Multinational financial management 7th CH18

GOVERNMENT SOURCES OF EXPORT FINANCING AND V... Definition: - unconditional order in writing - exporter’s order for importer to pay - at once sight draft or - in future time draft... C

FINANCING FOREIGN TRADE

CHAPTER 18

CHAPTER OVERVIEW:

I PAYMENT TERMS

II DOCUMENTS

III.FINANCING TECHNIQUES

IV GOVERNMENT SOURCES OF

EXPORT FINANCING AND

V COUNTERTRADE

PAYMENT TERMS

B Cash in Advance

1 Minimal risk to exporter

2 Used where there is

a Political unrest

c New unfamiliar customer

PAYMENT TERMS

C Letter of Credit (L/C)

1 A letter addressed to seller

a written and signed by

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

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

obliga-tion

b reduced financing costs

c provides negotiable and

uncondi-tional financial instrument

(ie May be converted to a banker’s acceptance)

PAYMENT TERMS

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

PAYMENT TERMS

4 Benefits of Open Accounts:

a greater flexibility in making

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

2 Acts as a shipper’s receipt

3 Establishes ownership over

goods if negotiable type

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.

D INSURANCE

1 Two Categories:

a Marine: transport by sea

b Air: transport by air

2 Insurance Certificate

issued to show proof of insurance

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

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 Non-recourse basis: Factor

assumes all payment risk.

c When used:

1.) Occasional exporting 2.) Clients geographically

dispersed.

b Use: Large capital purchases

c Most popular in W Europe

IV GOVERNMENT SOURCES OF

EXPORT FINANCING

IV GOVERNMENT SOURCES OF

A Export-Import Bank of the U.S

-known as Ex-Im Bank

-finances and facilitates U.S

GOVERNMENT SOURCES OF EXPORT FINANCING

1 Ex-Im Bank Programs:

a Direct loans to exporters

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.