1 Multinational Financial Management Alan Shapiro 10 th Edition John Wiley & Sons, Inc. PowerPoints by Joseph F. Greco, Ph.D. California State University, Fullerton

CHAPTER 18 Financing Foreign Trade

PAYMENT TERMS I.PAYMENT TERMS A.Four Principal Means: 1.Cash in advance 2.Letter of Credit 3.Drafts 4.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 and 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.pre-shipment (cancellation of the order) risk protection

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 discrepancies, e. if discrepancies, easy cash recovery

PAYMENT TERMS 4.Types of L/Cs a.documentary b.irrevocable c.confirmed

PAYMENT TERMS D.DRAFTS 1.Definition: a. unconditional order in writing b. exporter’s order for importer to pay c. at once (sight draft) or in future (time draft)

PAYMENT TERMS 2.Three Functions of Drafts a.clear evidence of financial obligation b.reduced financing costs c.Can be a financial product for investors (i.e. May be converted to a banker’s acceptance)

PAYMENT TERMS 3.Types of Drafts a.sight b.time

PAYMENT TERMS E.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

DOCUMENTS II.DOCUMENTS USED IN INT’L TRADE A.Three 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

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.Marine Insurance Policy covers sea as well as air transport 2.Insurance Certificate issued to show proof of insurance

SHORT-TERM FINANCING TECHNIQUES III.FINANCING TECHNIQUES A.Four Types: 1.Bankers’ Acceptances a. Creation: drafts accepted b. Terms: Payable at maturity to holder

SHORT-TERM 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)

SHORT-TERM 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

SHORT-TERM FINANCING TECHNIQUES 4.Forfaiting a.Definition: discounting at a fixed rate without recourse for medium-term accounts receivable b.Use: Large capital purchases c.Most popular in W. Europe

GOVERNMENT SOURCES 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 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 2.Restrictions: a. At least 51% U.S. content b.No armaments c.Must be environmentally friendly

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 developing countries with “soft- currency” 2.when tariffs or quotas prevent trade

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