Financing Foreign Trade

Chapter 15

International Finance is about

Risk Mitigation or Risk Engineering

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Types of Risk

Preshipment - Shipment Postshipment

The Trade Cycle and Risk

The Trade Cycle
Contract Port of Destination Land Transport Land Transport and Delivery

Port of Departure Production

Sea Transport

Final Payment

Customs!

The Transaction over Time

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4

Pre-shipment Risks
Contract Port Entry
LOADING SHIP

Transport

Production Process

To Port

PORT

Initial Contact

EXPORT CUSTOMS
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Transport to Port

By rail mode

By ground mode

By air mode

THE PORT

LOADING THE SHIP

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INCOTERMS
EXPORTERS LOADING DOCK

Port Entry SHIP

Transport

Production Process

To Port

Ex Works

FAS

FOB
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Shipment Risks
Ocean Freight is most common mode of transport

LOADED SHIP

Port Of Departure

PERILS OF THE SEA

Port Of Arrival

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Shipment Risks
Perils

of the Sea

Engine Trouble Ramming Jettison Running Aground

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Post-Shipment Risk

CUSTOMS

IMPORTERS WAREHOUSE

Port Of Arrival

Transit to Importer

FINAL PYMT
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PAYMENT TERMS
I. PAYMENT TERMS A. Four Principal Means: 1. Cash in advance 2. Open Account 3. Letter of Credit 4. Drafts
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PAYMENT TERMS
B. Cash in Advance 1. Minimal risk to exporter 2. Used where there is a. Political unrest b. Goods made to order *c. New and unfamiliar customer
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PAYMENT TERMS
C. OPEN ACCOUNT 1. Creates a credit sale 2. To importers advantage 3. More popular lately because a. major surge in global trade b. credit information improved c. more global familiarity with exporting.
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PAYMENT TERMS
4. Benefits of Open Accounts: a. greater flexibility in making a trade b. lower transactions costs Major disadvantage: -Slow payment -highly vulnerable to government currency controls.

5.

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PAYMENT TERMS
D. Letter of Credit (L/C) 1. A letter addressed to seller a. written and signed by buyers (importer) bank b. promising to honor sellers (exporter) drafts. c. Bank substitutes its own commitment *d. Seller must conform to terms e. Protects in case of discrepancies

* Not an advantage to the exporter

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PAYMENT TERMS
2. Advantages of an L/C to Exporter a. eliminates credit risk and b. pre-shipment risk of order cancellation

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PAYMENT TERMS
3. Advantages of L/C to Importer a. shipment by exporter assured b. documents inspected ensure the correct order c. may allow better sales terms

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PAYMENT TERMS
4. Safest type of L/Cs a. documentary
includes bill of lading and commercial invoice

b.

irrevocable
99% of the time

c.

confirmed
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PAYMENT TERMS
E. DRAFTS 1. Definition: - unconditional order in writing - exporters order for importer to pay - at once (sight draft) or - in future (time draft)

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PAYMENT TERMS
2. Three Functions of Drafts a. clear evidence of financial obligation b. reduced financing costs c. Can be a financial product for investors (i.e. A time draft may be converted to a bankers acceptance)

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PAYMENT TERMS
3. Types of Drafts a. sight b. time

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DOCUMENTS
II. DOCUMENTS USED IN INTL TRADE A. Three most used documents 1. Bill of Lading (most important) 2. Commercial Invoice 3. Insurance Certificate
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DOCUMENTS
B. Bill of Lading Three functions: 1. Acts as a contract to carry the goods. 2. Acts as a shippers receipt 3. Establishes ownership over goods if negotiable type.

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DOCUMENTS
C. COMMERCIAL INVOICE Purpose: 1. Lists full details of goods shipped with INCOTERMS 2. Names of importer/exporter given 3. Identifies payment terms in a specific currency 4. List charges for transport and insurance.

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INCOTERMS
A codification of international rules for the uniform interpretation of common contract clauses in export/import transactions.
EXW: FAS: FOB:
liability at exporters warehouse; importer has most liability along side the ship

after shipment is loaded on board

Delivered duty paid - exporter has most
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DDP:

DOCUMENTS
D. INSURANCE 1. Marine Insurancesame name whether ocean or air freight.

2.

Insurance Certificateissued per trip to show proof of insurance

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A Small Container Ship

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Insurance Principle: GENERAL AVERAGE

An ocean marine loss that occurs through the voluntary sacrifice of a part of the vessel or cargo, or an expenditure, to safeguard the vessel and its remaining cargo from a common peril. If the sacrifice is successful, all interests at risk contribute to the loss borne by owner of the sacrificed property based on their respective saved values.

loss under an ocean marine policy.

A party can insure their portion of such a

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Example of General Average Liability Assigned

If only shipper As container is jettisoned at a loss of $250,000, what is shipper B and C liable for? Total Co. Containers % Value Liability A 1 5 $250,000 0 B 4 20 $20,000 $50,000 C 15 75 $150,000 $187,500
Total: 20 containers at risk when ship set sail.

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SHORT-TERM FINANCING TECHNIQUES

III. FINANCING TECHNIQUES A. Four Types: 1. Bankers Acceptances 2. Discounting the draft 3. Factoring 4. Forfaiting
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BANKERS ACCEPTANCES
1. Bank created acceptances a. Creation: Time drafts accepted by bank b. Terms: Payable at maturity to holder c. Sale in the money market: Bankers acceptance d. Highly liquid market

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DISCOUNTING
2. Discounting a. Converts exporters time drafts to cash minus interest to maturity and commissions. b. Low cost financing with few fees c. May be: with recourse (exporter still liable) or without recourse(bank takes liability for nonpayment)

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FACTORING
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.

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FORFAIT
4. Forfaiting a. Definition: discounting at a fixed rate without recourse for mediumterm accounts receivable b. Use: Large capital purchases c. Most popular in W. Europe
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GOVERNMENT SOURCES
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.

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GOVERNMENT SOURCES
1. Ex-Im Bank Programs: a. Direct loans to exporters b Loan guarantees c. Risk Insurance: Political and commercial insurance

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GOVERNMENT SOURCES
2.

Ex-Im Restrictions:

At least 51% U.S. content No armaments Must be environmentally friendly to both countries

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COUNTERTRADE
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.

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COUNTERTRADE
B. When to Use Countertrade 1. with soft-currency developing countries 2. when tariffs or quotas prevent trade.

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