Financing & Methods of Payment Chapter 8
Agenda 8.0 Introduction 8.1 Export financing methods/terms of payment 8.2 Payment / financing procedures 8.3 Countertrade
8.0 Introduction Export Financing Definition: • Loans made for the shipping of products outside a country or region. • To enables businesses to bring their products all over the world.
8.1 Export Financing Methods/ Terms of Payment • 7 methods of receiving payment for products sold abroad: 8.1.1 Consignment 8.1.2 Open Account 8.1.3 Documentary Collections 8.1.4 Letter of credit/ Documentary Credit 8.1.5 Cash on Delivery 8.1.6 Cash with Order 8.1.7 Long-term Financing
8.1.1 Consignment • Demand for payment is usually made by means of a clean draft( no documents attached). • Payment typically occurs after the products have been resold by the buyer.
8.1.2 Open Account • A term of payment in which no banks are involved, only an agreement between seller and buyer that payment will be made within an agreed period of time. • Banks become involved through wire transfers, but no negotiations. • Some procedure and methods as in domestic trade. • Normally be willing to use this method only when he/ she has confidence in the creditworthiness of the buyer.
8.1.3 Documentary Collections • A collection, which is accompanied by commercial documents. • Means that the bank handles documents according to the instructions received. • This payment method is most often used in international trade in the exchange of merchandise for money. • With this method, the goods are shipped to the foreign country, but the documents are sent to the buyer’s bank.
Cont.. DOCUMENTS AGAINST ACCEPTANCE • When shipping documents are delivered to the buyer by the collecting bank after the buyer has accepted the draft for payment at a certain maturity date. DOCUMENTS AGAINST PAYMENT • When documents are delivered to the buyer upon payment of a draft.
8.1.4 Letter of credit/ Documentary Credit • International trade procedure in which the credit worthiness of an importer is substituted by the guaranty of a bank for a specific transaction. • Under documentary credit arrangement also called letter of credit arrangement, a bank (usually in the importer’s country) undertakes to pay for a shipment, provided the exporter submits the required documents (such as a clean bill of lading, certificate of insurance, certificate of origin) within a specified period.
8.1.5 Cash on Delivery • A transaction in which goods are paid for in full cash or by certified check immediately when they are received by the buyer.
8.1.6 Cash with Order • Cash or part cash with order • Cash in Advance/Prepayment occurs when a buyer sends payment in the agreed currency and through agreed method to a seller before the product is manufactured and or shipped.
8.1.7 Long-term Financing • Is a major project, large capital equipment sales and special exports such as agricultural commodities moving under government programs may require long-tern financing. • Allow the procedures to receive funds in the near future while allowing the purchaser to spread payments over several years.
8.2 Payment / Financing Procedures There are 2 general categories : 8.2.1Letter of credit 8.2.2 Drafts or bills of exchange
8.2.1Letter of Credit • Use of letters for financing export shipments popular with exports. • Arranging payment affords a high degree of protection against the risk inevitably arising in export business. • A letter of credit is only as good as the bank that issues it and it confirmed the bank that confirms it. • Except in their general form and phraseology, letter o f credit very greatly.
Type of Letters of Credit (a) Revocable and Irrevocable • Ability of the establishing to revoke before expired day. • Revocable - changed or cancelled at any time without notice to the beneficiary Example : issuing bank’s client. • Irrevocable – cannot be unilaterally cancelled or amended by the importer. • Privilege of revoking – temptation way unscrupulous buyer.
b) Confirmed and Unconfirmed • The bank in the exporter’s country announces its confirmation. • Words to the following effect are to be found in the letter of credit. • If the credit does not require that drafts be drawn, the wording • Will be adjusted but still must state that the bank has added its • Confirmation to the credit.
(c) Clean and Documentary • Beneficiary clean draft or receipt for funds. • Notifying bank against documentary drafts delivery of full set.
(d) Transferable and Nontransferable • Transfer of all or part of the letter credit. • Nontransferable may not be transferred by the beneficiary. • 3 main reasons why an exporter may request a transferable letter credit : (i) Beneficiary/exporter may actually be a middlemen (ii) Providing only a part know who the actual supplier. (iii) Buyer’s/importer’s agent.
(e) Assignment of Proceeds • The proceeds due to him or her to another party. • The legal procedure similar to the assignment of rights under any contract.
(f) Revolving letters of credit • Devised to meet the needs business transactions are more or less regular and continuous. (i) Credit indicating the maximum amount to negotiate fresh bills. (ii) Credit providing for a specified maximum payment. • Noncumulative revolving credit, cumulative, credit unused shipment.
