Trade Finance by benbenzhou


									Trade Finance
 When an exporter sells goods to an
  importer and has to allow the buyer a
  credit period before having the
  payment for the goods, the seller may
  suffer a cash shortage.
 When an importer buys goods from an
  exporter and has to pay the seller
  immediately on receipt of the
  documents or goods, the importer may
  encounter a cash flow problem.
Trade Finance
 Therefore, banks and finance
  companies offer different kinds to
  facilities to importers and exporters in
  order to solve their problems of
  insolvency. The cash granted in forms
  of loans and advances assists the
  liquidity position of an importer or an
Export Facilities - Overdraft
 The overdraft facility for the current account
  might be unsecured or secured by the
  accountee’s property or personal guarantee.
  Overdraft is used as a short-term finance to
  assist cash flow because the interest rate is
  high. There is a limited amount provided
  over a period of time which is subject to
  review annually. Overdraft interest is
  charged only on the actual amount
  overdrawn on a daily basis. Therefore,
  overdraft is suitable for customers with
  temporary liquidity needs and is very flexible.
  Export Facilities - Packing loan
Packing loan is offered by a banker to an exporter to
   finance the purchase of raw materials for producing
   the goods to be exported or the goods for resale.
   So it is a pre-shipment finance. The exporter must
   provide information required like the Sales Contract
   (for D/P or D/A) or the Documentary Credit for the
   transaction in order to apply for the packing loan.
   A packing loan may be granted against the deposit
   of the documentary credit as the collateral. Under
   the packing loan agreement, the customer must
   present the shipping documents to the bank
   granting the loan before the latest shipment date
   and expiry date of the documentary credit.
 Export Facilities - Advance
 against collection
 It is a post-shipment finance. The
  remitting bank agrees to advance a certain
  percentage of the value of the goods under
  a D/P or D/A collection to the exporter
  before obtaining payment from the
  importer. The interest might be deducted
  from the amount if the payment date is
 Export Facilities - Negotiation of
 Documentary Credit documents
 (with or without recourse)
 The negotiating bank offers advance to the
  exporter on the basis of the documents sent for
  payment under an irrevocable letter of credit
  and obtains reimbursement from the paying
  bank or issuing bank. The advance may be a
  certain percentage of the amount of the bill of
  exchange. For negotiation with recourse, if
  payment is not ultimately obtained from the
  issuing bank or paying bank, the negotiating
  bank will be able to claim repayment from the
  beneficiary of the advance plus interest.
 Export Facilities - Negotiation of
 Documentary Credit documents
 If the documents are presented for
  negotiation without recourse, it is the
  responsibility of the negotiating bank to
  check the documents and to make the
  judgment that the documents are complied
  with the terms and conditions of the
  documentary credit. Because once it has
  paid the bill, it has no right of recourse to
  the exporter.
 Export Facilities - Bills discounted under
 documentary credit available by acceptance
 An acceptance credit requires the bills of
  exchange to be drawn on the issuing bank or a
  paying bank in the beneficiary’s country. The
  beneficiary presents the draft and the shipping
  documents for acceptance. After checking the
  documents and accepting the bill of exchange,
  the beneficiary may ask his bank to discount the
  bill of exchange in order to get immediate fund
  to assist his liquidity. The discounted bill of
  exchange will be kept by the bank until maturity
  to obtain payment from the issuing bank or the
  paying bank.
 Export Facilities - Acceptance credit
 facility under documentary collection
 Similar to documentary acceptance credit, when
  the exporter engages in a series of transactions
  with the importer, he may apply for an
  acceptance credit line from his bank with the
  documents under documentary collection as
  security. Then the exporter is authorized to
  draw a term bill on his bank, acting as the
  acceptance house, which is processing the
  documentary collection for him. This bill of
  exchange is separate from the underlying trade
  bill of exchange which is drawn on the importer.
  When the bill has been accepted by his bank, it
  becomes an “eligible bill”.
