INTERNATIONAL TRADE FINANCE

Names Prabha Bisht Harsh Chopra Supriya Gunthey Shweta Kothari Mishikaa Parakh Shridevi Y

Roll No 91 95 102 108 118 134

Introduction Letter of credit Cash In Advance Payment Method Collection Method Open account system Export factoring Forfaiting

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Financing of international trade Lending issuing letters of credit Factoring export credit and insurance Companies involved importers and exporters banks and financiers insurers and export credit agencies

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An LC is a commitment by a bank on behalf of the importer that payment will be made to exporter provided that the terms and conditions stated in the LC have been met An LC is useful when reliable credit information about a foreign buyer is difficult to obtain ,but the exporter is satisfied with the creditworthiness of the importers bank. This method also protects the importer since the documents required to trigger payment provide evidence that goods have been shipped as agreed.

Buyer/ Importer Applicant

L/C Application

Seller/ Exporter Beneficiary

L/C

L/C

Issuing Bank

Advising Bank Confirming Bank Negotiating Bank

5

Buyer/ Importer
DOCs

Merchandise

Seller/ Exporter
$ DOCs

DOCs

Issuing Bank

Advising Bank Confirming Bank Negotiating Bank

6

With the cash-in-advance payment method, the exporter can eliminate credit risk or the risk of non-payment since payment is received prior to the transfer of ownership of the goods. Wire transfers and credit cards are the most commonly used cash-in-advance options available to exporters. With the advancement of the Internet, escrow services are becoming another cash-in-advance option for small export transactions.

Applicability Risk Pros Payment before shipment Eliminates risk of non-payment Cons May lose customers to competitors over payment terms No additional earnings through financing operations

Wire Transfer Most Secure and Preferred Cash-in-Advance Method Credit Card A Viable Cash-in-Advance Method Escrow Service A Mutually Beneficial Cash-in-Advance Method Payment by Cheque A Less-Attractive Cash-in-Advance Method

The importer is a new customer The importers creditworthiness is doubtful. The political and commercial risks of the importers home country are very high. The exporters product is unique, not available elsewhere, or in heavy demand. The exporter operates an Internet-based business where the acceptance of credit card payments is a must to remain competitive.

A documentary collection (D/C) is a transaction whereby the exporter entrusts the collection of payment to the exporters bank (remitting bank), which sends documents to the importers bank (collecting bank), along with instructions for payment. Funds are received from the importer and remitted to the exporter through the banks in exchange for those documents. D/Cs involve using a bill of exchange (commonly known as a draft) that requires the importer to pay the face amount either at sight (document against payment [D/P] or cash against documents) or on a specified future date (document against acceptance [D/A] or cash against acceptance).

Applicability Risk Pros Bank assistance in obtaining payment The process is simple, fast, and less costly than LCs Cons Banks role is very limited and they do not guarantee payment Banks do not verify the accuracy of the documents

The exporter and importer have a well established relationship The exporter is confident that the importing country is politically and economically stable An open account sale is considered too risky, and an LC is unacceptable to the importer

The exporter ships the goods to the importer and receives the documents in exchange. The exporter presents the documents with instructions for obtaining payment to his bank. The exporters remitting bank sends the documents to the importers collecting bank. The collecting bank releases the documents to the importer on receipt of payment or acceptance of the draft. The importer uses the documents to obtain the goods and to clear them at customs. Once the collecting bank receives payment, it forwards the proceeds to the remitting bank. The remitting bank then credits the exporters account.

Time of Payment

After shipment, but documents are released

before

the

Transfer of Goods Exporter Risk

After payment is made at sight If draft is unpaid, goods may need to be disposed of or may be delivered without payment if documents do not control possession

Time of Payment

On maturity of draft at a specified future date

Transfer of Goods

Before payment, but upon acceptance of draft

Has no control over goods after acceptance and may not get paid at due date

Exporter Risk

An open account transaction is a sale where the goods are shipped and delivered before payment is due, which is usually in 30 to 90 days. Obviously, this option is the most advantageous option to the importer in terms of cash flow and cost, but it is consequently the highest risk option for an exporter.

Applicability Recommended for use in secure trading relationships to win customers with the use of one or more appropriate trade finance techniques. Risk Exporter faces significant risk as the buyer could default on payment obligation after shipment of the goods. Pros Boost competitiveness in the global market Establish and maintain a successful trade relationship. Cons Exposed significantly to the risk of nonpayment Additional costs associated with risk mitigation measures

Export factoring is a complete financial package that combines export working capital financing, credit protection, foreign accounts receivable bookkeeping and collection services.

The purchasing of an exporter's receivables (the amount importers owe the exporter) at a discount by paying cash. The forfaiter, the purchaser of the receivables, becomes the entity to whom the importer is obliged to pay its debt.

Three elements relate to the pricing of a forfaiting transaction Discount rate, the interest element, usually quoted as a margin over LIBOR. Days of grace, added to the actual number of days until maturity for the purpose of covering the number of days normally experienced in the transfer of payment, applicable to the country of risk. Commitment fee, applied from the date the forfaiter is committed to undertake the financing, until the date of discounting

Credit is extended to the exporter for a period ranging between 180 days to seven years. Minimum bill size is normally $250,000, although $500,000 is preferred. The payment is normally receivable in any major convertible currency. A letter of credit or a guarantee is made by a bank, usually in the importer's country. The contract can be for either goods or services.