Description
Describe the methods of payment for international trade, to explain common trade finance methods and to describe the major agencies that facilitate international trade with export insurance and/or loan programs.
International Trade Financing
Chapter Objectives
• To describe the methods of payment for
international trade;
• To explain common trade finance methods;
and
• To describe the major agencies that facilitate
international trade with export insurance
and/or loan programs.
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
Example for L/C
NIKE
• Not well known internationally in 1970’s
• Due to use of L/C was able to sub-contract
shoe manufacturing from Japan
• The backing of banks, L/Cs facilitated NIKE to
do business internationally without
international parties having worry about
payments
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
• 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
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.
Payment Methods
for International Trade
• 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
Method O : Drafts (Bills of Exchange)
• Time drafts (documents against acceptance) :
When the shipment has been made, the
buyer accepts (signs) the presented draft.
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
– Sometimes, the exporter may request that a
local bank confirm (guarantee) the L/C.
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).
Sample Letter of Credit (Confirmation)
Advice Number: BA000000094 Amount: April 17, 2002
Issue Bank Ref: 1234/LMC/5678 US$: Advice Date: 21 March 2002
Beneficiary: ABC Company, Inc. Applicant: XYZ Company, Inc. Expire Date: 21 July 2002
5278 S. Motorized Blvd 25 Rising Sun Way
Detroit, MI 48210 Tokyo, Japan 120-113
000-000-0000 +000-0000-0000
We have been requested to advise you of the following letter of credit issued by: First Bank of Japan
123 Cherry Blossom Dr
Tokyo, Japan
Please be guided by its terms and conditions and by the following:
Credit is available by negotiation of your draft(s) in duplicate at sight for 100% of invoice value drawn on us
accompanied by the following documents:
1. Signed commercial invoice, one (1) original and three (3) copies.
2. Full set ocean bills of lading consigned to the order of First Bank of Japan, Japan notify applicant and marked
freight collect.
3. Packing list, two (2) copies.
Evidencing Shipment of: 20,000 motorized tooth brushes FOB San Francisco
Shipment From: Detroit, MI through San Francisco, CA Shipment To: Tokyo, Japan
Partial Shipments not allowed. All banking charges outside Japan are for beneficiary's account. Documents must be
presented within 21 days from BILL date.
At the request of our correspondent, we confirm this credit and engage with you that all drafts drawn under and in
compliance with the terms of this credit will be duly honored by us.
Please examine this instrument carefully. If you are unable to comply with the terms or conditions, please communicate
with your buyer to arrange for an amendment.
Sincerely,
Jill Moneybags
Account Manager
International Banking Group • Jack and Jill Bank Corp. • P.O. Box 1234 • Detroit, MI 48201
http://www.tradenet.gov/...
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
Comparison between Acceptance and
Loan
LOAN Acceptance
Amount $1,000,000 $1,000,000
Term 180 days 180 days
Rate Prime + 1.5% BA rate + 1.5%
10% + 1.5% = 11.5% 7.6% + 1.5 = 9.1%
Interest Cost $57,500 $45,500
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
(Forfaiting)
– 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 forfaiting bank).
Trade Finance Methods
OCountertrade
– 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 countertrade types include barter,
compensation (product buy-back), and
counterpurchase.
– The primary participants are governments and
multinationals.
Online Application
• Need more help on financing your trade?
Visit:
– the U.S. Business Advisor at
http://www.business.gov/busadv/index.cfm
– the U.S. Small Business Administration at
http://www.sbaonline.sba.gov/
– the Los Angeles Area Chamber of Commerce at
http://www.tradeport.org/
– America's Business Funding Directory at
http://www.businessfinance.com/
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.
http://www.exim.gov/
http://www.exim.gov/
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.
Online Application
• Find out more about the PEFCO and its
programs at http://www.pefco.com/.
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.
http://www.opic.gov/
http://www.opic.gov/
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.
Impact of International Trade Financing Decisions on
an MNC’s Value
( ) ( ) | |
( )
¿
¿
¦
¦
)
¦
¦
`
¹
¦
¦
¹
¦
¦
´
¦
+
×
=
n
t
t
m
j
t j t j
k
1 =
1
, ,
1
ER E CF E
= Value
E (CF
j,t
) = expected cash flows in currency j to be received
by the U.S. parent at the end of period t
E (ER
j,t
) = expected exchange rate at which currency j can
be converted to dollars at the end of period t
k = weighted average cost of capital of the parent
Trade Financing Decisions
Chapter Review
• Payment Methods for International Trade
– Prepayments
– Letters of Credit
– Sight Drafts and Time Drafts
– Consignments
– Open Accounts
Chapter Review
• Trade Finance Methods
– Accounts Receivable Financing
– Factoring
– Letters of Credit
– Banker’s Acceptances
– Working Capital Financing
– Medium-Term Capital Goods Financing (Forfaiting)
– Countertrade
Chapter Review
• Agencies that Motivate International Trade
– Export-Import Bank of the U.S.
– Private Export Funding Corporation
– Overseas Private Investment Corporation
– Other Considerations
• Impact of International Trade Financing on an
MNC’s Value
Thank You
doc_362728144.pptx
Describe the methods of payment for international trade, to explain common trade finance methods and to describe the major agencies that facilitate international trade with export insurance and/or loan programs.