 Export Facilities - Acceptance credit
 facility under documentary collection
 The exporter will discount it with a discount
  house, which can be another commercial
  bank, a merchant bank or a finance
  company, at a fine rate of interest. Then
  his account will be credited with the face
  value of the bill less discount charges and
  acceptance commission.
 Export Facilities - Acceptance credit
 facility under documentary collection
 At the maturity date, the discount house will
  present the eligible bill to the acceptance
  house for payment. By this time, the
  exporter’s bank (i.e. the acceptance house)
  should have obtained the reimbursement from
  the importer under the trade bill. An
  acceptance credit is usually granted on a with-
  recourse condition. The bill of exchange
  drawn by the exporter on his bank must have
  an expiry date later than that of the trade bill
  of exchange under the documentary collection.
 Export Facilities - Factoring
 Factoring is the purchase of trade debts
  (accounts receivables) by a finance company,
  with or without recourse, after deducting the
  finance company’s administration fee and the
  interest of the advance. The seller obtains
  immediate cash before the buyer’s payment for
  the goods sold on Open Account. Some
  factoring companies also provide their clients
  with a sales ledger accounting service and bad
  debt protection.
 Export Facilities - Factoring
 Factoring serves young growing companies in
  the early stage of development to obtain
  finance when their owners have few tangible
  personal assets to support the companies for
  expansion. Instead of undertaking the credit
  control function, they can concentrate their
  effort in production and marketing.
 Export Facilities - Factoring
 Firstly, the seller prepares an invoice to the
  factor to have an assignment stamp on the
  invoice which details that the debt has been
  assigned to the factor. Secondly, the invoice is
  sent to the buyer. The factor releases the
  agreed percentage of the invoice value, usually
  up to 80%, with the customer after charging an
  administration fee for the credit control and a
  discount rate which is the equivalent of bank
  interest. When the invoice is due, the factor
  receives the payment from the buyer. The
  unfinanced portion of the invoice value 20% is
  returned to the customer.
 Export Facilities - Factoring
 With a recourse factoring, if the factor is not
  paid by the buyer when the invoice is due, the
  customer has to return the advance to the
  factor. With a non-recourse factoring, the
  customer receives the added benefit of
  protection against bad debts. But the
  customer has to pay the factor a bad debt
  protection premium.
 Import Facilities - Import loan
 Import loan is offered by a banker to an
  importer for D/P or D/A transactions, which
  might be secured by the importer’s
  property or by the imported goods only.
  The bank will pay the exporter immediately
  under D/P at sight or at maturity of the
  draft under D/A on behalf of the importer.
  Then the importer will repay the bank at
  maturity of the loan.
 Import Facilities - Shipping
 The importer’s bank gives a guarantee to the
  carrier that the responsibility for the goods can
  be transferred to the bank, which enables the
  importer to obtain delivery of the goods without
  presentation of the bill of lading. Shipping
  Guarantee is often used when the goods arrive
  at the destination before the receipt of the
  shipping documents. A shipping guarantee is
  usually a pre-printed form provided by the
  shipping company signed by the importer and
  countersigned by the importer’s bank.
 Import Facilities - Shipping
 Because the bank will lose physical control
  of the goods upon signing a shipping
  guarantee, it requires protection such as
  full margin of deposit or a trust receipt line.
 Import Facilities - Trust Receipt
 The bank pays the seller for the goods on
  behalf of the buyer and obtain repayment of
  the amount plus interest from the buyer at the
  maturity of the T/R. By the trust receipt, the
  customer agrees to hold the proceeds of sale
  of the goods as the banker’s security in place
  of the goods themselves. A trust receipt
  should only be used in the case where the
  goods were previously in the actual or
  constructive possession of the banker and
  were duly pledged to the banker.
 Import Facilities - Trust Receipt
 Trust Receipt is usually granted with the
  documentary credit line. The importer who
  takes delivery of goods against a T/R
  agrees to hold the goods in trust for his
  bank and acknowledges the bank’s interest
  in the goods. He also undertakes to repay
  the bank from the sales proceeds.
