INTERNATIONAL TRADING

Unit 5 (EXPORT FINANCE)

OBJECTIVE: BY THE END OF THE LESSON, STUDENTS ARE ABLE TO EXPLAIN

PROCESS OF INTERNATIONAL TRADING

I. Contents
1. Zamec, a plumbing and central heating company in Barakonia receives three export enquiries.
2. Methods of payment in international trade:
a. Documentary letter of credit
b. Open account
c. Documentary collections
d. Forfeiting

READING 1
Introduction
Zamena Engineering Company (ZAMEC) is the main plumbing equipment manufacturer in Barakonia. It
makes central heating equipment, bathroom and kitchen fittings. In the last few days, importers in Franc,
Germany and Britain have approached Zamec wishing to buy their products.
Merchands General et Cie is an import house in Paris specializing in all types of tools and domestics
equipment and supplies to DIY supermarkets in France; Diether Holzmeister GmbH is a construction
company basedin Mainz, Germany; and O’Toole&Son is a builder’s merchant of Reading, England, with
branches all over the UK.
All three companies are making interesting offers, but it may not be best to use some method of payment
with all of them. The terms offered by each trading partner are different and the terms of trade for the three
countries vary. Zamec needs more information about these companies and prospects for the future. It needs
advice from its bank, Manara Lombard, to decide how best to finance export deals in each case.
Vocabulary
How are the following ideas expressed in the reading passage?
a. A company which trades internationally on its own account (2 words, paragraph 2)
b. A retail shop which sells to builders and the construction industry (2 words, paragraph 2)
c. A large popular self-service store which sells home improvement items for people to ‘do it themselves’
(2 words, paragraph 2).
d. The agreed points on which you do business (1 word, paragraph 3).
e. The advantages and disadvantages in a trading situation (3 words, paragraph 3).
f. The outlook for the future (1 word, paragraph 3).

Before Reading
Make notes on the letter as follows:
Name of customer:
Size of customer:
Market, country:
Types of outlet:
(e.g. supermarket, hotel, etc).
Reason for demand:
Size of order:
Prospects:
 International Banking Group
MEGA BANK CORPORATION
PO. Box 1000, ATLANTA, Georgia 30302-1000
CABLE ADDRESS: MegaB
TELEX NO 1234567
SWIFT NO. MBBABC 72

OUR ADVICE NUMBER: EA00000091 ****AMOUNT****

ADVICE DATE: 08MAR297 USD****25,000,000
ISSUE BANK REF: 3312/HB/22341
EXPIRY DATE: 23JUN97

BENEFICIARY: APPLICANT:
THE WALTON SUPPLY CO. HHB HONG KONG
2356 SOUTH N.W.STREET 34 INDUSTRIAL DRIVE
ATLANTA, GEORGIA 30345 CENTRAL, HONG KONG

WE HAVE BEEN REQUESTED TO ADVISE TO YOU THE FOLLOWING LETTER OF CREDIT AS

ISSUED BY:
THIRD HONG KONG BANK
1 CENTRAL TOWER
HONG KONG

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 PERCENT OF INVOICE VALUE DRAWN ON US ACCOMPANIED BY THE FOLLOWING
DOCUMENTS:
1. SIGNED COMMERCIAL INVOICE IN 1 ORIGINAL AND 3 COPIES.
2. FULL SET 3/3 OCEAN BILL OF LADING CONSIGNED TO THE ORDER OF THIRD HONG
KONG NOTIFY APPLICANT AND MARKED FREIGHT COLLECT.
3. PACKING LIST IN 2 COPIES.
EVIDENCING SHIPMENT OF: 5000 PINE LOGS-WHOLE-8 TO 12 FEET
FOB SAVANNAH, GEORGIA
SHIPMENT FROM: SAVANNAH, GEORGIA TO: HONG KONG
LATEST SHIPPING DATE: 02JUN97
PARTIAL SHIPMENTS NOT ALLOWED TRANSHIPMENT NOT ALLOWED
ALL BANKING CHARGES OUTSIDE HONG KONG ARE FOR BENEFICIARYS ACCOUNT.
DOCUMENTS MUST BE PRESENTED WITHIN 21 DAYS FROM B/L DATE.
AT THE REQUEST OF OUR CORRESPONDENT, WE CONFIRM THIS CREDIT AND ALSO
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
THE TERMS OR CONDITIONS, PLEASE COMMUNICATE WITH YOUR BUYER TO ARRANGE
FOR AN AMENDMENT

