Financing International Trade (1)

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Part VShort-Term Asset and Liability Management

Subsidiariesof MNC with

Excess Funds

Subsidiariesof MNC with

Deficient Funds

InternationalCommercial

Paper Market

Eurobanks inEurocurrency

Market

MNCParent

Deposits Purchase

Securities

Provisionof Loans

Provisionof Loans

DepositsPurchaseSecurities

Borrow

Funds

Borrow

FundsBorrowFunds

BorrowFunds

Borrow Funds Borrow Funds


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Financing International Trade

19

Chapter

South-Western/Thomson Learning 2003


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Chapter Objectives

To describe the methods ofpayment for international trade;

To explain common trade financemethods; and

To describe the major agencies that

facilitate international trade with exportinsurance and/or loan programs.


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Payment Methods

for International Trade In any international trade transaction,

credit is provided by either

the supplier (exporter), the buyer (importer),

one or more financial institutions, or

any combination of the above.

The form of credit whereby the supplierfunds the entire trade cycle is known as

supp l ier credi t.


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Method : Prepayments

The goods will not be shipped until the buyer

has paid the seller. Time of payment: Before shipment

Goods available to buyers : After payment

Risk to exporter: None Risk to importer: Relies completely on

exporter to ship goods as ordered

Payment Methods

for International Trade


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Method : Letters o f c redit (L/C)

These are issued by a bank on behalf of the

importer promising to pay the exporter uponpresentation of the shipping documents.

Time of payment: When shipment is made

Goods available to buyers : After payment Risk to exporter: Very little or none

Risk to importer: Relies on exporter to shipgoods as described in documents

Payment Methods



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Method : Drafts (B i l ls of Exchange)

These are unconditional promises drawn by

the exporter instructing the buyer to pay theface amount of the drafts.

Banks on both ends usually act asintermediaries in the processing of shippingdocuments and the collection of payment. Inbanking terminology, the transactions areknown as documentary collections.

Payment Methods



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Time of payment: On presentation of draft

Goods available to buyers : After payment Risk to exporter: Disposal of unpaid goods


Payment Methods

for International TradeMethod : Drafts (B i l ls of Exchange)

Sight drafts (documents against payment) :

When the shipment has been made, the draftis presented to the buyer for payment.


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Time of payment: On maturity of draft

Goods available to buyers : Before payment Risk to exporter: Relies on buyer to pay


Payment Methods

for International TradeMethod : Drafts (B i l ls of Exchange)

Time drafts (documents against acceptance) :

When the shipment has been made, thebuyer accepts (signs) the presented draft.


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Method : Cons ignments

The exporter retains actual title to the goods

that are shipped to the importer. Time of payment: At time of sale to third

party

Goods available to buyers : Before payment

Risk to exporter: Allows importer to sellinventory before paying exporter

Risk to importer: None

Payment Methods



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Method : Open Accoun ts

The exporter ships the merchandise and

expects the buyer to remit payment accordingto the agreed-upon terms.

Time of payment: As agreed upon

Goods available to buyers : Before payment Risk to exporter: Relies completely on buyerto pay account as agreed upon

Risk to importer: None

Payment Methods



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Trade Finance Methods

Accounts Receivable Financing

An exporter that needs funds immediately

may obtain a bank loan that is secured byan assignment of the account receivable.

Factoring (Cross-Border Factoring)

The accounts receivable are sold to a thirdparty (the factor), that then assumes all the

responsibilities and exposure associated

with collecting from the buyer.


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Letters of Credit (L/C)

These are issued by a bank on behalf of

the importer promising to pay the exporterupon presentation of the shipping

documents.

The importer pays the issuing bank the

amount of the L/C plus associated fees.

Commercial or import/export L/Cs are

usually irrevocable.



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Sometimes, the exporter may request that

a local bank confirm (guarantee) the L/C.



The required documents typically include a

draft (sight or time), a commercial invoice,and a bill of lading (receipt for shipment).