 Import Facilities - Hire purchase
 Hire purchase is also called instalment
  finance. The seller receives payment
  immediately from the bank or finance
  company while the buyer obtains the goods
  immediately and pays for the goods by
  instalments. The ownership of the goods
  will conditionally passed to the buyer after
  the payment of the last instalment.
 Import Facilities - Forfaiting
 Forfaiting is a method of providing
  medium-term finance to the importer for
  capital goods by banks or finance

Firstly, the exporter negotiate with the importer who
    wants medium-term finance for the purchase of
    the machinery or equipment.
 Import Facilities - Forfaiting
Secondly, the importer must make a down-payment
  (deposit) for the purchase, and balance is to be
  paid by regular instalments within a period of 5
  years to 7 years. Thirdly, the importer has to issue
  a series of promissory notes to the exporter, or
  accept a series of bills of exchange drawn by the
  exporter. Fourthly, the exporter’s bank acts as the
  forfaiter who discounts the series of promissory
  notes or bills of exchange at a fixed or floating
  interest rate. So that the exporter receives cash
  immediately from the forfaiter while the importer
  can obtain the machinery or equipment
  immediately. Finally, the importer pays for the
  promissory notes or bills of exchange on their
  maturity dates.
 Import Facilities - Leasing
 Leasing is used for capital goods including
  aircrafts, ships, industrial equipment,
  construction equipment, etc. A lease is a
  contract of hiring of goods whereby the
  owner of the goods, the leasor, delivers the
  goods to its customer, the leasee, who
  obtains possession of and the right to use
  the goods but not the ownership in
  consideration of the payment of rental.
 Import Facilities - Leasing
 Firstly, the customer signs a Lease Contract
  with a leasing company for the capital goods.
  Secondly, the leasing company pays the seller
  for the goods immediately after delivery. Then,
  the leasee pays rentals to the leasing company
  periodically for the use of the capital goods
  which is still owned by the leasing company.
  Lastly, the leasing company will usually sell the
  capital goods to the leasee after a certain
  period of time or to another party who wants to
  buy the capital goods second-handed.
 Import Facilities - Leasing
 There are some advantages of leasing. Firstly,
  leasing provides up to 100% of the cost of the
  capital goods and no deposits are required from
  the leasee. Secondly, the lease rentals are tax
  deductible. Thirdly, lease is not a borrowing
  and does not use up the customer’s capital or
  credit lines. Lastly, if there are tax allowance
  to the lessor arising from the ownership of the
  capital goods, the costs of leasing can even be
  reduced as compared to the hire purchase.
 Export Credit Insurance
 In today's increasingly competitive trading
  environment, the offer of credit payment terms
  seems inevitable if exporters seek to grow their
  business. Therefore, export credit insurance
  helps to safeguard an exporter's interests while
  promising wider access to trade financing.
  Export credit insurance provides protection
  against the risks of non-payment involved when
  offering credit terms to overseas buyers.
 Hong Kong Export Credit Insurance
 In Hong Kong, the Export Credit Insurance
  Corporation (ECIC) has made focused efforts to
  enhance the professional standards of its credit
  risk assessment to increase the confidence of the
  banking community in accepting ECIC policies
  as valid collateral discounted against export bills.
  In fact, most banks in Hong Kong have always
  been willing to accept ECIC policies as
  secondary collateral for export loans.
 Hong Kong Export Credit Insurance
 The Hong Kong Export Credit Insurance
  Corporation (ECIC) was created by statute in
  1966 to encourage and support export trade
  though the provision of insurance protection for
  Hong Kong exporters against non-payment risks
  arising from commercial and political events. Its
  capital is wholly-owned by the Government of
  the Hong Kong Special Administrative Region
  which also guarantees its contingent liability,
  currently standing at $12.5 billion.
 Hong Kong Export Credit Insurance
 ECIC was established under the Hong Kong
  Export Credit Insurance Corporation Ordinance
  (Chapter 1115). The Corporation provides a
  wide range of insurance facilities to Hong Kong
  exporters of both goods and services who trade
  with overseas buyers on credit terms, usually of
  up to 180 days. The facilities cover two main
  types of non-payment risks for goods exported
  and services rendered arising from buyer risks
  and country risks.