READING II A LETTER FROM FRANCE

MERCHANDS GENERALS TEL : (1) 43 26 02 89
69 Boulevard Vauban
75006 PARIS

Ref: AL/7/93/895
The General Manager
Zamec
UI. Petrova 114,
10.789 Zamina
Barakonia
Dear Sir/Madam
We are interested in your product for possible introduction to the French market. As you probably
know, we are of the largest export/import houses in France and we have excellent connection in the building
materials trade. We supply imported tools and general hardware to builder’s merchants, DIY
superstores and construction companies all over France. Our turnover stands at around 15 million French
Francs. We enlose a brochure giving this and other information about Merchands Generals.
We have copies of your catalogues and price lists and want to begin with an order for bathroom and
kitchen taps and fittings as detailed on the enclosed indent. The total value based on your price list is US
$25,000 at today’s rate for buying Barakonia Dinars with Dollars.
We request 90 days’ credit and the price should include insurance and delivey to the French border by
rail freight.
We are sure that once we have sold your first consignment there will be a continued demand in France,
mainly on the basis of the quality and price competitiveness of Zemco products.

Yours faithfully,
Mme. Agnes Lambert

Chief Buyer
Vocabulary
Referring o export terms
They’re asking for ……………
Example:
We request 90 day’s credit
………….. 90 day’s credit ……..terms
They’re asking for 90 days’ credit to be included in the terms.
1. Practice referring to requested terms, using the example.
a. The price should include insurance
………. insurance …….price.
b. ………and delivery to the French border (INCOTERMS) ……. terms.
c. ………EC import tax ………the total cost.
d. ………delivery to their depot in France ………price.
(Note: Delivery to the importer’s country is known as if terms-cost, insurance, freight. The exact
definition is laid down in INCOTERMS = International chamber of Commerce Terms).
e. ………. export packing only ………..contract.
f. ……….180 day’s credit ………..conditions.

Noun + preposition
2. Choose the best preposition to complete each sentence.
a. We want delivery /in/a/for/to our office in Milan.
b. We wish to place an order /in/at/for/to 500 radiators.
c. The goods will have to be shipped /with/in/on/by rail.
d. We can give you an introduction /in/at/for/to our subsidiary company in Brussels.
e. It comes to £5,090 /in/at/for/to today’s rate of exchange.
f. We need information /for/in/on/of the plumbing market in the USA.
g. We need information /about in/by/of your company
h. They have good banking connections /on/by/in/to Barcelona.
i. They have good connections /on/by/in/among our sales staff.
j. The airline has good connections /on/by/in/to Barcelona
3. How are the following ideas expressed in the letter?
a. Total sales for one year, at present, roughly … (4 words, paragraph 2).
b. Because they are well made (5 words, paragraph 5).
c. They cost less than other goods of the same kind. (2 words, paragraph 3).
d. A form giving details of an import/export order (1 word, paragraph 3)
e. A group of packages, boxes, crates or containers sent as one shipment of goods in trade (1 word,
paragraph 5).
READING III A LETTER FROM ENGLAND

Before you read, prepare to make notes on the letter as follows:

Name of customer: Reasons for demand:
Size of customer: Size of order:
Market, country: Prospects:

Ref: AL/7/93/895 O’TOOLE & SON

The General Manager RIVERSIDE INDUSTRIAL ESTATE
Zamec STATION ROAD, READING, RG&9ub
UI. Petrova 114, TEL: 0734 00015 FAX: 0734 00026
10,789 Zamina 28 JULY 2015
Barakonia

Dear Sir/Madam
We are writing to offer exclusive agency for Zamec products in this country.
Last year one of our directors, Robin Stobart, was in Barakonia and attended the trade fair at Brassonova,
where he was greatly impressed by your product range and quality. We decided that the Zamec range would
complement products we are already selling.
O’Toole & Son has 170 large builer’s merchant stores selling all kinds of building materials, interior
fittings and tools. Our stores sell to the DIY market, builders of all sizes and construction companies. We are
public company with shares quoted on the London Stock Exchange and our last year’s profits were £40,000
on the previous year.
What we are looking for is the right to be your sole agents in Britain using our retail outlets for all Zamec
products. We would suggest payment should be by a roll over credit arrangement to allow for monthly
orders. And so give you some idea of the amounts, we would be able to guarantee an average monthly
turnover of £3,000 .
Mr. Stobart is planning another visit to Barakonia in one month’s time. Perhaps he could visit you and
discuss our proposal in more detail when he is in Zamina.

