1. Chapter 18 FINANCING FOREIGN TRADE

2. Types of Risk Preshipment - Shipment - Postshipment

4. Production Process Transport To Port Port Entry Ex Works FAS INCOTERMS EXPORTER’S LOADING DOCK SHIP FOB

5. LOADED SHIP Ocean Freight is most common mode of transport PERILS OF THE SEA Shipment Risks Port Of Departure Port Of Arrival

7. Post-Shipment Risk Port Of Arrival CUSTOMS IMPORTER’S WAREHOUSE FINAL PYMT Transit to Importer

8. Initial Contact Contract Production Process Transport To Port Port Entry Pre-shipment Risks LOADING SHIP PORT EXPORT CUSTOMS

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

10. 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

11. 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

12. PAYMENT TERMS 2.Advantages of an L/C to Exporter a.eliminates credit risk b.pre-shipment (cancellation of the order) risk protection

13. 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.easy cash recovery if discrepancies

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

15. 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)

16. 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)

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

18. 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

19. 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.

20. 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

21. 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.

22. 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.

23. DOCUMENTS D.INSURANCE 1.Marine Insurance Policy covers sea as well as air transport 2.Insurance Certificate issued to show proof of insurance

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

25. 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).

26. 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.

27. 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

28. 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.

29. 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

30. GOVERNMENT SOURCES Restrictions: At least 51% U.S. content No armaments Must be environmentally friendly

31. 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

32. COUNTERTRADE B.When to Use Countertrade 1.with developing countries with “soft- currency” 2.when tariffs or quotas prevent trade