1 EXPORT - IMPORT FINANCE

2 International Trade Finance  Profit is not a sole factor to determine the company’s survival  Understand the importance of “Cash Flow”  Exporters always prefer advance payment  Importers always prefer open account  Letter of Credit is a compromise  Mismatch of Cash outflow and Cash inflow

3 Providers of the Trade Finance  Exporter Open account Collection Consignment  Importer Advance payment Red Clause L/C  Bank Loan L/C Account Receivables Financing Packing credit Trust receipt Shipping Guarantee  Financial Institutions Factoring Forfaiting Leasing Hire Purchase

4 Account Receivable Financing  Or invoice financing  a short term, post shipment export financing  loan against account receivable as a collateral  The exporter still has to collect the payment from the buyer on his own and pay back the money to the bank

5 Factoring  A purchase of exporter’s account receivable in the form of invoices at a discount from their face value

6 High cost of extending credit  Exporter is forced to extend credit terms to its customers  30, 60, 90 days of sometimes 180 days  Exporter has become a “bank” with interest free  The result, Cash Flow Crunch  The factoring process; Cash now, no waiting

7 Factoring VS Loan  Factoring is not a loan  Invoices are business assets  With factoring, you are actually sell those assets, not receiving a loan against them  The money you receive from factor will not have to pay back

8 Factoring VS Account Receivable Financing  With Account Receivable Financing, you receive a loan against which your invoices are pledged as collateral  This is money which will have to be repaid at some point in the future  With Factoring, you are selling your asset  There is nothing to repay

9 Who qualifies?  Factors actually receive their money from the importer (customers)  As a result, they are more interested in customers’ creditability as opposed to that of exporters

10 Factoring : Classifications  Non-recourse  Recourse  Modified recourse The difference has to do with who is at risk in case the customer defaults on payment

11 Non-Recourse  The factor assumes the risk of customer non-payment  The exception Quality & Quantity dispute Dispute not related to financial reason

12 Recourse  When the exporters have a high number of customers that are considered poor credit  The factor has recourse against exporter if the importer defaults on payment

13 Modified recourse  The risk is shared between exporter and the factor  In the event of default payment, the factor will have recourse against the export up to a pre-set limit

14 Factoring Diagram Exporter Importer Transportation 1. Sales contract : Open Account 180 days 2. Shipment Factor 4. Copy of Invoice 3. Original Invoice With instruction to pay factor 5. Advance portion (let’ say 85%) 6. Payment at maturity date 7. Remaining Payment minus factoring fee

15 Summary of Factoring  Normally applied to the payment terms by open account  Financial situation in the country must be well developed  Factors concerning image of the exporter

16 Forfaiting  A purchase of a series of credit instruments such as draft drawn under time letter of credit, bill of exchange, promissory note  It has been done on a non-recourse basis  Operated on a discount basis  Available up to 100% of the contract value

17 When should forfait be used?  Higher amount than factoring, normally more than $100,000  Normally fixed rate, medium to long term finance

18 Information needed  Who is the buyer  What goods are being sold  Value and currency of contract  Due date and duration of contract

19 Required documents  Copy of sales contract  Copy of signed commercial invoices  Copy of shipping documents  Letter of guarantee or aval

20 Exporter’s perspective  Advantages Improve cash flow Non-recourse Fixed rate finance No administrative expense on collection Forfeiting bear all risk of currency exchange and interest rate risk Simple documents Confidentiality  Disadvantages Regulation in importing country Difficulty in ensuring that the importer can obtain a guarantee Costly

21 Importer’s perspective  Advantages Simple documents Obtain fixed rate extended credit Improve credit lines  Disadvantages Effect of Aval : some degree on his credit line Cost of guarantee fee Costly due to forfaiting fee

22 Forfaiter’s perspective  Advantages Simple documents Assets purchases is easily transferable High margin  Disadvantages Event of default payment Creditworthiness of guanrantor Risk of currency and interest rate fluctuation

23 Financing available to the importer  Letter of Credit  Trust receipt (T/R)  Shipping Guarantee