International Trade Financing
Chapter Objectives
• To describe the methods of payment for
international trade;
• To explain common trade finance methods;
and
• To describe the major agencies that facilitate
international trade with export insurance
and/or loan programs.
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
Example for L/C
NIKE
• Not well known internationally in 1970’s
• Due to use of L/C was able to sub-contract
shoe manufacturing from Japan
• The backing of banks, L/Cs facilitated NIKE to
do business internationally without
international parties having worry about
payments
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
• 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
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.
Payment Methods
for International Trade
• 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
Method O : Drafts (Bills of Exchange)
• Time drafts (documents against acceptance) :
When the shipment has been made, the
buyer accepts (signs) the presented draft.
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
– Sometimes, the exporter may request that a
local bank confirm (guarantee) the L/C.
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).
Sample Letter of Credit (Confirmation)
Advice Number: BA000000094 Amount: April 17, 2002
Issue Bank Ref: 1234/LMC/5678 US$: Advice Date: 21 March 2002
Beneficiary: ABC Company, Inc. Applicant: XYZ Company, Inc. Expire Date: 21 July 2002
5278 S. Motorized Blvd 25 Rising Sun Way
Detroit, MI 48210 Tokyo, Japan 120-113
000-000-0000 +000-0000-0000
We have been requested to advise you of the following letter of credit issued by: First Bank of Japan
123 Cherry Blossom Dr
Tokyo, Japan
Please be guided by its terms and conditions and by the following:
Credit is available by negotiation of your draft(s) in duplicate at sight for 100% of invoice value drawn on us
accompanied by the following documents:
1. Signed commercial invoice, one (1) original and three (3) copies.
2. Full set ocean bills of lading consigned to the order of First Bank of Japan, Japan notify applicant and marked
freight collect.
3. Packing list, two (2) copies.
Evidencing Shipment of: 20,000 motorized tooth brushes FOB San Francisco
Shipment From: Detroit, MI through San Francisco, CA Shipment To: Tokyo, Japan
Partial Shipments not allowed. All banking charges outside Japan are for beneficiary's account. Documents must be
presented within 21 days from BILL date.
At the request of our correspondent, we confirm this credit and engage with you that all drafts drawn under and in
compliance with the terms of this credit will be duly honored by us.
Please examine this instrument carefully. If you are unable to comply with the terms or conditions, please communicate
with your buyer to arrange for an amendment.
Sincerely,
Jill Moneybags
Account Manager
International Banking Group • Jack and Jill Bank Corp. • P.O. Box 1234 • Detroit, MI 48201
http://www.tradenet.gov/...
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
Comparison between Acceptance and
Loan
LOAN Acceptance
Amount $1,000,000 $1,000,000
Term 180 days 180 days
Rate Prime + 1.5% BA rate + 1.5%
10% + 1.5% = 11.5% 7.6% + 1.5 = 9.1%
Interest Cost $57,500 $45,500
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
(Forfaiting)
– 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 forfaiting bank).
Trade Finance Methods
OCountertrade
– 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 countertrade types include barter,
compensation (product buy-back), and
counterpurchase.
– The primary participants are governments and
multinationals.
Online Application
• Need more help on financing your trade?
Visit:
– the U.S. Business Advisor at
http://www.business.gov/busadv/index.cfm
– the U.S. Small Business Administration at
http://www.sbaonline.sba.gov/
– the Los Angeles Area Chamber of Commerce at
http://www.tradeport.org/
– America's Business Funding Directory at
http://www.businessfinance.com/
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.
http://www.exim.gov/
http://www.exim.gov/
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.
Online Application
• Find out more about the PEFCO and its
programs at http://www.pefco.com/.
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.
http://www.opic.gov/
http://www.opic.gov/
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.
Impact of International Trade Financing Decisions on
an MNC’s Value
( ) ( ) | |
( )
¿
¿
¦
¦
)
¦
¦
`
¹
¦
¦
¹
¦
¦
´
¦
+
×
=
n
t
t
m
j
t j t j
k
1 =
1
, ,
1
ER E CF E
= Value
E (CF
j,t
) = expected cash flows in currency j to be received
by the U.S. parent at the end of period t
E (ER
j,t
) = expected exchange rate at which currency j can
be converted to dollars at the end of period t
k = weighted average cost of capital of the parent
Trade Financing Decisions
Chapter Review
• Payment Methods for International Trade
– Prepayments
– Letters of Credit
– Sight Drafts and Time Drafts
– Consignments
– Open Accounts
Chapter Review
• Trade Finance Methods
– Accounts Receivable Financing
– Factoring
– Letters of Credit
– Banker’s Acceptances
– Working Capital Financing
– Medium-Term Capital Goods Financing (Forfaiting)
– Countertrade
Chapter Review
• Agencies that Motivate International Trade
– Export-Import Bank of the U.S.
– Private Export Funding Corporation
– Overseas Private Investment Corporation
– Other Considerations
• Impact of International Trade Financing on an
MNC’s Value
Thank You
doc_362728144.pptx