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Financing International Trade & Transactions Dr. Katalin Csekő. Trade Finance. Trade finance is needed both by the exporter and importer Exporter: gap between time of delivery time and of the payment actually made;
Trade Finance Trade finance is needed both by the exporter and importer • Exporter: gap between time of delivery time and of the payment actually made; • Importer: gap between the time he has paid for the goods and the time the goods are sold for a profit. • Why is financing needed? • to bridge the time gaps and lapses; • to ensure the smooth operation; • to avoid cash flow problems; • Self-financing if banks are reluctant to do so;
Forms of trade financing Most common trade financing instruments are: (deferred payments) • Documentary collection; • Discounting of bills of exchange; • Documentary credit; • Factoring; • Forfeiting; • Lombard crediting;
How to finance the exporter 1. Possibilities for the exporter: • Credited by the bank, • If the export deal incorporates the use of: • Bill of Exchange; • Documentary collection; • Documentary credit; (L/C) Exporter may obtain cash: by negotiation of the documents or discounting the bill.
How to finance the exporter 2 • Payment can be done: • With recourse: the bank will have a recovery /reimbursement from the exporter if the bill of exchange remains unpaid; • Without recourse if the bank will not have the amount of the bill of exchange as to its tenor, it has no right for recovery;
How to finance the importers • Deferred payment; Money transfer without security tool at a defined time; Current-debt/liability=accounts payable; • Documents against payment type of documentarycollection; • Documentary credit with acceptance, and with deferred payment; • Bank-credit or loan;
Documentary collection 1. • Debiting vs. Documentary collection; • Usage set up by ICC→ URC 522; • Actors: • Principal= Exporter → has to bear all costs of the process; Remitting bank= seller’s bank; Presenting & Collecting bank= Buyer’s bank; • Documents: commercial vs. Financial (B/E, cheque)
Documentary collection 2. • At sight = D/P type; • Deferred payment= D/A type; • Forms: • Open account trade: goods to be delivered to the address and to the order of the buyer; • Indirect: to the address of the buyer/or forwarder and to the order or the bank; • Direct: to the address and to the order of the bank;
BILL OF EXCHANGE 1 NEGOTIABLE (Transferable) Payment INSTRUMENT; Different national regulations are based on: • UK Bills of Exchange Act 1882; • Uniform Law on Bills of Exchange, Geneva Convention 1932; (mainly Europe( • UCC; • UNCTAD Uniform Convention;
B/E Parties involved Bill of Exchange 2 • The Drawee: to whom the bill is addressed, the buyer, a bank which will pay on the buyer’s behalf; • The Drawer: the seller, the person who draws the bill; • The Payee endorses the Bill of Exchange in favor of the next beneficiary (endorsee) full or in blank; The seller is commonly the payee; • The Payee: the beneficiary, who gets the money; • The Acceptor: the drawee, as soon as he has signed his name across the Bill of Exchange/ willingness to pay the Bill of Exchange at maturity. • The Endorser: the Payee or any other person who signs his name on the back of the Bill of Exchange.
The core elements Bill of Exchange 3 • UNCONDITIONAL PROMISE OR ORDER TO PAY; • SUM CERTAIN IN MONEY; • REQUIRING THE PERSON TO WHOM IT IS ADDRESSED TO PAY, ON DEMAND, OR AT A FIXED OR DETERMINABLE FUTURE TIME, • TO OR TO THE ORDER OF A SPECIFIC PERSON= HOLDER IN DUE COURSE=FREE OF ANY CLAIM AND DEFENSES OF ANY THIRD PARTIES; • TO BEARER, HOLDER; • THE RULES OF B/E IS TO BE APPLIED TO B/L AND OTHER DOCUMENTS OF TITLE (CERTIFICATE OF INSURANCE, WAREHOUSE WARRENT)
Geneva ConventionBill of Exchange 4 The followings must be stipulated in a valid B/E: • 1.The tenor of Bill of Exchange is to be drawn up in the language the instrument; • 2.Unconditional order to pay a sum certain in money =quasi money; • 3. The name of the person who is called upon to pay = drawee; • 4. The due date of payment: at sight /deferred time; • 5. The place where payment is due; • 6. The name of the person to whom or to whose order payment is to be made= payee; • 7. The date and place where the Bill of Exchange has been issued; • 8. The signature of the person who issues the Bill of Exchange= drawer;
Negotiation of the Bill of Exchange 5 • by endorsement if there is an order clause (to the order of) or it is missing • full or • blank endorsement • Includes the physical delivery; • by cession before the notary public, if the paper not to order”.
Discount calculations Bill of Exchange 6 discount on a Bill of Exchange of USD 1.000.000,- for 91 days at 8,5% would be: discount=principal 1.000.000 x __8,5 % x 91days 360 x 100 payee gets: USD 1.000.000,- 21.486= 978.514,-USD Payee gets: principal less discount.
Promissory Note Date and Place of Issuance: Budapest, 10th September 2011. I InterkerKft. (Address, Registry. No.) pay against this promissory note to the orderof Helm Hamburg Co. (Address, Registry. No.) EUR 50.000,- FiftyThousand EUR on November 11, 2011 in BudapestatCitibank Budapest Acc. No 13-45679034 Peter.J Foldes InterkerKft Budapest
The Bill of Exchange Date and place of issue: Budapest 16th October 2011 Pay against this Bill of Exchange to the order of Smith and Co Ltd New York USD 20.000,-, Twenty Thousand USD on 16th December 2011 in New York, Credit Bank New York Account No.34519987 Drawn to: Issued by: Black and White Ltd Trader Co New York Budapest drawee drawer