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FINANCING FOREIGN TRADE

FINANCING FOREIGN TRADE. CHAPTER 11. FINANCING FOREIGN TRADE. CHAPTER OVERVIEW: I. PAYMENT TERMS II. DOCUMENTS III. FINANCING TECHNIQUES IV. GOVERNMENT SOURCES OF EXPORT FINANCING AND CREDIT INSURANCE V. COUNTERTRADE. FINANCING FOREIGN TRADE. I. PAYMENT TERMS

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FINANCING FOREIGN TRADE

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  1. FINANCING FOREIGN TRADE CHAPTER 11

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

  3. FINANCING FOREIGN TRADE I. PAYMENT TERMS A. Five Principal Means: 1. Cash in advance 2. Letter of Credit 3. Drafts 4. Consignment 5. Open Account

  4. FINANCING FOREIGN TRADE 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. FINANCING FOREIGN TRADE C. Letter of Credit (L/C) 1. A letter addressed to seller a. written and signed by buyer’s bank b. promising to honor seller’s drafts. c. Bank substitutes its own commitment d. Seller must conform to terms

  6. FINANCING FOREIGN TRADE 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. FINANCING FOREIGN TRADE 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. FINANCING FOREIGN TRADE 4. Types of L/Cs a. documentary b. non-documentary c. revocable d. irrevocable e. confirmed f. transferable

  9. FINANCING FOREIGN TRADE D. DRAFTS 1. Definition: - unconditional order in writing - exporter’s order for importer to pay - at once (sight draft) or - in future (time draft)

  10. FINANCING FOREIGN TRADE 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)

  11. FINANCING FOREIGN TRADE 4. Types of Drafts a. sight b. time c. clean (no documents needed) d. documentary

  12. FINANCING FOREIGN TRADE 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. FINANCING FOREIGN TRADE 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 exporting.

  14. FINANCING FOREIGN TRADE 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. FINANCING FOREIGN TRADE II. DOCUMENTS USED IN INT’L TRADE A. Four most used documents 1. Bill of Lading (most important) 2. Commercial Invoice 3. Insurance Certificate 4. Consular Invoice

  16. FINANCING FOREIGN TRADE B. Bill of Lading Three functions: 1. Acts as a contract to carry the goods. 2. Acts as a shipper’s receipt 3. Establishes ownership over goods if negotiable type.

  17. FINANCING FOREIGN TRADE 2. Type of Bills a. Straight b. Order c. On-board d. Received-for-shipment e. Clean f. Foul

  18. FINANCING FOREIGN TRADE 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.

  19. FINANCING FOREIGN TRADE 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.

  20. FINANCING FOREIGN TRADE E. CONSULAR INVOICE Local consulate in host country issues a visa for the exporter’s invoice. Requires fee to be paid to consulate.

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

  22. FINANCING FOREIGN TRADE 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).

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

  24. FINANCING FOREIGN TRADE 4. Forfaiting a. Definition: discounting at a fixed rate without recourse of medium-term accounts receivable denominated in a fully convertible currency. b. Use: Large capital purchases c. Most popular in W. Europe

  25. FINANCING FOREIGN TRADE 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. FINANCING FOREIGN TRADE 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. FINANCING FOREIGN TRADE 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.

  28. FINANCING FOREIGN TRADE C. Foreign Credit Insurance Association (FCIA) 1. Offers commercial and political risk insurance 2. When insured, exporter often able to obtain financing faster.

  29. FINANCING FOREIGN TRADE 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.

  30. FINANCING FOREIGN TRADE B. When to Use Countertrade 1. With “soft-currency” developing countries 2. When foreign contractor must perform.

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