IBUS 3530:

International Trade Finance

Trade Finance
Supplier credits
• Most commonly used, mainly for shorter, also medium-term periods to a lesser
degree .

• The credit structure is determined by

• time span and size,
• the buyer’s country and
• the method of payment agreed in the sales contract

 details that determine not only the seller’s risk exposure but also the structure required by the
financial institution, should the credit have to be refinanced at a later stage.
Supplier credits
• Factors for seller’s consideration:
• how it can be refinanced: through existing bank limits or by separate
discounting or refinancing of the finance instrument that becomes available
at shipment or shortly thereafter.

• credit terms from the seller: a sales argument and a competitive advantage.
Supplier credits
• Not easy to see if the price has been increased
• Seller may overcompensate for the risks
• Buyer may ask for a quotation to include both cash against delivery and a supplier credit
alternative to make a fair comparison.

• Seller must evaluate before offering a supplier credit:

• To what degree is the requested credit changing the commercial and/or the political risk involved
in the transaction?
• Can the buyer be expected to take any open credit costs?
• Should the financial costs be included or kept the credit terms open to be discussed with the
buyer?
• How can such credit be refinanced?
• How should the currency risk be evaluated and covered?
Short-term supplier credits
• The most common form: open account payment terms
• The invoice specifies the date when payment must be received at the seller’s
account.
• Seller may enclose a bill of exchange with the invoice even when trading on
open account terms.

• The seller should also evaluate whether it would be beneficial to offer

both cash against delivery terms and short-term credit on favourable
terms (interests).
Medium- and long-term supplier credits
• Supplier credits of two years or more:
• arranged in connection with the sale of capital goods, and with credit documentation.
• bills of exchange or promissory notes
• the choice of currency; and the choice of fixed or floating interest rate.
• need not be the same as the invoicing currency
• often covered by export credit insurance

• Most used forms of refinancing supplier credits :

• bank loans and trade finance limits;
• invoice finance facilities;
• export factoring;
• forfaiting;
• other medium-term refinancing.
Bank loans and trade finance limits
• Short-term supplier credits - existing bank credit limits.
• If the transaction is made in foreign currency, the seller may alternatively take a separate
loan in the same currency to refinance the supplier credit, thereby also covering the currency
risk involved.
Bank loans and trade finance limits
• Banks offer trade-related loans connected to documentary collection and L/Cs

• After delivery, there are additional finance alternatives covering the short-term
credit of normally 30–90 days.
• Confidential financing, where the finance is a transaction between the seller and the
bank/finance company, of which the buyer is not aware, referred to as ‘invoice discounting’.
• a ‘with recourse’ lending up to a certain level of the face value of the invoices, often 70—80%.

• Notified financing, where the buyer is fully informed about the finance transaction, normally
through an assignment on each invoice to a third party, ‘export factoring’.
• A finance company (the factor) purchases seller’s receivables and assumes the credit risk, with or without recourse
to the seller.
• Mostly with recourse factoring up to 90% of invoice value
• ‘two-factor export factoring’ vs ‘direct export
factoring’
Forfaiting
• Forfaiting is relinquishing the right (selling the claim) on trade receivables by an
exporter to a forfeiter at discounted price for immediate cash payment.
• discounting, covering maturity dates ranging from 180 days up to a more typical three- to
five-year period, even up to 10 years.
• receivables are mainly in the form of bills of exchange, promissory notes or other negotiable
debt instruments.

• Forfaiting institutions located in the larger international financial centres and the
size of this form of refinancing has grown considerably.
• The value of the forfaiting market is now estimated at more than USD 300 billion annually.
Buyer credits
• Buyer credits are given directly to the buyer or the buyer’s bank
• Enabling the seller to receive cash payment at delivery and/or at different stages of
construction or installation, while at the same time a longer-term credit is extended to the
buyer.
• Normally used for larger individual transactions, particularly when the transaction involves
more than just delivery of goods or covers a longer contract period, and often also when the
delivery is tailor-made to the specifications of the buyer.

• In two different forms:

• ‘bank-to-bank credits’
• ‘bank-to-buyer credits’, then mostly covered by a guarantee from the buyer’s bank.
1. Refinancing with or without recourse to seller.

2. Credit normally 80–85% and buyer instructs

seller’s bank to release the money.

3. Seller’s bank has buyer’s bank as counterpart,

who arranges a similar loan with buyer, mostly
with similar documentation.

4. Seller’s bank has the buyer as a direct

counterpart and will request a third-party
guarantee, normally from buyer’s bank.
Key terms/issues
• Supplier credits
• Short-term
• Medium-, long-term
• Bank loans
• Invoice discounting
• Export factoring
• Forfaiting
• Buyer credits