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Multinational Financial ManagementAlan Shapiro7th EditionJ.Wiley & Sons Power Points by Joseph F. Greco, Ph.D. California State University, Fullerton
CHAPTER 18 FINANCING FOREIGN TRADE
CHAPTER OVERVIEW: I. PAYMENT TERMS II. DOCUMENTS III. FINANCING TECHNIQUES IV. GOVERNMENT SOURCES OF EXPORT FINANCING AND CREDIT INSURANCE V. COUNTERTRADE
I. PAYMENT TERMS I. PAYMENT TERMS A. Five Principal Means: 1. Cash in advance 2. Letter of Credit 3. Drafts 4. Consignment 5. Open Account
PAYMENT TERMS B. Cash in Advance 1. Minimal risk to exporter 2. Used where there is a. Political unrest b. Goods made to order c. New unfamiliar customer
PAYMENT TERMS C. Letter of Credit (L/C) 1. A letter addressed to seller a. written and signed by buyer’s bank b. promising to honor seller’s drafts. c. Bank substitutes its own commitment d. Seller must conform to terms
PAYMENT TERMS 2. Advantages of an L/C to Exporter a. eliminates credit risk b. reduces default risk c. payment certainty d. prepayment risk protection e. financing source
PAYMENT TERMS 3. Advantages of L/C to Importer a. shipment assured b. documents inspected c. may allow better sales terms d. relatively low-cost financing e. easy cash recovery if discrepancies
PAYMENT TERMS 4. Types of L/Cs a. documentary b. non-documentary c. revocable d. irrevocable e. confirmed f. transferable
PAYMENT TERMS D. DRAFTS 1. Definition: - unconditional order in writing - exporter’s order for importer to pay - at once (sight draft) or - in future (time draft)
PAYMENT TERMS 2. Three Functions of Drafts a. clear evidence of financial obliga- tion b. reduced financing costs c. provides negotiable and uncondi- tional financial instrument (ie. May be converted to a banker’s acceptance)
PAYMENT TERMS 3. Types of Drafts a. sight b. time c. clean (no documents needed) d. documentary
PAYMENT TERMS E. CONSIGNMENT 1. Exporter = the consignor 2. Importer = the consignee 3. Consignee attempts to sell goods to a third party; keeps some profit, remits rest to consignor. 4. Use: Between affiliates
PAYMENT TERMS F. OPEN ACCOUNT 1. Creates a credit sale 2. To importer’s advantage 3. More popular lately because a. major surge in global trade b. credit information improved c. more global familiarity with exporting.
PAYMENT TERMS 4. Benefits of Open Accounts: a. greater flexibility in making a trade b. lower transactions costs 5. Major disadvantage: highly vulnerable to government currency controls.
II. DOCUMENTS II. DOCUMENTS USED IN INT’L TRADE A. Four most used documents 1. Bill of Lading (most important) 2. Commercial Invoice 3. Insurance Certificate
DOCUMENTS B. Bill of Lading Three functions: 1. Acts as a contract to carry the goods. 2. Acts as a shipper’s receipt 3. Establishes ownership over goods if negotiable type.
DOCUMENTS 2. Type of Bills a. Straight b. Order c. On-board d. Received-for-shipment e. Clean f. Foul
DOCUMENTS C. COMMERCIAL INVOICE Purpose: 1. Lists full details of goods shipped 2. Names of importer/exporter given 3. Identifies payment terms 4. List charges for transport and insurance.
DOCUMENTS D. INSURANCE 1. Two Categories: a. Marine: transport by sea b. Air: transport by air 2. Insurance Certificate issued to show proof of insurance 3. All shipments insured today.
DOCUMENTS E. CONSULAR INVOICE Local consulate in host country issues: • a visa for the exporter’s invoice • requires fee to be paid to consulate
III. FINANCING TECHNIQUES III. FINANCING TECHNIQUES A. Four Types: 1. Bankers’ Acceptances a. Creation: drafts accepted b. Terms: Payable at maturity to holder
FINANCING TECHNIQUES 2. Discounting a. Converts exporters’ drafts to cash minus interest to maturity and commissions. b. Low cost financing with few fees c. May be with (exporter still liable) or without recourse(bank takes liability for nonpayment).
FINANCING TECHNIQUES 3. Factoring -firms sell accounts receivable to another firm known as the factor. a. Discount charged by factor b. Non-recourse basis: Factor assumes all payment risk. c. When used: 1.) Occasional exporting 2.) Clients geographically dispersed.
FINANCING TECHNIQUES 4. Forfaiting a. Definition: discounting at a fixed rate without recourse of medium-term accounts receivable denominated in a fully convertible currency. b. Use: Large capital purchases c. Most popular in W. Europe
IV. GOVERNMENT SOURCES OF EXPORT FINANCING IV. GOVERNMENT SOURCES OF EXPORT FINANCING AND CREDIT INSURANCE A. Export-Import Bank of the U.S. -known as Ex-Im Bank -finances and facilitates U.S. exports only.
GOVERNMENT SOURCES OF EXPORT FINANCING 1. Ex-Im Bank Programs: a. Direct loans to exporters b. Intermediate loans to exporters c. Loan guarantees d. Preliminary commitments e. Political and commercial insurance
GOVERNMENT SOURCES OF EXPORT FINANCING B. Private Export Funding Corporation (PEFCO) 1. Finances large sales from private sources 2. May purchase loans of U.S. importers 3. ExIm Bank provides loan guarantees.
GOVERNMENT SOURCES OF EXPORT FINANCING C. Foreign Credit Insurance Association (FCIA) 1. Offers commercial and political risk insurance 2. When insured, exporter often able to obtain financing faster.
V. COUNTERTRADE V. COUNTERTRADE A. Three Specific Forms: 1. Barter direct exchange in kind 2. Counterpurchase sale/purchase of unrelated goods but with currencies 3. Buyback repayment of original purchase through sale of a related product.
COUNTERTRADE B. When to Use Countertrade 1. With “soft-currency” developing countries 2. When foreign contractor must perform.