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International trade finacing

International trade, Letter of credit, Financing methods, Practices

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International trade finacing

  1. 1. International Trade, InstrumentsInternational Trade, Instruments and Institutionsand Institutions Kanchan Kandel BBA
  2. 2. Foreign trade transaction We understand “Trade” as something wherein goods are sold in return of some goods or money. In international trade, there is always dilemma to importer and exporter who would like to do business with one another. Importer is always feared of not receiving the goods or receiving goods with different qualities so they want to pay after the goods received. In other hand, exporters also fear of not receiving the payment in time or not at all, so they want payment before the delivery of goods.
  3. 3. Foreign trade transaction Because of the distance between two, it is not possible to simultaneously hand over goods with one and accept payment with other. To address these fundamental dilemmas of being unwilling to trust a stranger in a foreign land is solved by using a high respected bank as intermediary or guarantor.
  4. 4. Payment method for internationalPayment method for international tradetrade Prepayment Letter of credit Draft (sight/time) Consignment Open account
  5. 5. PrepaymentPrepayment It is also known as advance payment. Under this method, the exporter will not ship the goods until the buyer has remitted payment to the exporter. This method affords the supplier the greatest degree of protection, and it is normally requested of the first time buyer whose creditworthiness is unknown.
  6. 6. DraftDraft A draft is the instrument normally used in international commerce to effect payment. A draft is simply an order written by an exporter (seller) instructing an importer (buyer) or its agent to pay a specified amount of money at a specified time. Thus, it is the exporter’s formal demand for payment from the importer. The person or business initiating the draft is known as the maker, drawer, or originator. Normally, this is the exporter.
  7. 7. DraftDraft The party to whom the draft is addressed is the drawee. Normally, this is the importer. Draft can be:  Sight draft : A sight draft is payable on presentation to the drawee Time Draft: A time draft, also called a usance draft, allows a delay in payment.
  8. 8. ConsignmentConsignment Under a consignment arrangement, the exporter ships the goods to the importer while still retaining actual title itself (exporter). The importer has the access to the inventory but does not have to pay for the goods until they have been sold to a third party. If the importer fails to pay, the exporter has limited recourse because no draft is involved and the goods have already been sold. Due to this nature, consignment is popular for subsidiary companies trading with the parent company.
  9. 9. Open AccountOpen Account if there is good relationship between importer and exporter, they may choose open account for transaction. In open account, importer open account in exporter firm. The value of goods shipped is added to this account. An exporter send invoice at the end of each month or after each transaction. This method save collection fees as well as cost of letter of credit.
  10. 10. The financing of internationalThe financing of international tradetrade Short term financing  Account receivable financing  Factoring  Letter of credit  Banker’s acceptance  Trust received loan Long term financing  Forfaiting  Buyer credit  Government Financing  Countertrade (it is fall on both category)
  11. 11. Account receivable financingAccount receivable financing Exporter can easily provide credit to the importer if there is good relationship between importer and exporter. After providing credit, if exporter needs fund immediately, it may choose to finance from bank, known as account receivable financing. Bank provide loan to the exporter on the base of account receivable. Bank has provide loan to the exporter so in case of buyer fails to pay the exporter is still responsible for repaying loan to the bank.
  12. 12. FactoringFactoring Exporter can sell their account receivable to a specialized third party or firm, known as factor. Factor can purchase receivable in Non-recourse or recourse basis. Non- recourse means that factor will take the credit, political, foreign exchange risk of receivable it purchases. Recourse means that the factor can give back receivable that are not collected.
  13. 13. Letter of Credit – A ConceptLetter of Credit – A Concept  A letter of credit is a document that a financial institution or similar party issues to a seller of goods or services which provides that the issuer will pay the seller for goods or services the seller delivers to a third-party buyer.  The document serves essentially as a guarantee to the seller that it will be paid by the issuer of the letter of credit regardless of whether the buyer ultimately fails to pay.  Letters of credit are used primarily in international trade for large transactions between a supplier in one country and a customer in another
  14. 14. Parties involved in letter of credit Applicant Issuing bank Advising bank Beneficiary Confirming bank Negotiating bank
  15. 15. Step-by-step process: Buyer and seller agree to conduct business. The seller wants a letter of credit to guarantee payment. Buyer applies to his bank for a letter of credit in favor of the seller. Buyer's bank approves the credit risk of the buyer, issues and forwards the credit to its correspondent bank (advising or confirming). The correspondent bank is usually located in the same geographical location as the seller (beneficiary). Advising bank will authenticate the credit and forward the original credit to the seller (beneficiary).
  16. 16. 16 1. Sales Contract 3. Request to advice and, if applicable, confirm letter of credit 2. Letter of credit application ISSUING BANK ADVISING/ CONFIRMING BANK SELLER BUYER 4. Advice of letter of credit Step in Import letter of credit
  17. 17. Cont…Cont… Seller (beneficiary) ships the goods, then verifies and develops the documentary requirements to support the letter of credit. Documentary requirements may vary greatly depending on the perceived risk involved in dealing with a particular company. Seller presents the required documents to the advising or confirming bank to be processed for payment. Advising or confirming bank examines the documents for compliance with the terms and conditions of the letter of credit and credit seller account.
