International Banking and Trade Finance

1. International Banking and Trade Finance Chpt 13

2. Managing Economic Exposure and Translation Exposure Chapter 12

3. Overview • Describe payment methods for international trade • Explain common methods of trade finance • Describe the major agencies facilitating international trade

4. Payment Methods for International Trade • Credit may be provided by: • 1. supplier (exporter) • 2. buyer (importer) • 3. financial institution • 4. a combination of the different organizations • Supplier credit • funds the entire trade cycle • from production to delivery

5. Payment Methods for International Trade • Primary methods of payment include: • 1. prepayment • 2. letters of credit • 3. drafts • 4. consignment • 5. open account

6. Payment Methods Letters of Credit (L/C) • Used by banks on behalf of the importer (buyer) • bank substitutes its credit for the buyer’s credit • promises to pay exporter upon receipt of shipping documents • Compromise for buyer and seller • buyer does not pay for goods until arrival

7. Payment Methods Drafts (Bill of Exchange) • A promise by one party (usually exporter) to pay draft upon arrival of goods • Documentary collections • banking channels used for most drafts • documents against payments • documents against acceptance • trade acceptance

8. Payment Methods Consignment • Exporter ships goods to importer while retaining title to goods • importer does not pay for goods until sold • exporter does not have a draft • participants are exposed to high level of risk

9. Payment Methods Open Account • Agreement based on trust and experience • exporter ships merchandise • buyer makes payments based upon agreement • exporter dependent upon buyer’s ability to pay • this method is becoming more popular in industrial countries

10. Trade Finance Methods Factoring • Selling the accounts receivables (A/R) • A/R sold before payment received from buyer • third party buyer of A/R is known as a factor • duties of factor • responsible for collections • performs credit check on buyer of merchandise • Cross-border factoring • uses factors in both countries of the transaction

11. Trade Finance Methods Letters of Credit (L/C) • Proven usefulness to business community • provides protection to exporter and importer • bank makes payment for a party (importer) to a beneficiary (exporter) • importer’s bank substitutes its credit for the importer’s bank’s credit

12. Trade Finance Methods Letters of Credit (L/C) • Characteristics of L/C • does not insure receipt of ordered goods • bank pays upon examination of documents, not goods • a confirming (domestic) bank may be contacted • pays exporter upon acceptance of documents by foreign bank

13. Trade Finance Methods Letters of Credit (L/C) • Trade related L/Cs • commercial letters of credit • import/export letters of credit • Types of trade L/Cs • revocable L/C • irrevocable L/C

14. Trade Finance Methods Letters of Credit (L/C) • Participating banks • issuing bank (issues L/C) • sends the L/C to the exporter’s bank (advising) • Advising bank • receives the L/C from the importer’s bank • Negotiating bank • inspects documents under the L/C • pays exporter

15. Trade Finance Methods Letters of Credit (L/C) • Draft (bill of exchange) • a promise written by one party (exporter) • requests importer to pay face amount of draft • banker’s acceptance • time draft drawn on and accepted by a bank • Bill of Lading (B/L) • serves as a receipt for shipment • key document in international shipping

16. Trade Finance Methods Letters of Credit (L/C) • Commercial invoice • exporter’s description of the merchandise sold • Variations of the L/C • standby L/C • transferable L/C • assignment of procedures

17. Trade Finance Methods Banker’s Acceptances • Bill of exchange (time draft) • drawn on (accepted) by a bank • accepting bank had obligation to pay at maturity • Benefits • exporter protected from credit risk of importer • exporter reduces exposure to political risk and to exchange controls

18. Trade Finance Methods Short-term Bank Loans • Provides financing for working capital cycle • Importer • finances acquisition of inventory (goods) from overseas • Exporter • may finance manufacture of goods for export

19. Trade Finance Methods Forfaiting • Long-term financing for importer • Transaction may involve purchase of financial obligations (bills of exchange) • without recourse to original holder (exporter) • Example: importer buys capital goods • issues promissory note to exporter • exporter sells notes to forfaiting bank

20. Trade Finance Methods Counter Trade • Reciprocal trade agreements • sale of goods to one country linked to purchase (or exchange) of goods from that same country • barter • compensation (clearing-account) arrangement • delivery of goods to one party includes the seller’s (exporter) buying back a specified amount of product from the buyer (importer)

21. Agencies that Motivate International Trade • US agencies • Export-Import Bank (Eximbank) • Private Export Funding Corporation (PEFCO) • Overseas Private Investment Corporation (OPIC)

22. Agencies that Motivate International Trade Eximbank • Mission • to finance and facilitate the export of US goods and services • to maintain competitiveness of US companies in overseas markets • Encourages private lenders to finance exports • Provides direct loans to foreign buyers

23. Agencies that Motivate International Trade Eximbank • Guarantee programs • Working Capital Guarantee Program • encourages banks to offer short-term financing • guarantees 100% of loan’s principal and interest • Medium-term Guarantee Program • encourages commercial lenders to finance the sale of US capital goods and services to foreign buyers • guarantees 100% of loan’s principal and interest

24. Agencies that Motivate International Trade Eximbank • Direct loan program • make fixed rate loans directly to foreign buyer • requires purchase of US capital goods and services • medium term (1-5) years and long term (7-10) years • Intermediary loan program • provides fixed rate funding to commercial banks • extends to foreign borrower

25. Agencies that Motivate International Trade Export Credit Insurance • Private insurance companies • work in cooperation with Eximbank • insures foreign receivables against: • nonpayment risk • commercial defaults • political risk defaults

26. Agencies that Motivate International Trade Private Export Funding Corp • Private corporation • owned by consortium of commercial banks • finance large projects with backing of Eximbank bank bank bank bank bank

27. Agencies that Motivate International Trade Overseas Private Investment Corp • Federal agency • insures direct US investments against • currency inconvertibility • expropriation • other political risks

28. Summary • Common payment methods for international trade are: • prepayment • letters of credit • drafts • consignment • open account

29. Summary • Popular financing methods of international trade are: • accounts receivable financing • factoring • letters of credit • banker’s acceptances • short-term bank loans • forfaiting • countertrade

30. Summary • Major agencies facilitating international trade are: • Export-Import Bank • Private Export Funding Corporation • Overseas Private Investment Corporation