Yours faithfully

Breden Walker
Chief Buyer

Interpretation
1. How are the following ideas expressed in the letter?
a. A representation of another company’s products in one are where no other agent for the same products
exist (2 words, paragraph 1)
b. The number of different kinds of item made by a company (2 words, paragraph 2).
c. A business and industrial exhibition (2 words, paragraph 2).
d. A business whose shares are bought and sold in a free market (2 words, paragraph 3).
e. Price given in the place where they sell shares (6 words, paragraph 3).
f. Showing an increase of (2 words, paragraph 3).
g. Haronise with (1 word, paragraph 2).
h. Large and small construction companies (4 words, paragraph 3).
i. Only representative (2 words, paragraph 4).
j. Want (3 words, paragraph 4).
k. Thought a great deal of (4 words, paragraph 2).

2. Study how the verbs below are used in the letter.

offer attend be impressed by quote
suggest guarantee allow for plan discuss

Now choose the best verb to complete each sentence:

 a. The management of Zamec ……….to consult their bank.
b. The bank …….free advice on export finance to their customers.
c. Zamec …………the quality of their products.
d. The export manager will ………..for the supply of the goods listed on the Merchands Generalls indent.
e. They were …………they new factory.
f. The meeting will be ………..by the Manara Lombard bank manager the Zamec export manager and
the production manager.
g. The bank will ………various methods of payment.
h. In calculating the price to the customer, you must ………..things such as insurance and freight.
i. The people in the meeting will …………various methods of payment.
j. The methods of payment available ………many different export situations.

3. Discussion
Question for the bank
You may not be able to answer these questions. Even so, you should try at least to think about them.
a. What are the main differences between the offers of Merchands Generals and O’Toole & Son?
b. What sort of advice will Zamec need?
c. What do you think a roll over credit is?
d. What will the bank have to do before it can advise Zamec

READING IV A LETTER FROM GERMANY

Make notes on the letter as follows:

Name of customer: Reason for demand:
Size of customer: Size of order:
Market, country:
Type of contract:

Ref:
The Export Manager,
Zamec, DIETHER HOLZMEISTER GmbH
UI. Petrova 114, BILHAUERSTR, 25
10,789 Zamina 6000 MAINZ
Barakonia TEL: (49) 6131 2212

Dear Sir/Madam,
We wish to introduce ourselves as a major building construction company in Germany with contracts in
Bremen and Kaiserslautern currently worth fourteen and a half million Deutschmarks.
Recently our Chief Production Engineer visited one of your communal central heating plants in the
Yumicalda Housing Estate outside Zamina. We are building a housing estate of similar size at Kaiserslautern
which includes a community centre, school, and clinic. The plan is to install a communal heating system for
all these public buildings as well as for the housing. The boilers must be capable of burning a variety of fuel
including waste products (the specifications are enclosed). We believe your firm has the necessary
experience and capacity for this construction project, which we estimate is worth US$2 million-a cost which
we want to spread over two years.
As you will appreciate with an order this size, we are making enquiries with other construction
engineering firms and will select the best deal we are offered. We will of course take into account quality,
cost, delivery time and credit facilities. But we think with your cost advantage, you are well placed to
compete with the two or three other manufacturers we are approaching.
One of our directors, Herr Strauss, is on a visit to the Ukraine at present. If you reply immediately, we will
contact him and ask him to return via Zamina to answer any queries you may have about our needs. I believe
there is a daily flight Kiev and he could be in Barakonia early next week.

Yours faithfully,

Hans Sachs

Vocabulary
Suggesting prior knowledge
As you will appreciate ….
1. This phrase is similar to As you probably know ….and is a polite formula often used to
preface conditions or restrictions.
Use it to complete the sentences below
a. ……., payment will have to be spread over two years.
b. ……., the bank will have to make enquiries about the credit status of Diether Holzmeister
GmbH.
c. ……., we will also look into the contracts of Holzmeister.
d. ……., we cannot allow the debt to increase any further.
2. How are the following ideas expressed in the letter?
a. At present (1 word, paragraph 1).
b. An area of buildings for people to live in (2 words, paragraph 2).
c. Facilities such as schools and clinics for communal use (2 words, paragraph 2).
d. Technical description
e. Understanding of how to do work because you have done it before (1 word, paragraph 2).
f. Pay for gradually (3 words, paragraph 2).
g. In the case of a large amount of business like this (5 words, paragraph 3).
h. Approaching different companies. (5 words, paragraph 3).
i. Allow for in our calculations (3 words, paragraph 3).
j. In a good position (2 words, paragraph 3).

3. Study how the following expressions are used in the letter. Now use them to complete the
dialogues. Family, practice the dialogues with another person in your group.

spread the cost specifications take into account making enquiries

capacity with an order this size currently worth well placed

a. Bank : What’s the state of export business at present?

