1. Multinational Financial Management Alan Shapiro 7th Edition J
Multinational Financial Management Alan Shapiro 7th Edition J.Wiley & Sons
Power Points by
Joseph F. Greco, Ph.D.
California State University, Fullerton

2. FINANCING FOREIGN TRADE
CHAPTER 18
FINANCING FOREIGN TRADE

3. CHAPTER OVERVIEW: I. PAYMENT TERMS II. DOCUMENTS
III. FINANCING TECHNIQUES
IV. GOVERNMENT SOURCES OF EXPORT FINANCING AND CREDIT INSURANCE
V. COUNTERTRADE

4. I. PAYMENT TERMS I. PAYMENT TERMS A. Five Principal Means:
1. Cash in advance
2. Letter of Credit
3. Drafts
4. Consignment
5. Open Account

5. 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

6. 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

7. 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

8. 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

9. PAYMENT TERMS 4. Types of L/Cs a. documentary b. non-documentary
c. revocable
d. irrevocable
e. confirmed
f. transferable

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

11. PAYMENT TERMS 2. Three Functions of Drafts
a. clear evidence of financial obliga- tion
b. reduced financing costs
c. provides negotiable and uncondi-
tional financial instrument
(ie. May be converted to a banker’s acceptance)

12. PAYMENT TERMS 3. Types of Drafts a. sight b. time
c. clean (no documents needed)
d. documentary

13. 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

14. 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.

15. 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.

16. 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

17. 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 if negotiable type.

18. DOCUMENTS 2. Type of Bills a. Straight b. Order c. On-board
d. Received-for-shipment
e. Clean
f. Foul

19. 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.

20. DOCUMENTS D. 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.

21. DOCUMENTS E. CONSULAR INVOICE Local consulate in host country issues:
a visa for the exporter’s invoice
requires fee to be paid to consulate

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

23. 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).

24. 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.

25. FINANCING TECHNIQUES 4. Forfaiting a. Definition:
discounting at a fixed rate without recourse of medium-term accounts receivable denominated in a fully convertible currency.
b. Use: Large capital purchases
c. Most popular in W. Europe

26. 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.

27. GOVERNMENT SOURCES OF EXPORT FINANCING
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

28. GOVERNMENT SOURCES OF EXPORT FINANCING
B. Private Export Funding Corporation
(PEFCO)
1. Finances large sales from private
sources
2. May purchase loans of U.S. importers
3. ExIm Bank provides loan guarantees.

29. GOVERNMENT SOURCES OF EXPORT FINANCING
C. Foreign Credit Insurance Association
(FCIA)
1. Offers commercial and political
risk insurance
2. When insured, exporter often
able to obtain financing faster.

30. V. 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.

31. COUNTERTRADE B. When to Use Countertrade
1. With “soft-currency” developing
countries
2. When foreign contractor must
perform.