of unpaid goods
• Risk to importer : Relies on exporter to ship
goods as described in documents
Payment Methods
for International Trade
Method O : Drafts (Bills of Exchange)
Time drafts (documents against
acceptance) : When the shipment has
been made, the buyer accepts (signs)
the presented draft.
• Time of payment : On maturity of draft
• Goods available to buyers : Before payment
• Risk to exporter : Relies on buyer to pay
• Risk to importer : Relies on exporter to ship
goods as described in documents
Payment Methods
for International Trade
Method O : Consignments
? The exporter retains actual title to the
goods that are shipped to the importer.
? Time of payment : At time of sale to third
party
? Goods available to buyers : Before
payment
? Risk to exporter : Allows importer to sell
inventory before paying exporter
? Risk to importer : None
Payment Methods
for International Trade
Method O : Open Accounts
? The exporter ships the merchandise and
expects the buyer to remit payment
according to the agreed-upon terms.
? Time of payment : As agreed upon
? Goods available to buyers : Before
payment
? Risk to exporter : Relies completely on
buyer to pay account as agreed upon
? Risk to importer : None
Trade Finance Methods
OAccounts Receivable Financing
? An exporter that needs funds immediately may
obtain a bank loan that is secured by an assignment
of the account receivable.
OFactoring (Cross-Border Factoring)
? The accounts receivable are sold to a third party
(the factor), that then assumes all the
responsibilities and exposure associated with
collecting from the buyer.
Trade Finance Methods
OLetters of Credit (L/C)
? These are issued by a bank on behalf of the
importer promising to pay the exporter upon
presentation of the shipping documents.
? The importer pays the issuing bank the amount of
the L/C plus associated fees.
? Commercial or import/export L/Cs are usually
irrevocable.
Trade Finance Methods
OLetters of Credit (L/C)
The required documents typically include a
draft (sight or time), a commercial invoice,
and a bill of lading (receipt for shipment).
Sometimes, the exporter may request that a
local bank confirm (guarantee) the L/C.
Documentary Credit Procedure
Buyer
(Importer)
O Sale Contract
Seller
(Exporter)
O Deliver Goods
O
Request
for Credit
Importer’s Bank
(Issuing Bank)
O
Documents
& Claim for
Payment
O
Present
Documents
O
Deliver
Letter of
Credit
O Present
Documents
O Send Credit
Exporter’s Bank
(Advising Bank)
O Payment
Trade Finance Methods
? Variations include
? standby L/Cs : funded only if the buyer does not pay the
seller as agreed upon
? transferable L/Cs : the first beneficiary can transfer all or
part of the original L/C to a third party
? assignments of proceeds under an L/C : the original
beneficiary assigns the proceeds to the end supplier
OLetters of Credit (L/C)
Trade Finance Methods
OBanker’s Acceptance (BA)
? This is a time draft that is drawn on and accepted
by a bank (the importer’s bank). The accepting bank
is obliged to pay the holder of the draft at maturity.
? If the exporter does not want to wait for payment, it
can request that the BA be sold in the money
market. Trade financing is provided by the holder of
the BA.
Trade Finance Methods
? In general, all-in-rates are lower than bank loan
rates. They usually fall between the rates of short-
term Treasury bills and commercial papers.
OBanker’s Acceptance (BA)
The bank accepting the drafts charges an
all-in-rate (interest rate) that consists of
the discount rate plus the acceptance
commission.
Life Cycle of a Typical Banker’s Acceptance
8. Pay Discounted Value of BA
1 - 7 : Prior to BA
1. Purchase
Order
Importer Exporter
5. Ship
Goods
Importer’s
Bank
2. Apply
for L/C
11.
Shipping
Documents
14. Pay
Face Value
of BA
10. Sign
Promissory
Note to Pay
6.
Shipping
Documents
& Time
Draft
4. L/C
Notification
9. Pay
Discounted
Value of
BA
7. Shipping Documents
&
Time Draft
Exporter’s
Bank
3. L/C
12. BA
Money Market
Investor
13. Pay Discounted Value of BA
16. Pay Face Value of BA
15. Present BA at Maturity
14 - 16 : When BA
matures
8 - 13 : When BA
is created
Trade Finance Methods
OWorking Capital Financing
? Banks may provide short-term loans that finance
the working capital cycle, from the purchase of
inventory until the eventual conversion to cash.
Trade Finance Methods
OMedium-Term Capital Goods Financing
(Forfeiting)
? The importer issues a promissory note to the
exporter to pay for its imported capital goods over a
period that generally ranges from three to seven
years.
? The exporter then sells the note, without recourse,
to a bank (the forfeiting bank).
Trade Finance Methods
OCounter trade
? These are 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.
? Common counter trade types include barter,
compensation (product buy-back), and counter
purchase.
? The primary participants are governments and
multinationals.