 Hong Kong Export Credit Insurance
 When an exporter is engaged in export trading
  on credit payment terms, such as Document
  against Payment (D/P), Documents against
  Acceptance (D/A) and Open Account (O/A), he
  is exposed to "non-payment" risks.
  Unforeseeable political, social and commercial
  factors can also prevent payments from the
  importer to the exporter.
 Hong Kong Export Credit Insurance
Risks covered can be classified as buyer risks and
   country risks. Buyer risks include:
       Insolvency and bankruptcy
     Default in payment
     Failure or refusal to take delivery of goods
 Hong Kong Export Credit Insurance
Country risks include:
      Blockage or delay in foreign exchange
      Cancellation of import licences
      Import bans
      Payment moratorium
    War, revolution, riot and natural disaster
 Hong Kong Export Credit Insurance
ECIC facilities cover not only exports shipped and
  re-exported from Hong Kong, but also those
  transported directly from suppliers' countries to
  their destination without passing through Hong
  Kong. The indemnity provided is normally 90%
  of the loss incurred.
 Comprehensive Cover Policy
The most popular ECIC product is the Comprehensive
  Cover Policy, which applies to the export and re-
  export of goods from Hong Kong, and to the
  external trade of goods manufactured outside Hong
  Kong, on credit periods of up to 180 days. Tailor
  made facilities or variations on the standard cover
  are available. Medium and long term cover may
  also be offered to cover exports of capital goods for
  credit periods of up to 5 years or even longer if
 Comprehensive Cover Policy
All protection commences from the date of shipment.
   The CCP covers both your domestic exports and re-
   exports from Hong Kong or from the following
   countries or areas:
       China                     Singapore
       Indonesia           South Korea
       Macau               Sri Lanka
       Malaysia            Taiwan
       Philippines               Thailand
 Comprehensive Cover Policy
For all events of loss, the maximum percentage of
   indemnity is 90%.
  For insolvency or bankruptcy of the buyer, claims are
   settled as soon as all relevant documents are submitted.
  Where the buyer fails to pay for goods he has taken
   delivery of, claims are settled 4 months from the due
   date of payment.
  Where the buyer fails or refuses to take delivery of the
   goods, claims are settled immediately after the resale of
For any other event of loss, claims are settled 4 months
   after the occurrence of the event.
 Comprehensive Cover Policy
Premium rates are calculated on the basis of the
   volume of insurable business, the spread of risks,
   the destination and the terms of payment. In
   general, the riskier the country and the longer
   the credit periods, the higher the premium rates.
 Cover on Sales to Oversea Buying
 Office in Hong Kong
There has been a tendency for overseas buying
  offices in Hong Kong to act as the principals in
  their own right in transactions with local
  manufacturers or suppliers. Where credit sales
  are involved, the local manufacturer is exposed
  to the risks of non-payment and has no legal
  right to pursue payment from the parent
  company of the buying office.
 Cover on Sales to Oversea Buying
 Office in Hong Kong
To protect the exporters, ECIC has created a facility to
  cover the credit risks arising from sales by Hong Kong
  manufacturers and suppliers to buying offices set up in
  Hong Kong. To be eligible for cover, the goods
  involved in the transaction must be intended for export
  to the parent company of the buying office or the
  parent's designated consignees. Documentary evidence
  such as contracts, transport documents, export
  declarations, etc. is normally sufficient for this purpose.
 Cover on Sales to Local Exporters
It is a common practice for Hong Kong
   manufacturers to supply goods to local exporters
   who in turn sell the goods to overseas buyers.
   Where credit sales are involved, the local
   manufacturer is exposed to the risks of non-
   payment in the event the local exporter defaults
   or becomes insolvent. Therefore ECIC has
   created a facility to cover the credit risks arising
   from sales by Hong Kong manufactures to
   exporters in Hong Kong.
