Financing International Trade Slide 1 of 20

Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Financing International Trade Slide 2 of 20

Managing Economic Exposure

and Translation Exposure

Chapter 12

Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
 Slide 3 of 20

Overview
Financing International Trade

 Describe payment methods for

international trade
 Explain common methods of trade
finance
 Describe the major agencies facilitating
international trade

Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
 Slide 4 of 20

Payment Methods for International

Trade
Financing International Trade

 Credit may be provided by:

– 1. supplier (exporter)
– 2. buyer (importer)
– 3. financial institution
– 4. a combination of the different
organizations
 Supplier credit
– funds the entire trade cycle
 from production to delivery
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
 Slide 5 of 20

Payment Methods for International

Trade
Financing International Trade

 Primary methods of payment include:

– 1. prepayment
– 2. letters of credit
– 3. drafts
– 4. consignment
– 5. open account

Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
 Slide 6 of 20

Payment Methods
Financing International Trade

Letters of Credit (L/C)

 Usedby banks on behalf of the importer

(buyer)
– bank substitutes its credit for the buyer’s
credit
– promises to pay exporter upon receipt of
shipping documents
 Compromise for buyer and seller
– buyer does not pay for goods until arrival
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
 Slide 7 of 20

Payment Methods
Financing International Trade

Drafts (Bill of Exchange)

 A promise by one party (usually

exporter) to pay draft upon arrival of
goods
 Documentary collections
– banking channels used for most drafts
– documents against payments
– documents against acceptance
 trade acceptance
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
 Slide 8 of 20

Payment Methods
Financing International Trade

Consignment

 Exporter ships goods to importer while

retaining title to goods
– importer does not pay for goods until sold
– exporter does not have a draft
– participants are exposed to high level of
risk

Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
 Slide 9 of 20

Payment Methods
Financing International Trade

Open Account

 Agreement based on trust and

experience
– exporter ships merchandise
– buyer makes payments based upon
agreement
 exporter dependent upon buyer’s ability to pay
– this method is becoming more popular in
industrial countries
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
 Slide 10 of 20

Trade Finance Methods

Financing International Trade

Factoring

 Selling the accounts receivables (A/R)

– A/R sold before payment received from
buyer
 third party buyer of A/R is known as a factor
– duties of factor
 responsible for collections
 performs credit check on buyer of merchandise

 Cross-border factoring
– uses factors in both countries of the
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
 Slide 11 of 20

Trade Finance Methods

Financing International Trade

Letters of Credit (L/C)

 Proven
usefulness to business
community
– provides protection to exporter and
importer
– bank makes payment for a party (importer)
to a beneficiary (exporter)
 importer’s bank substitutes its credit for the
importer’s bank’s credit

Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
 Slide 12 of 20

Trade Finance Methods

Financing International Trade

Letters of Credit (L/C)

 Characteristics of L/C
– does not insure receipt of ordered goods
 bank pays upon examination of documents, not
goods
– a confirming (domestic) bank may be
contacted
 pays exporter upon acceptance of documents
by foreign bank

Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
 Slide 13 of 20

Trade Finance Methods

Financing International Trade

Letters of Credit (L/C)

 Trade related L/Cs

– commercial letters of credit
– import/export letters of credit
 Types of trade L/Cs
– revocable L/C
– irrevocable L/C

Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
 Slide 14 of 20

Trade Finance Methods

Financing International Trade

Letters of Credit (L/C)

 Participating banks
– issuing bank (issues L/C)
– sends the L/C to the exporter’s bank
(advising)
 Advising bank
– receives the L/C from the importer’s bank
 Negotiating bank
– inspects documents under the L/C
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
 Slide 15 of 20

Trade Finance Methods

Financing International Trade

Letters of Credit (L/C)

 Draft (bill of exchange)

– a promise written by one party (exporter)
 requests importer to pay face amount of draft
– banker’s acceptance
 time draft drawn on and accepted by a bank
 Bill of Lading (B/L)
– serves as a receipt for shipment
 key document in international shipping
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
 Slide 16 of 20

Trade Finance Methods

Financing International Trade

Letters of Credit (L/C)