Agencies that Motivate
International Trade
? Due to the inherent risks of international trade,
government institutions and the private sector
offer various forms of export credit, export
finance, and guarantee programs to reduce risk
and stimulate foreign trade.
Agencies that Motivate
International Trade
Export-Import Bank of the U.S. (Ex-Imbank)
? This U.S. government agency aims to create
jobs by financing and facilitating the export of
U.S. goods and services and maintaining the
competitiveness of U.S. companies in
overseas markets.
? It offers guarantees of commercial loans,
direct loans, and export credit insurance.
Agencies that Motivate
International Trade
Private Export Funding Corporation (PEFCO)
? PEFCO is a private corporation that is owned
by a consortium of commercial banks and
industrial companies.
? In cooperation with Ex-Imbank, PEFCO
provides medium- and long-term fixed-rate
financing for foreign buyers through the
issuance of long-term bonds.
Agencies that Motivate
International Trade
Overseas Private Investment Corporation
(OPIC)
? OPIC is a U.S. government agency that
assists U.S. investors by insuring their
overseas investments against a broad range
of political risks.
? It also provides financing for overseas
businesses through loans and loan
guaranties.
Agencies that Motivate
International Trade
? Beyond insurance and financing, the U.S. has
tax provisions that encourage international
trade.
? The FSC Repeal and Extraterritorial Income
Exclusion Act of 2000, which replaced the
1984 Foreign Sales Corporation provisions in
response to WTO concerns, excludes certain
extraterritorial income from the definition of
gross income for U.S. tax purposes.
doc_905171585.ppt
It describes financial aspects and concepts related to international trade.Terms like payment methods,credit,bill of exchange,leter of credit etc are explained in detail. It also explains the role of EXIM Bank, PEFCO, OPIC in promoting international trade.
Financing International Trade
International Financial
Management
Payment Methods
for International Trade
? In any international trade transaction, credit is
provided by either
? the supplier (exporter),
? the buyer (importer),
? one or more financial institutions, or
? any combination of the above.
? The form of credit whereby the supplier funds
the entire trade cycle is known as supplier
credit.
Payment Methods
for International Trade
Method O : Prepayments
? The goods will not be shipped until the
buyer has paid the seller.
? Time of payment : Before shipment
? Goods available to buyers : After payment
? Risk to exporter : None
? Risk to importer : Relies completely on
exporter to ship goods as ordered
Payment Methods
for International Trade
Method O : Letters of credit (L/C)
? These are issued by a bank on behalf of the
importer promising to pay the exporter upon
presentation of the shipping documents.
? Time of payment : When shipment is made
? Goods available to buyers : After payment
? Risk to exporter : Very little or none
? Risk to importer : Relies on exporter to ship
goods as described in documents
Payment Methods
for International Trade
Method O : Drafts (Bills of Exchange)
? These are unconditional promises drawn
by the exporter instructing the buyer to
pay the face amount of the drafts.
? Banks on both ends usually act as
intermediaries in the processing of
shipping documents and the collection of
payment. In banking terminology, the
transactions are known as documentary
collections.
Payment Methods
for International Trade
Method O : Drafts (Bills of Exchange)
Sight drafts (documents against
payment) : When the shipment has
been made, the draft is presented to
the buyer for payment.
• Time of payment : On presentation of draft
• Goods available to buyers : After payment
• Risk to exporter : Disposal of unpaid goods
• Risk to importer : Relies on exporter to ship
goods as described in documents
Payment Methods
for International Trade
Method O : Drafts (Bills of Exchange)
Time drafts (documents against
acceptance) : When the shipment has
been made, the buyer accepts (signs)
the presented draft.
• Time of payment : On maturity of draft
• Goods available to buyers : Before payment
• Risk to exporter : Relies on buyer to pay
• Risk to importer : Relies on exporter to ship
goods as described in documents
Payment Methods
for International Trade
Method O : Consignments
? The exporter retains actual title to the
goods that are shipped to the importer.
? Time of payment : At time of sale to third
party
? Goods available to buyers : Before
payment
? Risk to exporter : Allows importer to sell
inventory before paying exporter
? Risk to importer : None
Payment Methods
for International Trade
Method O : Open Accounts
? The exporter ships the merchandise and
expects the buyer to remit payment
according to the agreed-upon terms.
? Time of payment : As agreed upon
? Goods available to buyers : Before
payment
? Risk to exporter : Relies completely on
buyer to pay account as agreed upon
? Risk to importer : None
Trade Finance Methods
OAccounts Receivable Financing
? An exporter that needs funds immediately may
obtain a bank loan that is secured by an assignment
of the account receivable.
OFactoring (Cross-Border Factoring)
? The accounts receivable are sold to a third party
(the factor), that then assumes all the
responsibilities and exposure associated with
collecting from the buyer.