(g) Deferred payment credit • Exporter will paid at specified dates after shipment. • Single shipment will paid by number of payment. • Substantial difference between a usance credit by negotiation and one • By acceptance or deferred credit. • Recent court cases have indicated only obligation of the book to honor • Pay at maturity and not before.
(h) Standby letter of credit • Used to finance the movement of goods. • Specifically, a standby letter of credit is an obligation to the beneficiary the issuing bank of the following. • To repay money borrowed by or advanced to the account party (ii) To make payment on the account of any evidence of indebtedness undertaken by the account party. (iii) To make payment on account of any default by the account party in the performance of a contractual obligation.
8.2.2 Drafts • An unconditional order in writing prepared by one (drawer) and addressed to another (drawee) • The draft is drawn by the beneficiary under the term of authorization in the letter of credit and in strait conformance with the condition stated. • The draft have to include as the name of the issuing bank. • Draft (in some countries) is said to be drawn to the account of the bank or buyer.
(I) Acceptance • ‘Acceptance’ frequently used connection with a draft, or bill of exchange. • The exporter can grant credit to the importer with out losing the protection of a letter of credit. • More easily negotiated or discounted if countersigned by the bank.
(II) Delivering Document • The most important element beside the amount to be collected is the statement of document are to be delivered against the acceptance of the draft (D/A) or against payment at the draft (D/P). • When a draft is drawn d/p, the drawee may secure the document of title only when the amount shown on the face of the draft.
Types of Draft • Clean or Documentary Draft • Accompanied by the relevant document needed to complete the export transaction. • Clean draft is one no document attached and is usually handed to a bank for collection in a foreign country. • Open account, the sale of stoke and bonds payment for services.
(b) Sight or Usance • Drawn to be payable either at sight or at some specified future time. • Name implies, sight draft supposed to paid first seen by the drawee. • Some countries is customary drawee to delay payment of sight draft until the merchandise.
(c) Time or Date Draft (Usance Draft) • Time or date draft are used where the seller/exporter is wiling to extend credit to the buyer/importer. • Great advantage to the drawee of a date draft is date on which the draft should be paid is known.
(d) With or Without Recourse • With recourse means parches by a banker other financial institution of draft. • The purchases draft or bills of exchange assumes full responsibility for payment, discharges his obligation as guarantor and consignees. • With recourse means exact opposite. • Consignee fails for any original drawer of the draft.
8.3 Countertrade • Definition Countertrade is exchange goods or services that are paid for, in whole or part, with other goods or services. • Each party is both buyer and seller at the same time. • Appeals to buyers in countries that short of foreign hard currencies.
Types of Countertrade 8.3.1 Pure Barter 8.3.2 Clearing arrangements 8.3.4 Counter purchase 8.3.5 Switch trading 8.3.6 Buy-back 8.3.7 Offsets
8.3.1 Pure Barter • Simple direct exchange without money • For example: Product A Product B • Online barter is now operating in the U.S. and can be expected to develop internationally. Company A Company B
8.3.2 Clearing Arrangements • 2 countries agree to exchange a number of products, some not easily sold on open market, for a specified period. • Both parties agree on the quantities and values to be exchanged and final settlement date for surpluses must be cleared up. • Transactions betweengovernments– clearing accounts • Transactions between organizations – evidence accounts
8.3.3 Counter Purchase • Sale of goods and services to a country by a company that promises to make a future purchase of a specific product from the country. For example: • Sell of goods and services Country A Country B • The products ‘purchased’ are not related to the original exporter’s product line. Volkswagen promises to purchase specific product from country B in the future East Germany
8.3.4 Switch Trading • One party agree in a barter or counter purchase arrangement has goods that the other does not want. • This kind of goods will sold for the exporter to some third party by a specialist called a switch trader. Engine Coffee Company A Company B Switch Specialist Sells to others
8.3.5 Buy Back • Also called compensation agreement. • A company agrees to supply technical knowledge to build a plant, or builds the plant or licenses the use of trademark, in exchange for the production output. For example: technology, equipment, training, or other services. agrees to give a certain percentage of the plant's output as partial payment for the contract. Plant Country A output
8.3.6 Offsets • Seller assist in or arrange for the marketing of products produced by the buyer. • Similar to counter purchase, but different because offset involved the industry and parties. • Seller will provides benefit to buyer because ‘seller’s’ purchase of components from the ‘buyer’ to be used in producing the seller’s products which want sold to buyer. For example: sell products and assist Company B marketing the products sell components to be used in producing seller’s products Company A Company B