Customer : We have export orders on our books ………$1.8 million
b. Bank : What’s the state of production at present?
Customer : We are working to 80 per cent ……….at the factory.

c. Bank : What’s the state of the Mainz order?

Customer : We’re waiting for their building…………
d. Bank : What’s the state of the Holzmeister project?
Customer : They want to ………over three years.
e. Bank : What’s the state of your factory programme at present?
Customer : We are …..to take any fresh orders.
f. Bank : What’s the state of the Marchands Generals account?
Customer : ………, we should expect some delays.
g. Bank : What’s the state of the Italian market at present?
Customer : Our sales representative in Italy is ………….
 h. Bank : What’s the state of the UK market at present?
Customer : If you ……the recession, it is not very bad.

Reading V
Introduction to methods of payment:

OPEN ACCOUNT
The exporters ship the goods ordered by the importers. The importers send payment either immediately
or monthly, according to agreement.
The payment itself may be a banker’s draft which is, in effect, a cheque drawn by a bank on itself. Of
course, it is easiest when the exporters’ and importers’ bank have accounts with each other and are
correspondents.
In the case of payment from the UK to the USA in dollars, the UK bank will authorize the US bank to
debit its account with them. The UK bank will make a note of the credit entry in its reconciliation account.
If payment is to be made in sterling, the US bank will authorize the UK bank to credit its reconciliation
account.
The points for and against this system are:
Advantages : Little paper work
Simple
Time and money saving
Good when regular shipments take place
Disadvantages can only be used when:
a. a relationship of complete trust exists between exporter and importer, and
b. there is political and economic stability in both countries

Picture 3: Bill of Lading

1. Tick (v) the correct answer.

a. With the open account method of payment, the price is agreed.
1. before the goods are shipped

2. after the goods have been shipped

b. With the open account method of payment, payment is made

1. before the goods are shipped
 2. after the goods have been shipped

3. after the goods have arrived

3. Ask and answer questions about the open account method of payment
a. What are the advantages of payment by open account?
b. What are the disadvantages of payment by open account?

Reading VI
DOCUMENT LETTER OF CREDIT
This is the commonest method of payment for trade between countries. It is operated by the banks and
money is transferred from the buyer to the seller shipping documents (which prove that they have shipped the
goods exactly in accordance with the Letter of Credit) together with a Bill of Exchange to a bank presenting
the importer.
This is issuing bank, so called because it issues the credit on behalf of the importer. If all the documents
are correct, the bank representing the importer makes immediate payment or accepts the Bill which means
that it will pay later. It then forwards the shipping documents to the importers who can use them to obtain the
goods at the place where the goods enter their country (port, airport, or border crossing).
The Bill of Exchange is a credit instrument which orders the issuing bank to pay a certain sum of money
at 30, 60, 90, or 180 days after sight. In accepting the Bill provided the shipping documents are correct, the
bank representing the importers simply puts its name and signature on the face of the Bill and returns it to the
exporters. By doing this, it agrees to pay the Bill when presented in one, two, three- or six-months’ time. The
number of days, or tenor of the Bill, is the period of credit that has been agreed between the exporter and the
importer. If no credit has been agreed, the exporter’s bank draws a sight draft which is, in effect, an order to
the importer’s bank to pay immediately or on sight of the documents and Bill.
If there is a period of credit, the Letter of Credit is based on D/A terms (documents against acceptance). If
there is no period of credit the Letter of Credit is based on D/P terms (documents against payment).
Advantages to traders: 1. It is safe method of payment
2. The buyers and sellers are protected
3. The banks are responsible for seeing that the shipping documents conform to
the Letter of Credit.
4. Additional protection is provided for the importers by transit insurance
(the insurances certificate is one of the documents required by the Letter of
Credit)

Picture 4: Bill of Exchange

Vocabulary
Equivalent expressions
1. How are the following ideas expressed in the reading passage?
 a. International trade(3 words, paragraph 1)
b. Give all the papers relating to the transit of the goods (5 words, paragraph 1)
c. Pay on sight (3 words, paragraph 2)
d Port of entry (7 words, paragraph 2)
e. Accept the Bill (11 words, paragraph 3)
f. The tenor of the Bill (14 words, paragraph 3)
g.D/A (3 words, paragraph 4)
h. D/P (3 words, paragraph 4)
2. Match the terms (a – e ) with their correct definitions
a. Shipping documents A.Documents against payment
b. The tenor B. Documents against acceptance
c. A sight draft C. An order to pay immediately
d. D/A terms D. The number of days of the Bill
e. D/P terms E. Papers which prove that the exporters have shipped