  18. 18. Cont….Cont…. If the documents are correct, the advising or confirming bank will claim the funds by: Debiting the account of the issuing bank. Waiting until the issuing bank remits, after receiving the documents. Reimburse on another bank as required in the credit. Advising or confirming bank will forward the documents to the issuing bank. Issuing bank will examine the documents for compliance. If they are in order, the issuing bank will debit the buyer's account. Issuing bank then forwards the documents to the
  19. 19. Step in import letter of creditStep in import letter of credit 19 7. Payment 9. Forward Document and Debit Buyer account 8. Send documents and Debit Issuing bank SELLER ADVISING/CONFIRMIN G BANK ISSUING BANK BUYER 5. Ship the goods 6. Present document s 10. Reimbursement
  20. 20. Type of L/CType of L/C • Revocable L/C : It may be amended or cancelled by the opening bank at any moment and without prior notice to the seller • Irrevocable L/C : In this case it is not possible to revoked or amended a credit without the agreement of the issuing bank, the confirming bank, and the beneficiary.   • Confirmed L/C : It is a special type of L/c in which another bank apart from the issuing bank has added its guarantee • The cost of confirming by two banks makes it costlier.
  21. 21. Cont…Cont… Sight or Term(Usane): Letters of credit can permit the beneficiary to be paid immediately upon presentation of specified documents (sight letter of credit), or at a future date as established in the sales contract (term/usance letter of credit).
  22. 22. Cont…..Cont….. Financing opportunities, such as pre-shipment finance secured by a letter of credit and/or discounting of accepted drafts drawn under letters of credit, are available in many countries. Bank expertise is made available to help complete trade transactions successfully. Payment for the goods shipped can be remitted to your own bank or a bank of your choice.
  23. 23. Cont…Cont… To the importer: • Payment will only be made to the seller when the terms and conditions of the letter of credit are complied with. • The importer can control the shipping dates for the goods being purchased. • Cash resources are not tied up.
  24. 24. Risk in L/cRisk in L/c Fraud Risks: The payment will be obtained for nonexistent or worthless merchandise against presentation by the beneficiary of forged or falsified documents. Sometime Credit itself may be forged. Sovereign and Regulatory Risks: Performance of the Documentary Credit may be prevented by government action outside the control of the parties. Legal Risks: Possibility that performance of a Documentary Credit may be disturbed by legal action relating directly to the parties and their rights and obligations under the Documentary Credit Force Majeure and Frustration of Contract: Performance of a contract including an obligation under a Documentary Credit relationship is prevented by external
  25. 25. Cont…Cont… Risks to the Applicant: Non-delivery of Goods Short Shipment Inferior Quality Early /Late Shipment Damaged in transit Foreign exchange Failure of Bank viz Issuing bank / Collecting Bank Risks to the Issuing Bank: 
  26. 26. Risk to the:Risk to the: Beneficiary: Failure to Comply with Credit Conditions Failure of, or Delays in Payment from, the Issuing Bank Advising Bank: The Advising Bank’s only obligation if it accepts the Issuing Bank’s instructions is to check the apparent authenticity of the Credit and advising it to the Beneficiary. Confirming Bank: If Confirming Bank’s main risk is that, once having paid the Beneficiary, it may not be able to obtain reimbursement from the Issuing Bank because of insolvency of the Issuing Bank or refusal of the Issuing Bank because of a dispute as to whether or not payment should have been made under the Credit.
  27. 27. BankerBanker’’ AcceptanceAcceptance In L/C will the exporter present time draft along with shipping documents to its local bank, and the exporter’s bank send the time draft along shipping documents to the importer’s bank. The importer’s bank accepts the draft, thereby creating the banker acceptance. If the exporter does not want to wait until the specified date to receive payment, it can sold the banker’s acceptance in the money market at discount.
  28. 28. Benefit to exporterBenefit to exporter The exporter does not need to worry about the credit risk of the importer. The exporter faces little exposure to political risk or to exchange controls imposed by a government because banks normally are allowed to meet their payment commitments even if control could prevent an importer from paying, Exporter can sell the banker’s acceptance at a discount before payment is due and thus obtain funds up front from the issuing bank.
  29. 29. Benefit to ImporterBenefit to Importer Banker’s acceptance by providing greater access to foreign markets when purchasing supplies and other product. Due to the documents presented along with the banker’ acceptance, the importer is assured that goods have been shipped. It allows the importer to pay at a later date, the importer’s payment is financed until the maturity date of the banker’s acceptance.
  30. 30. Benefit to BankBenefit to Bank The bank accepting the drafts benefits in that it earns a commission for creating an acceptance.
  31. 31. Trust Received loanTrust Received loan Trust Receipt (TR) is a type of short-term import loan to provide the buyer with financing to settle goods imported under Letter of Credit where title of goods is held by the bank. Under a TR arrangement, the Bank retains title to the goods but allows the buyer to take possession of the goods on trust for resale before paying the Bank on TR due date
  32. 32. Medium and long term financingMedium and long term financing Buyer credit Government Financing Forfaiting Countertrade (it is fall on both category)
  33. 33. Buyer CreditBuyer Credit When expensive capital equipment is being purchased an exporter sometime arranges for a financial institutions to grant credit to the importer, known as buyer credit. By arranging the credit for the importer, the exporter is ultimately paid cash up front, and the financial intermediaries bear most of the default risk of the importer.