Trade Finance Methods
OLetters of Credit (L/C)
? These are issued by a bank on behalf of the
importer promising to pay the exporter upon
presentation of the shipping documents.
? The importer pays the issuing bank the amount of
the L/C plus associated fees.
? Commercial or import/export L/Cs are usually
irrevocable.
Trade Finance Methods
OLetters of Credit (L/C)
The required documents typically include a
draft (sight or time), a commercial invoice,
and a bill of lading (receipt for shipment).
Sometimes, the exporter may request that a
local bank confirm (guarantee) the L/C.
Documentary Credit Procedure
Buyer
(Importer)
O Sale Contract
Seller
(Exporter)
O Deliver Goods
O
Request
for Credit
Importer’s Bank
(Issuing Bank)
O
Documents
& Claim for
Payment
O
Present
Documents
O
Deliver
Letter of
Credit
O Present
Documents
O Send Credit
Exporter’s Bank
(Advising Bank)
O Payment
Trade Finance Methods
? Variations include
? standby L/Cs : funded only if the buyer does not pay the
seller as agreed upon
? transferable L/Cs : the first beneficiary can transfer all or
part of the original L/C to a third party
? assignments of proceeds under an L/C : the original
beneficiary assigns the proceeds to the end supplier
OLetters of Credit (L/C)
Trade Finance Methods
OBanker’s Acceptance (BA)
? This is a time draft that is drawn on and accepted
by a bank (the importer’s bank). The accepting bank
is obliged to pay the holder of the draft at maturity.
? If the exporter does not want to wait for payment, it
can request that the BA be sold in the money
market. Trade financing is provided by the holder of
the BA.
Trade Finance Methods
? In general, all-in-rates are lower than bank loan
rates. They usually fall between the rates of short-
term Treasury bills and commercial papers.
OBanker’s Acceptance (BA)
The bank accepting the drafts charges an
all-in-rate (interest rate) that consists of
the discount rate plus the acceptance
commission.
Life Cycle of a Typical Banker’s Acceptance
8. Pay Discounted Value of BA
1 - 7 : Prior to BA
1. Purchase
Order
Importer Exporter
5. Ship
Goods
Importer’s
Bank
2. Apply
for L/C
11.
Shipping
Documents
14. Pay
Face Value
of BA
10. Sign
Promissory
Note to Pay
6.
Shipping
Documents
& Time
Draft
4. L/C
Notification
9. Pay
Discounted
Value of
BA
7. Shipping Documents
&
Time Draft
Exporter’s
Bank
3. L/C
12. BA
Money Market
Investor
13. Pay Discounted Value of BA
16. Pay Face Value of BA
15. Present BA at Maturity
14 - 16 : When BA
matures
8 - 13 : When BA
is created
Trade Finance Methods
OWorking Capital Financing
? Banks may provide short-term loans that finance
the working capital cycle, from the purchase of
inventory until the eventual conversion to cash.
Trade Finance Methods
OMedium-Term Capital Goods Financing
(Forfeiting)
? The importer issues a promissory note to the
exporter to pay for its imported capital goods over a
period that generally ranges from three to seven
years.
? The exporter then sells the note, without recourse,
to a bank (the forfeiting bank).
Trade Finance Methods
OCounter trade
? These are 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.
? Common counter trade types include barter,
compensation (product buy-back), and counter
purchase.
? The primary participants are governments and
multinationals.
Agencies that Motivate
International Trade
? Due to the inherent risks of international trade,
government institutions and the private sector
offer various forms of export credit, export
finance, and guarantee programs to reduce risk
and stimulate foreign trade.
Agencies that Motivate
International Trade
Export-Import Bank of the U.S. (Ex-Imbank)
? This U.S. government agency aims to create
jobs by financing and facilitating the export of
U.S. goods and services and maintaining the
competitiveness of U.S. companies in
overseas markets.
? It offers guarantees of commercial loans,
direct loans, and export credit insurance.
Agencies that Motivate
International Trade
Private Export Funding Corporation (PEFCO)
? PEFCO is a private corporation that is owned
by a consortium of commercial banks and
industrial companies.
? In cooperation with Ex-Imbank, PEFCO
provides medium- and long-term fixed-rate
financing for foreign buyers through the
issuance of long-term bonds.
Agencies that Motivate
International Trade
Overseas Private Investment Corporation
(OPIC)
? OPIC is a U.S. government agency that
assists U.S. investors by insuring their
overseas investments against a broad range
of political risks.
? It also provides financing for overseas
businesses through loans and loan
guaranties.
Agencies that Motivate
International Trade
? Beyond insurance and financing, the U.S. has
tax provisions that encourage international
trade.
? The FSC Repeal and Extraterritorial Income
Exclusion Act of 2000, which replaced the
1984 Foreign Sales Corporation provisions in
response to WTO concerns, excludes certain
extraterritorial income from the definition of
gross income for U.S. tax purposes.
doc_905171585.ppt