Multinational Financial

Management
Alan Shapiro
7th Edition
Power
Points
by
J.Wiley
& Sons

Joseph F. Greco, Ph.D.

California State University, Fullerton

CHAPTER 18
FINANCING FOREIGN
TRADE
2

CHAPTER OVERVIEW:
I.
PAYMENT TERMS
II.
DOCUMENTS
III.FINANCING TECHNIQUES
IV.
GOVERNMENT SOURCES OF
EXPORT FINANCING AND
CREDIT
INSURANCE
V.
COUNTERTRADE
3

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
4

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
5

PAYMENT TERMS
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
6

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
7

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
8

PAYMENT TERMS
4.
a.
b.
c.
d.
e.
f.

Types of L/Cs
documentary
non-documentary
revocable
irrevocable
confirmed
transferable
9

PAYMENT TERMS
D. DRAFTS
1. Definition:
- unconditional order in writing
- exporters order for importer
pay
- at once (sight draft) or
- in future (time draft)

to

10

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 bankers
acceptance)
11

PAYMENT TERMS
3. Types of Drafts
a. sight
b. time
c. clean (no documents
needed)
d. documentary
12

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
13

PAYMENT TERMS
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.
14

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

15

II. DOCUMENTS
II. DOCUMENTS USED IN INTL
TRADE
A. Four most used documents
1. Bill of Lading (most
important)
2. Commercial Invoice
3. Insurance Certificate
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DOCUMENTS
B. Bill of Lading
Three functions:
1. Acts as a contract to carry
goods.
2. Acts as a shippers receipt
3. Establishes ownership over
goods if negotiable type.

the

17

DOCUMENTS
2.
a.
b.
c.
d.
e.
f.

Type of Bills
Straight
Order
On-board
Received-for-shipment
Clean
Foul
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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.

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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.
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DOCUMENTS
E.

CONSULAR INVOICE
Local consulate in host country
issues:
a visa for the exporters invoice
requires fee to be paid to consulate

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III. FINANCING TECHNIQUES

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

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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).
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FINANCING TECHNIQUES
3. Factoring
-firms sell accounts receivable to another
firm
known as the factor.
a.
Discount charged by factor
b.
Non-recourse basis: Factor
assumes all payment risk.
c.
When used:
1.)
Occasional exporting
2.)
Clients geographically
dispersed.
24

FINANCING TECHNIQUES
4. Forfaiting
a. Definition:
discounting at a fixed rate
recourse of medium-term
receivable denominated
convertible currency.

without
accounts
in a fully

b. Use: Large capital purchases

c. Most popular in W. Europe
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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.

26

GOVERNMENT SOURCES OF
EXPORT FINANCING
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

27

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.

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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.
29

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.
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COUNTERTRADE
B. When to Use Countertrade
1. With soft-currency
developing
countries
2. When foreign contractor
must
perform.
31