READING VII
DOCUMENTARY COLLECTIONS
This method of getting payment is popular because it is very simple and cheap to operate. The exporters
ship the goods and send the shipping documents and draft Bill of Exchange to their bank. Their bank sends
them to a bank in the importers’ country for collection. That bank tells the importers that the documents have
arrived and they may then give an advance (payment ahead of time) to the exporters for the draft. Meanwhile
they negotiate acceptance or payment of the draft with the importers. The importers find a bank to accept
payment, if it is a tenor draft, or pay it immediately, if it is a sight draft.
The bank is not responsible for checking the correctness of the documents. If the bank has provided an
advance, it should have a letter of hypothecation from the customer which gives the bank the right to sell the
goods if the importers default.
Advantage : 1. It is quicker, simpler and cheaper than a Letter of Credit
2. The exporters have control over the goods until the draft is paid or accepted
Disadvantage: If the importers default the exporters have the expense of selling the goods, storing
them until later or bringing them back to their own country.

Picture 5: Documentary Collections

1. Parties agree contract of sale
2. Seller ships goods to buyer
3. Seller sends collection documents to its bank
4. Seller’s bank sends documents on to buyer’s
bank.
5. Documents presented to buyer by its bank
6. Buyer pays (collection against payment or
accept bill (collection against acceptance)
7. Buyer’s bank sends payment to seller’s bank,
if payment received, or a notice of acceptance,
if Bill accepted
8. Seller’s bank pays seller, if payment received,
or holds accepted Bill until maturity, if Bill
accepted

DISCUSSION
Are the following statements TRUE or FALSE according to the text?
1.With the documentary collection method, the bank becomes the owner of the goods.
2. The price of the goods is negotiated with the bank.
3. A Bill of Exchange may be used.
4. The bank has no protection if the goods are lost or damaged.
5. A bank which has given an advance against negotiation of Bills has no protection if the importers
default.
6. The bank must check the correctness of the shipping documents.
7. The bank uses the documents to obtain the goods from the port of entry.
8. A letter of hypothecation is provided by the bank to the exporters.

READING VIII
FORFAITING
Forfaiting is a medium-term method of export finance used for capital goods. With the agreement of the
exporter and the importer, the forfaiter, which is the lending bank, provides an advance to cover the total cost
of the machinery and installation once it has been installed and is in working order.
The advance is made to the importer, not the exporter, although the forfeiter pays the exporter directly.
But the importer is responsible to the bank for the repayment. The importer usually gives the
forfeitist a series of avalised promissory notes. These are notes. guaranteed by a bank, promising to pay on
agreed dates.
The advantage of this to exporters is that they are not liable if the importers default. The disadvantage is
that it may be difficult for the importers to provide the needed security to enable a bank to avalise their
promissory notes. The whole of the contract may depend on this, otherwise another form of finance would
have to be found.
From the importers’ point of view, it may be cheaper for them if interest rates are lower in their country
than in the exporters’ country.

VOCABULARY
1. How are the following ideas expressed in the text.
a. Machinery and equipment used for production (2 words paragraph 1)
b. The lending bank (1 word paragraph)
c. The loan (1 word paragraph 1)
d. To pay for (1 word paragraph 1
e. The bank has no recourse to the exporters (17 words, paragraph 3) they are not liable if the importers
default.
f. Credit instrument validated by a bank ( 3 words paragraph 3)

2. Complete the sentences with words from the box

guarantee medium forfeiter capital promissory avalised

1. Forfaiting is form of ………term finance used to finance the export of …….goods.

2. The exporter is paid by the ……..when the machinery has been installed.
3. The payment is called up in the form of an ……….note by the bank to the importer.
4. The importer has to provide …….to the bank in the form of avalised promissory notes.
 Step 1 : Forfeiter and Exporter agreed upon a Forfaiting Agreement.
 Step 2 : Sales Contract has been signed between Exporter and Importer.
 Step 3 : Shipment is initiated by the exporter.
 Step 4 : The importer obtains a guarantee from his bank.
 Step 5 : The importer obtains a guarantee from his bank.
 Step 6 : Exporter gives documents to forfeiter.
 Step 7 :  Forfaiter controls the documents pays for them as indicated on the Forfaiting
Agreement
 Step 8 : Forfaiter presents documents to bank at maturity date.
 Step 9 : Importer pays to bank at maturity date.
 Step 10 : Bank pays to forfaiter at maturity date.