Short-term Financing

							Export & Import Financing


        Chapter Twenty

        Eiteman, Stonehill, & Moffett



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Trade payment terms
 cash in advance
 draft
     bill of exchange
 letter of credit (L/C)
     bankers acceptance
 consignment
 open account

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Cash in advance
 Advantages
     least risky alternative
     risk is shifted entirely to the importer
 Disadvantages
     may be non-competitive, lose business
 preferred if goods made to order
     for purpose of financing the production


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Draft - bill of exchange
 issued and signed by the exporter (drawer)
     unconditional orders to pay (for the importer)
       on demand (sight draft)
       at a specified time in the future (time draft)
     fixes the amount of manner of payment
 time draft becomes an acceptance
     when accepted by drawee (exporter)
 L/C (promise of banker’s acceptance)
     draft (bill of exchange) accepted by bank


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Draft - types of drafts
 documentary drafts
     drafts which require supporting
      documentation
          bills of lading, invoices, etc.
     drafts accompanying trades are
      documentary
 non documentary (clean)
     non-commercial transactions


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Drafts - mechanics
 a draft extends credit
     receivable to the exporter
     payable to the importer
 exporter gives control of goods to importer
     for the signature on draft
 contract between exporter and importer
  only
 transferable (usually banker’s acceptances)
     at discount to bank, acceptance dealer
     rate lower than prime

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L/C - terms
 promise of payment issued by the
  importer’s bank
     binds the importer’s bank to pay determining
       currency of payment
       timing of payment
       amount of payment
     binds the exporter to deliver a certain product
       quantity of goods
       quality of goods
       delivery date for goods

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L/C - advantages exporter
 reduces credit risk
     the bank’s reputation is on line
 reduces political risk
     banking system is tied into the political
      system
 reduces pre-shipment risk
     contracted terms for delivery of goods



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L/C - advantages importer
 reduces delivery risk
     contract stipulates delivery terms
 bank oversees custom’s procedures
 importer can contract for better terms
     exporter’s risk substantially reduced
 prepayment by importer goes to bank
     if the shipment is not satisfactory easier
      for importer to recover payment

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L/C - types of L/Cs
 documentary L/Cs
     L/Cs which require supporting documentation
       bills of lading, invoices, etc.
     majority of L/Cs are documentary
 non documentary (clean)
     non-commercial transactions
 irrevocable L/C
     cannot be revoked except by mutual consent
 revocable (rarely used) better than nothing

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L/C - types of L/Cs con’t
 confirmed L/C by an other bank
     usually a bank in the exporter’s country
     obligates both banks to honor the obligation
 unconfirmed L/C- obligates issuing bank
 transferable L/C
     right to transfer, must be contracted
     transfer of L/C and supporting documents
 assignment
     assigning part of the proceeds to another party


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Banker’s acceptance
 acceptance of the draft by a bank
     bank substitutes its credit for importer’s credit
     if transferable - creates a negotiable instrument
       may discount this to the exporter
       resell in secondary markets
 terms
     maturities 30, 60, 90 days
 bank profits from
     fee on L/O, discount on acceptance


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Banker’s acceptance - hold
 PV of 1,000,000 usd
     less 2% annual commission
     less 9.7% wacc
                    1,000,000 usd
             P0                0.25  972,29555 usd
                                              .
                  102  1097
                   .   0.25
                            .

 exporter gets BA and holds to term
 exporter hedges transaction exposure

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Banker’s acceptance - discount
 PV of 1,000,000 usd
     less 2% commission per annum
     less 10.4% discount per annum

                     1,000,000 usd
              P0                0.25  970,750.65 usd
                   102  1104
                    .   0.25
                             .
 exporter gets BA and discounts
 exporter gets into exchange market
  now
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Mechanics of a trade
 few weeks after contract
     goods, price, quantity, quality
     production of goods financed by
          increase in input inventories, by payables
          labor inputs by accruals
     result an increase in output inventories
          payables, accruals must be paid
          payment financed by short-term financing


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Mechanics of a trade - con’t
 goods shipped
     output inventories still carried as assets
     goods, bill of lading, draft sent
     L/C sent to exporter
 delivery of goods
     goods, bill of lading, draft at customs
     time draft accepted
       by importer (acceptance)
       by importer’s bank (bankers acceptance)
     output inventories now change to receivables


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Mechanics of a trade con’t
 Banker’s acceptance may be transferable
     can be held by exporter for payment
       receivable stays on exporters books
       payable stays on importers books
     must hedge transaction exposure if it exists
 Banker’s acceptance if transferable
     can be discounted
       sold at discount to a bank or broker
               then receivable becomes cash
               payable still on importers books


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Mechanics of a trade con’t
 Risk if BA discounted
     foreign exchange exposure exists
          from time contract agreed to
          until draft is accepted by the importer’s
           bank
               BA signed
     credit risk
          higher until draft accepted (BA signed)
          lower until BA discounted


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Mechanics of a trade con’t
 Risk if L/C held to maturity
     foreign exchange exposure exists
          from time contract agreed to
          L/C matures
     credit risk
          higher until draft accepted (L/C issued)
          lower until L/C matures




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Consignment
 exporter retains title to good shipped
     importer gains possession, but not title
 very risky
     easy for importer to default on this type
      of arrangement
 terms
     whatever the importer sells is paid for
     goods not sold returned

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open account
 most flexible
     importer receives goods - a payable
     acceptance by importer sufficient
     reduces bank charges
 risky - no bank guarantee on
  payment
     importer and exporter need to have a
      good stable relationship

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Documents of trade
 bill of lading B/L
     contract between exporter and carrier
     straight B/L - consigns good to importer
     order B/L - transferable
          often serves as collateral for L/C
     on board B/L - on board being shipped
     received-for-shipment B/L
          received, but not shipped
     clean B/L - goods(externally) look
      undamaged
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Other documents
 commercial invoice
     full description of merchandise
 insurance
     open (floating) prearrangement with
      insurer to cover shipments made
          requires an insurance certificate which
           must conform to information on B/L
 consular invoice

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Factoring
 firms that buy a firm’s receivables at
  discount
     non-recourse basis - factor assumes all risk
     recourse - exporter assumes risk
 factoring fees can run from 1.75 to 2 % per
  month
     compounded from 23.14 to 26.82 % per year
     on top of this non-recourse fees can add to this




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Export financing
 export-import banks
     finance exports of goods and services
     subsidy to try to create new markets for exports
     these are not market driven
       very bureaucratic & often political
 export-credit insurance
     low cost credit insurance
     lowers the cost of borrowing by reducing risk




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Countertrade
 barter
     direct exchange of goods between two parties
 counter purchase - parallel barter
     continued sale and purchase of goods
       Finland frequently sold manufactured goods for
        raw materials (oil) with the former Soviet Union
 buyback
     repayment of exports made by the sale of
      related product


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Payment terms
 evolving instruments of international
  trade
     these instruments and methods are used
      to
          facilitate trade by exploiting comparative
           advantage
          reduce risk
               who
               how much
               its cost

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