Export FInance


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Export Finance in International Business

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Export FInance

  1. 1. Contents …. 1. Introduction ( Export Finance) 2. Methods of Payment 1. Payment in Advance 2. Open Account 3. Consignment Sale 4. Letter of Credit 5. Documentary Bills 3. Negotiation – Meaning 4. Negotiation / Collection 5. Methods in Negotiation of documents
  2. 2. Unlike any other business, export producers have to take high interest in the financial aspect of their business. Export finance involves various specialized institutions involved in the export finance business or foreign exchange transaction. It starts when an exporter gets an order from a foreign importer and end when money received by the export producers Export FinanceExport Finance
  3. 3. Methods of Payment The sale contract between the exporter and the importer must clearly specify, “when the payment will be made and how it will be made”. It depends upon a number of factors like exporters knowledge of the buyer, buyer financial capacity, the degree of the risk involved in receiving payment, foreign exchange restrictions in the importing country, demand and supply of the product to be exported, competition in the foreign market etc.
  4. 4. Most commonly used important methods of payments are ; 1. Payment in advance Under this method, an exporter may receive a bank draft or bank advice either on confirmation of order or before the shipment is made. The case when the importer will be ready to make advance payments when the buyer is unknown to the exporter and there is n trust between them. If the exporter is a monopolist in the market etc… In this system the burden of export payment is borne by the importer.
  5. 5. Open Account The exporter sends the invoice and other documents directly to the overseas buyer with a covering letter stating the amount of money to be remitted to him. The importer remitted the amount immediately. A credit period is allowed. Importer will make the payment on the expiry of the credit period. The exporter accept this order of payment of : There is keen competition among various sellers. There is a long and established relationship between the exporter and the importer. The foreign exchange regulations of the exporting country shall permit such an arrangement etc..
  6. 6. Consignment Sale The goods are shipped a foreign distributer who sell them on behalf of the exporter. The exporter retains title to the goods until they are sold, at which payment is sent to the exporter. The exporter has greatest risk and least control over the goods Receiving payment may take quite a while
  7. 7. Letter of Credit It is popular mode of payment, because it involves less risk for the exporter. The bank of the importer under take the responsibility to pay the exporter under this instruction. The writer undertaking of the importers bank to exporter is known as a letter credit. One of the important advantages of the letter of credit from the point of view of exporter is that immediately after the shipment of goods he can present the bill of exchange and other documents and obtain payment from a bank at his own center.
  8. 8. Documentary Bills The bank agrees to act as a media between the exporter and the importer The exporter agrees to submit the document to his bank along with the bill of exchanges. The documents usually required are full set of bill of lading, invoice and marine insurance policy. The exporters bank then sends the bill along with the other documents to its correspondents bank in the importers country and present the bill before the importer either for payment or for acceptance as per the terms of the bill.
  9. 9. Negotiation - Meaning After the goods has been physically loaded on board, exporter collect bill of lading, which is the primary document in the process of shipment of goods. After collecting all the relevant documents that the importer requires in terms of the contract, exporter present the document to collect payment. The process is known as negotiation of document with bank. “Presentation of documents by the exporter to the bank for collecting payments of exported goods is known as negotiation of documents or realization of export proceeds”
  10. 10. There are two methods in negotiation of documents ; 1.Negotiation Of Document Under Documentary Bill 2.Negotiation Of Documents Under Documentary Letter Of Credit
  11. 11. Negotiation Under Documentary BillsUnder this system the bank agrees to become media between the importer and the exporter. The exporter agrees to submit on documents to his bank along with one bill of exchange. The documents usually required are full set of bill of lading, invoice and marine insurance policy. The exporters bank sends the bill and the other document to the correspondent importers bank and it presents the bill before the importer either for payment or for acceptance as per the terms of the bill.
  12. 12. There Are Two Types Of Payment In Negotiation Under Documentary Bill: 1.Document Against Payment (D/P) 2.Documents Against Acceptance (D/A)
  13. 13. Documents Against PaymentThe exporters bank will send the documents to its correspondent importers bank in the importing country which will present the documents to the buyers and on payments of bill exchange, will delivers the documents to him, so that, he can take the possession of good.
  14. 14. Documents Against AcceptanceIn this case exporters correspondent bank will submit the bill of exchange to be signed by the buyer to indicate his acceptance of one payments obligation After he accept the bill, he will get possession of the documents. On the date of payment the bank will again present the bill of the buyer who then makes payments.
  15. 15. Under D/A bills, the exporter will have to wait for payment to the bill is finally paid for. But the negotiating bank are very often willing to discount the bill. Under D/P if the importer fails to accept the document by making the required payment, the document will remain in the hands of bank, and the exporter may not lose the title of goods. In such a case the exporter will have two option either to get the products back or to find out some other agent to sell the product.
  16. 16. Negotiation under letter of creditUnder L/C, the buyer (importer) instruct the bank to open documentary L/C in favor of seller (Exporter). When L/C is open to favor of exporter, exporter negotiates the documents with the negotiating bank. Negotiating bank is, the bank which pay or accept the draft of the exporter. Exporter gets on payments if the documents are in conformity with the terms of letter of credit
  17. 17. Whether there is L/C or not the exporter has to draw the bill of exchange on D/A or D/P basis in terms of contract for presenting the documents to the bank.
  18. 18. When documents can be negotiated? When the exporter present the documents the, the first thing negotiating bank does is to carefully scrutinize the documents whether they are as per the terms and conditions of L/C. The bank should exercise extreme care in verifying that there are no minor or major discrepancies in the documents. The document should also be in accordance with the interpretation of various clauses contained in the uniform customs and practices for documentary credit, application at the time of the negotiation of documents.
  19. 19. Conclusion
  20. 20. Reference International Trade and Financial Environment – M K Bhat International Business – Roger Benet, Pearson Export – Import Trade – C Ramagopal Export Management – D C Kapoor