Multinational Financial Management Alan Shapiro 7th Edition J.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: Cash in advance Letter of Credit Drafts Consignment Open Account PAYMENT TERMS B Cash in Advance Minimal risk to exporter Used where there is a Political unrest b Goods made to order c New unfamiliar customer PAYMENT TERMS C Letter of Credit (L/C) 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 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 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 a b c d e f Types of L/Cs documentary non-documentary revocable irrevocable confirmed transferable PAYMENT TERMS D DRAFTS Definition: - unconditional order in writing - exporter’s order for importer pay - at once (sight draft) or - in future (time draft) 10 to DOCUMENTS B Bill of Lading Three functions: Acts as a contract to carry goods Acts as a shipper’s receipt Establishes ownership over goods if negotiable type 17 the DOCUMENTS a b c d e f Type of Bills Straight Order On-board Received-for-shipment Clean Foul 18 DOCUMENTS C COMMERCIAL INVOICE Purpose: Lists full details of goods shipped Names of importer/exporter given Identifies payment terms List charges for transport and insurance 19 DOCUMENTS D INSURANCE Two Categories: a Marine: transport by sea b Air: transport by air Insurance Certificate issued to show proof of insurance All shipments insured today 20 DOCUMENTS E CONSULAR INVOICE Local consulate in host country issues: • a visa for the exporter’s invoice • requires fee to be paid to consulate 21 III FINANCING TECHNIQUES III FINANCING TECHNIQUES A Four Types: Bankers’ Acceptances a Creation: drafts accepted b Terms: Payable at maturity to holder 22 FINANCING TECHNIQUES 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) 23 FINANCING TECHNIQUES 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 24 FINANCING TECHNIQUES Forfaiting a Definition: discounting at a fixed rate recourse of medium-term receivable denominated convertible currency without accounts in a fully b Use: Large capital purchases c Most popular in W Europe 25 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 26 GOVERNMENT SOURCES OF EXPORT FINANCING 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 27 GOVERNMENT SOURCES OF EXPORT FINANCING B Private Export Funding Corporation (PEFCO) Finances large sales from private sources May purchase loans of U.S importers ExIm Bank provides loan guarantees 28 GOVERNMENT SOURCES OF EXPORT FINANCING C Foreign Credit Insurance Association (FCIA) Offers commercial and political risk insurance When insured, exporter often able to obtain financing faster 29 V COUNTERTRADE V.COUNTERTRADE A Three Specific Forms: Barter direct exchange in kind Counterpurchase sale/purchase of unrelated goods but with currencies Buyback repayment of original purchase through sale of a related product 30 COUNTERTRADE B When to Use Countertrade With “soft-currency” developing countries When foreign contractor must perform 31 ... TERMS Three Functions of Drafts a clear evidence of financial obligation b reduced financing costs c provides negotiable and unconditional financial instrument (ie May be converted to a banker’s