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Variations include

- standby L/Cs : funded only if the buyerdoes not pay the seller as agreed upon- transferable L/Cs : the first beneficiary

can transfer all or part of the original L/C

to a third party- assignments of proceeds under an L/C:

the original beneficiary assigns theproceeds to the end supplier




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Bankers Acceptance (BA)

This is a time draft that is drawn on and

accepted by a bank (the importers bank).The accepting bank is obliged to pay the

holder of the draft at maturity.

If the exporter does not want to wait for

payment, it can request that the BA be sold

in the money market. Trade financing is

provided by the holder of the BA.



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In general, all-in-rates are lower than bank

loan rates. They usually fall between the

rates of short-term Treasury bills and

commercial papers.


Bankers Acceptance (BA)

The bank accepting the drafts charges an

all-in-rate (interest rate) that consists of thediscount rate plus the acceptance

commission.


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Working Capital Financing

Banks may provide short-term loans that

finance the working capital cycle, from thepurchase of inventory until the eventual

conversion to cash.



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Medium-Term Capital Goods Financing

(Forfaiting)

The importer issues a promissory note tothe exporter to pay for its imported capital

goods over a period that generally ranges

from three to seven years.

The exporter then sells the note, without

recourse, to a bank (the forfaiting bank).



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Countertrade

These are foreign trade transactions in

which the sale of goods to one country islinked to the purchase or exchange of

goods from that same country.

Common countertrade types include

barter, compensation (product buy-back),

and counterpurchase.

The primary participants are governments

and multinationals.



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Due to the inherent risks of internationaltrade, government institutions and the

private sector offer various forms ofexport credit, export finance, and

guarantee programs to reduce risk and

stimulate foreign trade.

Agencies that Motivate

International Trade


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International TradeExpor t-Impo rt Bank of the U.S. (Ex-Imbank )

This U.S. government agency aims to

create jobs by financing and facilitatingthe export of U.S. goods and services and

maintaining the competitiveness of U.S.

companies in overseas markets.

It offers guarantees of commercial loans,direct loans, and export credit insurance.


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PrivateExportFundingCorporat ion(PEFCO)

PEFCO is a private corporation that is

owned by a consortium of commercialbanks and industrial companies.

In cooperation with Ex-Imbank, PEFCO

provides medium- and long-term fixed-ratefinancing for foreign buyers through the

issuance of long-term bonds.


International Trade


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Overseas Private Investment Corporat ion

(OPIC)

OPIC is a U.S. government agency thatassists U.S. investors by insuring their

overseas investments against a broad

range of political risks.

It also provides financing for overseasbusinesses through loans and loan

guaranties.


International Trade


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Beyond insurance and financing, the U.S.has tax provisions that encourage

international trade. The FSC Repeal and Extraterritorial

Income Exclusion Act of 2000, which

replaced the 1984 Foreign Sales

Corporation provisions in response toWTO concerns, excludes certain

extraterritorial income from the definition

of gross income for U.S. tax purposes.


International Trade


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Impact of International Trade FinancingDecisions on an MNCs Value

n

tt

m

j

tjtj

k1=

1

,,

1

ERECFE=Value

E (CFj,t) = expected cash flows in currencyjto be received

by the U.S. parent at the end of period t

E (ERj,t) = expected exchange rate at which currencyjcan

be converted to dollars at the end of period t

k = weighted average cost of capital of the parent

Trade Financing Decisions


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Payment Methods for International Trade

Prepayments Letters of Credit

Sight Drafts and Time Drafts

Consignments

Open Accounts

Chapter Review


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Chapter Review

Trade Finance Methods Accounts Receivable Financing

Factoring Letters of Credit

Bankers Acceptances

Working Capital Financing

Medium-Term Capital Goods Financing

(Forfaiting)

Countertrade


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Chapter Review

Agencies that Motivate International Trade Export-Import Bank of the U.S.

Private Export Funding Corporation Overseas Private Investment Corporation

Other Considerations

Impact of International Trade Financing onan MNCs Value

Financing International Trade (1)

Documents

Transcript of Financing International Trade (1)