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 2
CHAPTER OVERVIEW: I. PAYMENT TERMS
II. DOCUMENTS III.FINANCING TECHNIQUES IV. GOVERNMENT SOURCES OF EXPORT FINANCING AND CREDIT INSURANCE V. COUNTERTRADE 3
PAYMENT TERMS I. PAYMENT TERMS A. Five Principal Means: 1. Cash in advance 2. Letter of Credit 3. Drafts 4. Consignment 5. Open Account 4
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 5
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 6
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 7
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 8
PAYMENT TERMS 4. a. b. c. d. e. f.
Types of L/Cs documentary non-documentary revocable irrevocable confirmed transferable 9
PAYMENT TERMS D. DRAFTS 1. Definition: - unconditional order in writing - exporter’s order for importer pay - at once (sight draft) or - in future (time draft) 10
PAYMENT TERMS 2. 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 acceptance) 11
PAYMENT TERMS 3. Types of Drafts a. sight b. time c. clean (no documents needed) d. documentary 12
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 13
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. 14
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 16
DOCUMENTS B. Bill of Lading Three functions: 1. Acts as a contract to carry goods. 2. Acts as a shipper’s receipt 3. Establishes ownership over goods if negotiable type. 17
DOCUMENTS 2. a. b. c. d. e. f.
Type of Bills Straight Order On-board Received-for-shipment Clean Foul 18
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.
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. 20
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). 23
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. 24
FINANCING TECHNIQUES 4. 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