 Small and Medium Enterprises Policy
Hong Kong owes much of its success to the flexibility and
  agility of the small and medium enterprises (SMEs)
  which make up most of the firms in the services sector.
  SMEs in general however are lack of manpower. Whilst
  devoting their main energy towards new business
  acquisition, they tend to overlook the risks inherent.
  The Small and Medium Enterprises Policy gives the
  SMEs a comprehensive protection over accounts
  receivable from exported goods or services.
 Cover on Export of Services
Services are tradable internationally and
  increasingly so. To keep up the momentum of
  growth, Hong Kong also needs to promote and
  support the export of services in order to
  enhance its position as an international
  commercial and financial centre
 Cover on Export of Services
ECIC provides comprehensive protection to the
  Hong Kong service sector when rendering
  services to overseas clients on credit terms.
  Tailor-made policies will now be available to
  cater for the unique requirements of the service
  industry. Cover usually starts on the date of
  rendering services.
 Other functions of ECIC
Apart from insurance cover, ECIC provides a credit
  advisory service to exporters, offering advice on the
  extent of credit which it is prudent of them to offer their
  buyers. The service draws on a computerized
  worldwide database that includes some 70,000 buyers,
  whose credit-worthiness is regularly monitored by
  ECIC’s underwriters. The credit information is derived
  from an international network made up of credit
  information agencies, banks and other credit insurers.
 Other functions of ECIC
Insurance policies issued by ECIC are accepted by
   the banking community as useful collateral for
   discounting export bills. The protection
   accorded to a policyholder may be extended to
   the policyholder's bank by a letter of authority,
   which enables claims to be paid directly to the
   bank and can be instrumental in helping
   policyholders obtain the banking facilities they
 Other functions of ECIC
With a worldwide network of lawyers and debt-
  collectors available to call on, the ECIC is in
  strong position to assist in solving payment
  problems and advising policyholders on
  practical actions for preventing or minimizing
  losses wherever they trade.
 Tutorial Exercise
Distinguish between short-term and long-term
   trade finance from the chapter.
Discuss the advantages and disadvantages of
   the following import facilities :
 Factoring
 Trust Receipt
 Shipping Guarantee
 Short-term Trade Finance
Packing Loan
Advance against collection
Negotiation of Documentary Credit documents
Discounting Bill of Exchange
Acceptance Credit Facility
Short-term Trade Finance
Import Loan
Shipping Guarantee
Trust Receipt
Long-term Trade Finance
Hire purchase
Advantages of Factoring to the
 Factoring service allows the seller to be
  more competitive in the market by
  granting credit terms to the buyers.
 Factoring service enhance the seller’s
  cash flow.
 Factoring service leads to a gain in
  controlling administrative costs and
  improvement in debt management. The
  exporter can concentrate on
  manufacturing, marketing, etc.
Disadvantages of Factoring to the
 The factoring charges and interests are
  expensive to the seller which reduce the
  profit margin.
 There may be adverse effect on the
  seller’s image because the factor deals
  with the overseas buyer in debt collection.
  Therefore, invoice discounting is preferred
  because the overseas buyer may be
  unaware that the documents are
  purchased by the finance company.
Advantages of Trust Receipt
 T/R allows the importer to take delivery of
  the goods for further processing or sale
  before paying for the goods, which
  enhances the importer’s liquidity.
 This trade finance is self-liquidating in the
  sense that the customers repay the bank
  from the sales proceeds.
Disadvantages of Trust Receipt
 T/R is granted to customers of high
  integrity or against adequate collateral.
 T/R is a short-term trade finance, overdue
  interest is high.
 The bank loses physical control of the
 The customer’s credit-worthiness may
  worsen or the goods may be obsolete, so
  the security dependent on the goods may
  be risky to the bank.
Advantages of Shipping Guarantee
 The importers can possess the goods
  immediately upon arrival.
 The importers can avoid paying
  demurrage charges.
Disadvantages of Shipping
 The importer must pay the bill even there
  are discrepancies in the documents.
 Margin deposit or Trust Receipt may be
  required to support the shipping

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