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Topic 2: International Trade Finance

(Reading : Shapiro, Chapter 18)


Principal means of payment in international trade
Basic trade-financing instruments and documents
Different methods of export financing, both private

and public sector


Forms of countertrade, costs and benefits

The Trade Cycle and Risk


The Trade Cycle
Exporter
Contract
Land Transport

Importer
Port of Destination
Land Transport
and Delivery

Port of Departure
Final Payment
Sea Transport
Production
Customs!

The Transaction over Time

Types of Risk: Pre-shipment; Shipment; Post-shipment


PAYMENT TERMS
A. Four Principal Means:
1. Cash in advance
2. Letter of Credit
3. Drafts
4. Open Account
B. Cash in Advance
1. Minimal risk to exporter
2. Used where there is:
a. Political unrest
b. Goods made to order
c. New and unfamiliar customer
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C. Letter of Credit (L/C)


1. A letter addressed to seller
a. Written and signed by buyers bank
b. Promising to honor sellers drafts.
c. Bank substitutes its own
commitment
d. Seller must conform to terms

2. Advantages of an L/C to Exporter


a. Eliminates credit risk
b. Pre-shipment risk protection
(See Shapiro, Page 641, Exhibits 18.2 and 18.3)
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3. Advantages of L/C to Importer


a.
b.
c.
d.
e.

Shipment assured.
Documents inspected.
May allow better sales terms.
Relatively low-cost financing.
Easy cash recovery if discrepancies arise.

4. Types of L/Cs
a. Documentary
b. Irrevocable
c. Confirmed
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D. DRAFTS
1. Definition:
- Unconditional order in writing
- Exporters order for importer to pay
- At once (sight draft) or
- In future (time draft)

2. Three Functions of Drafts


a. Clear evidence of financial obligation.
b. Reduced financing costs.
c. Can be a financial product for investors
(i.e. may be converted to a bankers
acceptance)

F. OPEN ACCOUNT
1. Creates a credit sale
2. To importers advantage
3. More popular lately because
a. Major surge in global trade.
b. Credit information improved.
c. More global familiarity with exporting.
4. Benefits of Open Accounts:
a. Greater flexibility in making a trade.
b. Lower transactions costs.
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5. Major disadvantage:
- Highly vulnerable to government
currency controls.
DOCUMENTS USED IN INTL TRADE
A. Three most used documents
1. Bill of Lading (most important)
2. Commercial Invoice
3. Insurance Certificate

B. Bill of Lading
Three functions:
1. Acts as a contract to carry the goods.
2. Acts as a shippers receipt
3. Establishes ownership over goods if
negotiable type.

C. Commercial Invoice
Purpose:
1. Lists full details of goods shipped
2. Names of importer/exporter given
3. Identifies payment terms
4. List charges for transport and insurance.
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D. Insurance Certificate
1. Two Categories:
a. Marine: transport by sea
b. Air: transport by air
2. Insurance certificate issued to show
proof of insurance.
SHORT-TERM FINANCING TECHNIQUES
FINANCING TECHNIQUES

A. Four Types:
1. Bankers Acceptances
a. Creation: drafts accepted
b. Terms: Payable at maturity to holder
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2. Discounting
a. Converts exporters drafts to cash
minus interest to maturity and
commissions.
b. Low cost financing with few fees.
c. May be with (exporter still liable) or
without recourse (bank takes liability for
nonpayment).
3. Factoring
Firms sell accounts receivable to another
firm known as the factor.
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a. Discount charged by factor


b. Non-recourse basis: Factor assumes
all payment risk.
c. When used:
i. Occasional exporting.
ii. Clients geographically dispersed.
4. Forfaiting
a. Definition: Discounting at a fixed rate
without recourse for medium-term
accounts receivable.
b. Use: Large capital purchases
c. Most popular in W. Europe
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GOVERNMENT SOURCES OF EXPORT


FINANCING AND CREDIT INSURANCE
A. Export-Import Bank of the U.S.
- known as Ex-Im Bank
- Finances and facilitates U.S. exports only.
1. Ex-Im Bank Programs:
a. Direct loans to exporters
b. Intermediate loans to exporters
c. Loan guarantees
d. Preliminary commitments
e. Political and commercial insurance
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2. Restrictions:
- At least 51% U.S. content
- No armaments
- Must be environmentally friendly
COUNTER-TRADE: A sophisticated form of barter
in which the exporting firm is required to take
the countervalue of its sale in local goods or
services, instead of cash. (Shapiro, P.660-663)
A. Three Specific Forms:
1. Barter: Direct exchange in kind.
2. Counter-purchase: Sale/purchase of
unrelated goods but with currencies.
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3. Buyback: Repayment of original


purchase through sale of a related
product.
B. When to Use Counter-trade
1. With soft-currency developing
countries.
2. When tariffs or quotas prevent
trade.

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