Export & Import Financing Chapter Twenty Eiteman, Stonehill, & Moffett May 25, 20151Chapter 20 - Trade financing

Export & Import Financing

Chapter Twenty

Eiteman, Stonehill, & Moffett

April 18, 2023 1Chapter 20 - Trade financing

Trade payment terms

cash in advance draft

bill of exchange

letter of credit (L/C) bankers acceptance

consignment open account


Cash in advance

Advantages least risky alternative risk is shifted entirely to the importer

Disadvantages may be non-competitive, lose business

preferred if goods made to order for purpose of financing the production


Draft - bill of exchange issued and signed by the exporter (drawer)

unconditional orders to pay (for the importer) on demand (sight draft) at a specified time in the future (time draft)

fixes the amount of manner of payment

time draft becomes an acceptance when accepted by drawee (exporter)

L/C (promise of banker’s acceptance) draft (bill of exchange) accepted by bank


Draft - types of drafts

documentary drafts drafts which require supporting

documentation bills of lading, invoices, etc.

drafts accompanying trades are documentary

non documentary (clean) non-commercial transactions


Drafts - mechanics a draft extends credit

receivable to the exporter payable to the importer

exporter gives control of goods to importer for the signature on draft

contract between exporter and importer only

transferable (usually banker’s acceptances) at discount to bank, acceptance dealer rate lower than prime


L/C - terms promise of payment issued by the

importer’s bank binds the importer’s bank to pay determining

currency of payment timing of payment amount of payment

binds the exporter to deliver a certain product quantity of goods quality of goods delivery date for goods


L/C - advantages exporter

reduces credit risk the bank’s reputation is on line

reduces political risk banking system is tied into the political

system

reduces pre-shipment risk contracted terms for delivery of goods


L/C - advantages importer

reduces delivery risk contract stipulates delivery terms

bank oversees custom’s procedures importer can contract for better terms

exporter’s risk substantially reduced

prepayment by importer goes to bank if the shipment is not satisfactory easier

for importer to recover payment


L/C - types of L/Cs documentary L/Cs

L/Cs which require supporting documentation bills of lading, invoices, etc.

majority of L/Cs are documentary

non documentary (clean) non-commercial transactions

irrevocable L/C cannot be revoked except by mutual consent

revocable (rarely used) better than nothing


L/C - types of L/Cs con’t confirmed L/C by an other bank

usually a bank in the exporter’s country obligates both banks to honor the obligation

unconfirmed L/C- obligates issuing bank transferable L/C

right to transfer, must be contracted transfer of L/C and supporting documents

assignment assigning part of the proceeds to another party


Banker’s acceptance acceptance of the draft by a bank

bank substitutes its credit for importer’s credit if transferable - creates a negotiable instrument

may discount this to the exporter resell in secondary markets

terms maturities 30, 60, 90 days

bank profits from fee on L/O, discount on acceptance


Banker’s acceptance - hold

PV of 1,000,000 usd less 2% annual commission less 9.7% wacc

exporter gets BA and holds to term exporter hedges transaction exposure

Pusd

usd0 0 25 0 25

1 000 000

1 02 1 097972 295 55

, ,

. ., .. .


Banker’s acceptance - discount PV of 1,000,000 usd

less 2% commission per annum less 10.4% discount per annum

exporter gets BA and discounts exporter gets into exchange market

now

Pusd

usd0 0 25 0 25

1 000 000

1 02 1 104970 750 65

, ,

. ., .. .


Mechanics of a trade

few weeks after contract goods, price, quantity, quality production of goods financed by

increase in input inventories, by payables labor inputs by accruals

result an increase in output inventories payables, accruals must be paid payment financed by short-term financing


Mechanics of a trade - con’t goods shipped

output inventories still carried as assets goods, bill of lading, draft sent L/C sent to exporter

delivery of goods goods, bill of lading, draft at customs time draft accepted

by importer (acceptance) by importer’s bank (bankers acceptance)

output inventories now change to receivables


Mechanics of a trade con’t Banker’s acceptance may be transferable

can be held by exporter for payment receivable stays on exporters books payable stays on importers books

must hedge transaction exposure if it exists

Banker’s acceptance if transferable can be discounted

sold at discount to a bank or broker then receivable becomes cash payable still on importers books


Mechanics of a trade con’t

Risk if BA discounted foreign exchange exposure exists

from time contract agreed to until draft is accepted by the importer’s

bank BA signed

credit risk higher until draft accepted (BA signed) lower until BA discounted


Mechanics of a trade con’t

Risk if L/C held to maturity foreign exchange exposure exists

from time contract agreed to L/C matures

credit risk higher until draft accepted (L/C issued) lower until L/C matures


Consignment

exporter retains title to good shipped importer gains possession, but not title

very risky easy for importer to default on this type

of arrangement

terms whatever the importer sells is paid for goods not sold returned


open account

most flexible importer receives goods - a payable acceptance by importer sufficient reduces bank charges

risky - no bank guarantee on payment importer and exporter need to have a

good stable relationship


Documents of trade bill of lading B/L

contract between exporter and carrier straight B/L - consigns good to importer order B/L - transferable

often serves as collateral for L/C on board B/L - on board being shipped received-for-shipment B/L

received, but not shipped clean B/L - goods(externally) look

undamaged


Other documents

commercial invoice full description of merchandise

insurance open (floating) prearrangement with

insurer to cover shipments made requires an insurance certificate which

must conform to information on B/L

consular invoice


Factoring firms that buy a firm’s receivables at

discount non-recourse basis - factor assumes all risk recourse - exporter assumes risk

factoring fees can run from 1.75 to 2 % per month compounded from 23.14 to 26.82 % per year on top of this non-recourse fees can add to this


Export financing export-import banks

finance exports of goods and services subsidy to try to create new markets for exports these are not market driven

very bureaucratic & often political

export-credit insurance low cost credit insurance lowers the cost of borrowing by reducing risk


Countertrade barter

direct exchange of goods between two parties

counter purchase - parallel barter continued sale and purchase of goods

Finland frequently sold manufactured goods for raw materials (oil) with the former Soviet Union

buyback repayment of exports made by the sale of

related product


Payment terms

evolving instruments of international trade these instruments and methods are used

to facilitate trade by exploiting comparative

advantage reduce risk

who how much its cost
