CHAPTER 12

FINANCING
FOREIGN TRADE

CHAPTER OVERVIEW:
I. PAYMENT TERMS
II. DOCUMENTS
III. FINANCING TECHNIQUES
IV. GOVERNMENT SOURCES OF EXPORT
FINANCING AND CREDIT INSURANCE
V. COUNTERTRADE

I. PAYMENT TERMS
I. PAYMENT TERMS
A. Five Principal Means:
1. Cash in advance
2. Letter of Credit
3. Drafts
4. Consignment
5. Open Account

PAYMENT TERMS
B. Cash in Advance
1. Minimal risk to exporter
2. Used where there is
a. Political unrest
b. Goods made to order
c. New unfamiliar customer

PAYMENT TERMS
C. Letter of Credit (L/C)
1. A letter addressed to seller
a. written and signed by
buyer’s bank
b. promising to honor seller’s
drafts.
c. Bank substitutes its own
commitment
d. Seller must conform to terms

PAYMENT TERMS
2. Advantages of an L/C to Exporter
a. eliminates credit risk
b. reduces default risk
c. payment certainty
d. prepayment risk protection
e. financing source

PAYMENT TERMS
3. Advantages of L/C to Importer
a. shipment assured
b. documents inspected
c. may allow better sales terms
d. relatively low-cost financing
e. easy cash recovery if
discrepancies

PAYMENT TERMS
4. Types of L/Cs
a. documentary
b. non-documentary
c. revocable
d. irrevocable
e. confirmed
f.
transferable

PAYMENT TERMS
D.

DRAFTS
1. Definition:
- unconditional order in writing
- exporter’s order for importer to
pay
- at once (sight draft) or
- in future (time draft)

PAYMENT TERMS
2. Three Functions of Drafts
a. clear evidence of financial obligation
b. reduced financing costs
c. provides negotiable and unconditional financial instrument
(ie. May be converted to a
banker’s acceptance)

PAYMENT TERMS
3. Types of Drafts
a. sight
b. time
c. clean (no documents needed)
d. documentary

PAYMENT TERMS
E.

CONSIGNMENT
1. Exporter = the consignor
2. Importer = the consignee
3. Consignee attempts to sell
goods to a third party; keeps
some profit, remits rest to
consignor.
4. Use: Between affiliates

PAYMENT TERMS
F.OPEN ACCOUNT
1. Creates a credit sale
2. To importer’s advantage
3. More popular lately because
a. major surge in global trade
b. credit information improved
c. more global familiarity with
exporting.

PAYMENT TERMS
4.

5.

Benefits of Open Accounts:
a. greater flexibility in making
a trade
b. lower transactions costs
Major disadvantage:
highly vulnerable to government
currency controls.

II. DOCUMENTS
II.DOCUMENTS USED IN INT’L TRADE
A. Four most used documents
1. Bill of Lading (most important)
2. Commercial Invoice
3. Insurance Certificate
4. Consular Invoice

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

DOCUMENTS
2.

Type of Bills
a. Straight
b. Order
c. On-board
d. Received-for-shipment
e. Clean
f.
Foul

DOCUMENTS
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.

DOCUMENTS
D.

INSURANCE
1. Two Categories:
a. Marine: transport by sea
b. Air: transport by air
2. Insurance Certificate
issued to show proof of
insurance
3. All shipments insured today.

DOCUMENTS
E.

CONSULAR INVOICE
Local consulate in host country
issues:

a visa for the exporter’s invoice.

requires fee to be paid to consulate.

III. FINANCING TECHNIQUES
III.

FINANCING TECHNIQUES
A. Four Types:
1. Bankers’ Acceptances
a. Creation: drafts accepted
b. Terms: Payable at
maturity to holder

FINANCING TECHNIQUES
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).

FINANCING TECHNIQUES
3. Factoring
-firms sell accounts receivable to
another firm known as the factor.
a. Discount charged by factor
b. Nonrecourse basis: Factor
assumes all payment risk.
c. When used:
1.) Occasional exporting
2.) Clients geographically dispersed.

FINANCING TECHNIQUES
4. Forfaiting
a. Definition:
discounting at a fixed rate
without
recourse of medium-term accounts
receivable denominated in a fully
convertible currency.
b. Use: Large capital purchases
c. Most popular in W. Europe

IV. GOVERNMENT SOURCES
OF EXPORT FINANCING
IV.

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.

GOVERNMENT SOURCES OF
EXPORT
FINANCING
1. Ex-Im Bank Programs:
a.
b.
c.
d.
e.

Direct loans to exporters
Intermediate loans to exporters
Loan guarantees
Preliminary commitments
Political and commercial
insurance

GOVERNMENT SOURCES OF
EXPORT
FINANCING
B. Private Export Funding Corporation
(PEFCO)
1. Finances large sales from private
sources
2. May purchase loans of U.S.
importers
3. ExIm Bank provides loan
guarantees.

GOVERNMENT SOURCES OF
EXPORT
FINANCING
C. Foreign Credit Insurance Association
(FCIA)
1. Offers commercial and political
risk insurance
2. When insured, exporter often
able to obtain financing faster.

V. COUNTERTRADE
V. COUNTERTRADE
A. Three Specific Forms:
1. Barter
direct exchange in kind
2. Counterpurchase
sale/purchase of unrelated
goods but with currencies
3. Buyback
repayment of original
purchase through
sale of a
related product.

COUNTERTRADE
B. When to Use Countertrade
1. With “soft-currency” developing
countries
2. When foreign contractor must
perform.