  34. 34. ForfaitingForfaiting Forfaiting is a method of trade finance that allows exporters to obtain cash by selling their medium- term foreign accounts receivable at a discount on a “without recourse” A forfaiter is a specialized finance firm or a department in a bank that performs non-recourse export financing through the purchase of medium- term trade receivables. The forfaiter will deduct interest (discount) in advance for the whole period of credit and disburse the net proceeds immediately
  35. 35. ForfaitingForfaiting 1. Sales agreement between Importer and exporter 2. Importer prepared the promissory notes and summit to bank. In most case importer bank which is located in importer country. 3. Importer bank signed (make guarantee or avalled) on promissory notes and send back to importer 4. Importer forward guaranteed Notes to exporter. 5. Exporter exchange guaranteed notes with cash from forfaiting bank (generally this notes are cashed at discount due to early received of cash and interest earn on early received will compensate the discount.
  36. 36. ForfaitingForfaiting 5. Exporter shipped the goods 6. Forfaiting bank either sells the notes to investor in money market or waits until the maturity. 7. At maturity, forfaiting bank present notes to importer bank. 8. Importer bank inform importer about arrived of notes and debit his/her account. 9. Importer bank pay or credit the forfaiting account
  37. 37. Step involved in forfeitingStep involved in forfeiting 37 4. Deliver Guarantee Notes 7 Ship the goods 1. Sales contract 2. Notes send for guarantee 3 Guaranteed notes return 9 Payment made Exporter Importer bankImporter 6 Cash payment 5 Present guarantee Notes Forfeiting bank 8 Notes Present 10 Payment made
  38. 38. CountertradeCountertrade The term countertrade denotes all type of foreign transaction in which sales of goods to the country is linked to the purchase or exchange of goods from the same country. Countertrade may or may not involve money in the transaction but there is guarantee of two ways commodity flow. Popular countertrade are: Barter Switch trading Counter purchased
  39. 39. BarterBarter The simplest form of countertrade is involved the direct exchange of goods or services from one country for the goods or services of another. Trade is balance in the sense that the value of what is being imported equal to the value of what is being exported. Although money is not involved, money may be the base that determines the value of the goods
  40. 40. SwitchingSwitching Switching trading involves a third party, a switch trader, who facilitates the eventual clean of an imbalance of trade, between two parties to a bilateral clearing agreement. For example, Nepal and China might agree to exchange Nepalese tea for Chinese garment during the coming year; at the time of delivery value of Nepalese tea exceeds the value of Chinese garments. Now Nepalese exporter has two alternatives to settle this balancing figure.
  41. 41. SwitchingSwitching First, Nepalese exporter can used this balancing value to purchase other goods from china or from other third country say India with the help of switch trader or  Second, it can directly sells this credit to switch trade in cash. Later on switch trader used this balancing value to purchase goods from china.
  42. 42. CounterpurchasedCounterpurchased  Barter require a double action of wants in that two parties in the transaction must each want what the other party has to provide, and want it at the same time and in the same amount. Because of these difficulties, there is another form of countertrade, called counterpurchase. Counter purchased is agreement between seller and buyer either to:
  43. 43. CounterpurchaseCounterpurchase Make purchase from a company nominated by the buyer, later buyer settle up the company it has nominated. Take product from the buyer in future, that is the seller accept credit in term of product.
  44. 44. OffsetOffset An Offset is a requirement of an importing country that the price of its import be offset in some way by the exporter. In offset, there might be contract between importer and exporter, where exporter, purchase raw material from Importer Company or country, in return exporter may supply finished goods. In other case exporter agree to purchase goods in the importers country, to increase its imports from that country, to transfer technology to the country or to conduct
  45. 45. BuybackBuyback In this agreement, the seller of the capital equipment agrees to buy the product made with the equipment it supplies. This form of countertrade is common with capital equipment used in mining and manufacturing. Buyback can be exits in three ways: Exporter receive product, directly from the factory that was constructed and these product are similar to exporter industry.
  46. 46. BuybackBuyback Mix of resultant product and other product of the country A famous example of a buyback is the agreement by several western European countries to supply the Soviet Union with pipe, compressor, controls, and other equipment necessary to build natural gas pipeline from the Soviet Union to Western Europe. The payment for the pipeline was natural gas delivered through the pipeline to Western Europe over the course of several years.
  47. 47. Practices in NepalPractices in Nepal  Short term financing: Banker’s Acceptance (In case of Time L/C)  TR Loan: This is Trust Receipt Loan under which a Bank allows the importer (its customer) to get the goods released from the Transporter and sell it for repaying to the Bank. The term of such loans vary from 30 days to 180 days.  Pre-shipment financing (Loans given to exporter to produce goods for the export)  Post – Shipment Financing (Loans or
  48. 48.