 Commercial invoice
– exporter’s description of the merchandise
sold
 Variations of the L/C
– standby L/C
– transferable L/C
– assignment of procedures
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
 Slide 17 of 20

Trade Finance Methods

Financing International Trade

Banker’s Acceptances

 Bill of exchange (time draft)

– drawn on (accepted) by a bank
– accepting bank had obligation to pay at
maturity
 Benefits
– exporter protected from credit risk of
importer
– exporter reduces exposure to political risk
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
 Slide 18 of 20

Trade Finance Methods

Financing International Trade

Short-term Bank Loans

 Provides financing for working capital

cycle
 Importer
– finances acquisition of inventory (goods)
from overseas
 Exporter
– may finance manufacture of goods for
export
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
 Slide 19 of 20

Trade Finance Methods

Financing International Trade

Forfaiting

 Long-term financing for importer

 Transaction may involve purchase of
financial obligations (bills of exchange)
– without recourse to original holder
(exporter)
 Example: importer buys capital goods
– issues promissory note to exporter
– exporter sells notes to forfaiting bank
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
 Slide 20 of 20

Trade Finance Methods

Financing International Trade

Counter Trade

 Reciprocal trade agreements

– sale of goods to one country linked to
purchase (or exchange) of goods from that
same country
– barter
– compensation (clearing-account)
arrangement
 delivery of goods to one party includes the
seller’s (exporter) buying back a specified
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
 Slide 21 of 20

Agencies that Motivate

International Trade
Financing International Trade

 US agencies
– Export-Import Bank (Eximbank)
– Private Export Funding Corporation
(PEFCO)
– Overseas Private Investment Corporation
(OPIC)

Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
 Slide 22 of 20

Agencies that Motivate

International Trade
Financing International Trade

Eximbank
 Mission
– to finance and facilitate the export of US
goods and services
– to maintain competitiveness of US
companies in overseas markets
 Encourages private lenders to finance
exports
 Provides direct loans to foreign buyers
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
 Slide 23 of 20

Agencies that Motivate

International Trade
Financing International Trade

Eximbank
 Guarantee programs
– Working Capital Guarantee Program
 encourages banks to offer short-term financing
 guarantees 100% of loan’s principal and
interest
– Medium-term Guarantee Program
 encourages commercial lenders to finance the
sale of US capital goods and services to foreign
buyers
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
 guarantees 100% of loan’s principal and
 Slide 24 of 20

Agencies that Motivate

International Trade
Financing International Trade

Eximbank
 Direct loan program
– make fixed rate loans directly to foreign
buyer
 requires purchase of US capital goods and
services
 medium term (1-5) years and long term (7-10)
years
 Intermediary loan program
– provides fixed rate funding to commercial
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
 Slide 25 of 20

Agencies that Motivate

International Trade
Financing International Trade

Export Credit Insurance

 Private insurance companies
– work in cooperation with Eximbank
– insures foreign receivables against:
 nonpayment risk
 commercial defaults

 political risk defaults

Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
 Slide 26 of 20

Agencies that Motivate

International Trade
Financing International Trade

Private Export Funding Corp

 Private corporation
– owned by consortium of commercial banks
– finance large projects with backing of
Eximbank

bank bank
bank
bank
bank
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
 Slide 27 of 20

Agencies that Motivate

International Trade
Financing International Trade

Overseas Private Investment Corp

 Federal agency
– insures direct US investments against
 currency inconvertibility
 expropriation

 other political risks

Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
 Slide 28 of 20

Summary
Financing International Trade

 Common payment methods for

international trade are:
– prepayment
– letters of credit
– drafts
– consignment
– open account

Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
 Slide 29 of 20

Summary
Financing International Trade

 Popular financing methods of

international trade are:
– accounts receivable financing
– factoring
– letters of credit
– banker’s acceptances
– short-term bank loans
– forfaiting
– countertrade
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
 Slide 30 of 20

Summary
Financing International Trade

 Majoragencies facilitating international

trade are:
– Export-Import Bank
– Private Export Funding Corporation
– Overseas Private Investment Corporation

Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson