BUSFIN02-1 International Trade Finance

1、International Trade Finance International Trade Finance: Learning Objectives Learn how international trade alters both the supply chain and general value chain of the domestic firm, thereby beginning the globalization process in the trade phase Consider what the key elements in an import or export t

2、ransaction are in business Discover how the three key documents in import-export the letter of credit, the draft, and the bill of lading combine to finance the transaction and to manage its risks International Trade Finance: Learning Objectives Identify what the documentation sequence is for a typic

3、al international trade transaction Learn how the various stages and their costs affect the ability of an exporter to enter a foreign market and potentially compete in both credit terms and pricing See what organizations and resources are available for exporters to aid in managing trade risk and fina

4、ncing Examine the various trade financing alternatives The Trade Relationship Trade financing shares a number of common characteristics with traditional value chain activities conducted by all firms All companies must search out suppliers for goods and services Must determine if supplier can provide

5、 products at required specifications and quality All must be at an acceptable price and delivered in a timely manner The Trade Relationship Understanding the nature of the relationship between the exporter and the importer is critical to understanding the methods for import-export financing utilized

6、 in industry Three categories of relationships: Unaffiliated unknown party Unaffiliated known party Affiliated partu Exhibit 20.1 Financing Trade: The Flow of Goods and Funds Exhibit 20.2 Alternative International Trade Relationships The Trade Dilemma International trade must work around a fundament

7、al dilemma: Imagine an importer and an exporter who would like to do business with one another Because of the distance between the two, it is not possible to simultaneously hand over goods and receive payments in person How do participants in international trade mitigate the risks associated with co

8、nducting business with a stranger? Key Documents As we will see in the following exhibits, letters of credit, order bills of lading and sight drafts are critical in conducting international trade An example of a letter of credit occurs when an importer obtains a banks promise to pay on its behalf, k

9、nowing the exporter will trust the bank When the exporter ships the merchandise to the importers country, title to the merchandise is given to the bank on a document called an order bill of lading The exporter asks the bank to pay for the goods using a sight draft The bank, having paid for the goods

10、, now passes title to the importer who eventually reimburses the bank Exhibit 20.3 The Mechanics of Import and Export Exhibit 20.4 The Bank as the Import-Export Intermediary Exhibit 20.5 The Trade Transaction Timeline and Structure Letter of Credit (L/C) Letter of Credit (L/C) is a banks conditional

11、 promise to pay issued by a bank at the request of an importer in which the bank promises to pay an exporter upon presentation of documents specified in the L/C The essence of an L/C is the promise of the issuing bank to pay against specified documents, which means that certain elements must be pres

12、ent for the bank Issuing bank must receive a fee for issuing L/C Banks L/C must contain specified maturity date Banks commitment must have stated maximum amount Banks obligation must arise only on presentation of specific documents and bank cannot be called on for disputed items Banks customer must

13、have unqualified obligation to reimburse bank on same condition of banks payment Letter of Credit (L/C) Commercial L/Cs are classified as follows Irrevocable Vs. Revocable irrevocable letters of credit are non-cancelable while its opposite can be cancelled at any time Confirmed Vs. Unconfirmed An L/

14、C issued by one bank can be confirmed by another bank Advantages of L/Cs are that it reduces risk of default and a confirmed L/C helps secure financing Disadvantages of L/Cs are the fees charged and that the L/C reduces the available credit of the importer Exhibit 20.6 Parties to a Letter of Credit

15、(L/C) Exhibit 20.7 Essence of a Letter of Credit (L/C) Draft A draft, sometimes called a bill of exchange (B/E), is the instrument normally used in international commerce to effect payment It is a written order by an exporter instructing an importer or its agent to pay a specified amount at a specif

16、ied time The party initiating the draft is the maker, drawer, or originator while the counterpart is the drawee In a commercial transaction where the buyer is the drawee it is a trade draft, or the buyers bank when it is called a bank draft Draft If properly drawn, drafts can become negotiable instr

17、uments As such they provide a convenient instrument for financing the international movement of merchandise To become a negotiable instrument, there are four requirements Must be written and signed by buyer Must contain unconditional promise to pay Must be payable on demand or at a fixed date Must b

18、e payable to bearer Draft Types of drafts include Sight drafts which is payable on presentation to the drawee Time drafts, also called usance draft, allows a delay in payment. It is presented to the drawee who accepts it with a promise to pay at some later date When a time draft is drawn on a bank,

19、it becomes a bankers acceptance When drawn on a business firm it becomes a trade acceptance Bankers Acceptance When a draft is accepted by a bank, it becomes a bankers acceptance Example: Acceptance of $100,000 for exporter Exporter may discount the acceptance note in order to receive the funds up-f

20、ront Face amount of acceptance$100,000 Less 1.5% p.a. commission for 6 months- 750 Amount received by exporter in 6 months$ 99,250 Less 7% p.a. discount rate for 6 months- 3,500 Amount received by exporter at once$95,750 Bankers Acceptances Bill of Lading Bill of Lading (B/L) is issued to the export

21、er by a common carrier transporting the merchandise It serves the purpose of being a receipt, a contract and a document of title As a receipt the B/L indicates that the carrier has received the merchandise As a contract the B/L indicates the obligation of the carrier to provide certain transportatio

22、n As a document of title, the B/L is used to obtain payment or written promise of payment before the merchandise is released to the importer Bill of Lading Characteristics of the Bill of Lading A straight B/L provides that the carrier deliver the merchandise to the designated consignee only An order

23、 B/L directs the carrier to deliver the goods to the order of a designated party, usually the shipper A B/L is usually made payable to the order of the exporter Documentation in Typical Trade Transaction Example: Assume Trident receives order from Canadian buyer; Trident will export financed under L

24、/C requiring a bill of lading with exporter collecting a time draft accepted by Canadian buyers bank The Canadian buyer places order with Trident Trident agrees to ship under L/C Canadian buyer applies to bank (Northland Bank) for L/C to be issued in favor of Trident for merchandise Northland Bank i

25、ssues L/C in favor of Trident and sends it to Southland Bank (Tridents bank) Documentation in Typical Trade Transaction Trident ships the goods to the Canadian buyer Trident prepares a time draft and presents it to Southland Bank. The draft is drawn on Northland Bank with required documents includin

26、g bill of lading Trident endorses the order bill of lading in blank so that title to goods goes with holder of documents Southland Bank Southland Bank presents draft and documents to Northland Bank for acceptance, Northland accepts and promises to pay draft at maturity 60 days Documentation in Typic

27、al Trade Transaction Northland Bank returns accepted draft to Southland Bank; Southland Bank could ask for discounted draft receiving funds today Southland Bank, now having a bankers acceptance, may sell the acceptance in the open market or it may hold the acceptance in its own portfolio If Southlan

28、d Bank had kept the acceptance, it would transfer the proceeds less commission to Trident Documentation in Typical Trade Transaction Northland Bank notifies Canadian buyer of arrival of documents; Canadian buyer signs note to pay Northern Bank for the merchandise in 60 days After 60 days, Northland

29、Bank receives payment from Canadian buyer On same day, holder of matured acceptance presents it for payment and receives it face value; it may be presented at Northland Bank or returned to Southland Bank for collection through normal bank channels Exhibit 20.8 Steps in a Typical Trade Transaction Go

30、vernment Programs to Help Finance Exports Governments of most export-oriented industrialized countries have special financial institutions that provide some form of subsidized credit to their own national exporters These export finance institutions offer terms that are better than those generally av

31、ailable from the competitive private sector Thus, domestic taxpayers are subsidizing lower financial costs for foreign buyers in order to create employment and maintain a technological edge Government Programs to Help Finance Exports Export Credit Insurance Provides assurance to the exporter or the

32、exporters bank that an insurer will pay should the foreign customer default In the US the Foreign Credit Insurance Association (FCIA) provides this type of insurance Export-Import Bank Known as the Eximbank, it facilitates the financing of US exports through various loan guarantee and insurance prog

33、rams Trade Financing Alternatives In order to finance international trade receivables, firms use the same financing instruments as they use for domestic trade receivables including; Bankers Acceptances Trade Acceptances Factoring Securitization Bank Credit Lines Covered by Export Credit Insurance Co

34、mmercial Paper Exhibit 20.9 Instruments for Financing Short-Term Domestic and International Trade Receivables Forfaiting: Medium and Long Term Financing Forfaiting is a specialized technique to eliminate the risk of nonpayment by importers in instances where the importing firm and/or its government

35、is perceived by the exporter to be too risky for open account credit The essence of forfaiting is the non-recourse sale by an exporter of bank-guaranteed promissory notes, bills of exchange, or similar documents received from an importer in another country The following exhibit outlines a typical fo

36、rfaiting transaction Exhibit 20.10 Typical Forfaiting Transaction Summary of Learning Objectives International trade takes place between three categories of relationships: unaffiliated unknown parties, unaffiliated known parties, and affiliated parties Trade transactions between affiliated parties t

37、ypically do not require contractual arrangements or external financing. Trade transactions between unaffiliated parties typically do as well as some type of external financing such as letters of credit Summary of Learning Objectives Over many years, established procedures have arisen to finance inte

38、rnational trade. The basic procedure rests on the interrelationship between three key documents, the L/C, the draft, and the bill of lading Variations in each type of the three documents provide a variety of ways to accommodate any type of transaction In the simplest transaction, in which all three

39、documents are used, an importer applies for and receives a L/C from its bank Summary of Learning Objectives In the L/C, the bank substitutes its credit for that of the importer and promises to pay if certain documents are submitted to the bank. The exporter may now rely on the promise of the bank ra

40、ther than that of the importer The exporter typically ships on an order bill of lading, attaches the bill of lading to a draft ordering payment from the importers bank and presents these documents, plus any additional documents, through its own bank to the importers bank Summary of Learning Objectiv

41、es If the documents are in order, the importers bank either pays the draft (sight draft) or accepts the draft (time draft). In the latter case, payment is at a future date. At this step the importers bank acquires title to the merchandise through the bill of lading and releases it to the importer against a prom