International Business basics

1. International Corporate Finance
International Business
and Trade Finance

2. Overseas Trade
• Export
• Import
• Third country trade
• High-seas trade
• Barter trade

3. Why do companies export?
• No local market
• Better price
• Components – off-shoring
• Incentives -tax and duty
• Cheaper credit

4. Risks faced by exporters
• Payment risk
• Exchange rate risk
• Regulatory risk
• Political risk

5. Why do companies import?
• Raw material
• Components
• Trading – Supply gap
• Value addition
• Value addition and export

6. Ways of settling
Cross-Border Transactions
• Currency of Invoicing (exchange rate risk
or forex risk)
• Advance Payment
• Bills for collection
• Bills discounting
• Use of LCs
• Negotiation of Bills / drafts drawn under
LCs
• INCO Terms
• Counter- Trade
• High Seas Trade

7. Risks importers face
• Delivery risk –
 Goods may not be delivered after
payment
• Exchange rate risk
• Quality risk
• Price risk
• Regulatory risk

8. Managing Payment Risk
• Advance Payment
• Bill for Collection …thro a bank
• Bill Discounting
• Factors / Forfaiting

9. Commercial Documents
• Sale Purchase Contract, Purchase
Order
• Invoice
• Bill-of-Exchange, Draft
• Sight Bill, Usance Bill / Time Draft
• Consignment Sale
• Counter Trade
• High-seas sale

10. SBI
Delhi
Seller
SBI
Coimbatore
Buyer
Sale / Purchase contract
Advice
Bills for Collection -- flow chart
Account Credited
Documents
Documents
against
Payment
Intimation
Documents

11. SBI
Delhi
Seller
SBI
Coimbatore
Buyer
Sale / Purchase contract
Collection of Usance Bills- flow chart
Documents
taken and
A/c
Credited
Docs
against
Acceptance
Intimation
Documents

12. SBI
Delhi
Seller
SBI
Coimbatore
Buyer
Sale / Purchase contract
Bills Discounted-- flow chart
Documents
taken and
A/c
Credited
Documents
against
Payment
Intimation
Documents

13. SBI
Delhi
Seller
SBI
Coimbatore
Buyer
Sale / Purchase contract
Discounting of Usance Bills- flow chart
Documents
taken and
A/c
Credited
Doc against
Acceptance
Intimation
Documents
Payment

14. SBI
INDIA
EXPORTER
INDIA
SBI
NEW YORK
IMPORTER
ITALY
RECEIVE
USD
PAY INR
SELLS GOODS
ADVICE
Export transaction -- flow chart

15. SBI
INDIA
IMPORTER
INDIA
SBI
NEW YORK
SUPPLIER
JAPAN
PAY USD
Pays Rupees
OWES MONEY
ADVICE
Import Transaction -- flow chart

16. Mechanics of Documentary Credit
IMPORTER EXPORTER
Contract
OPENING
BANK
ADVISING/
NEGOTIATING
BANK
SHIPPING
COMPANY
GOODS
DOCS
DOCUMENTS
OPEN CREDIT
DOCUMENTS
PAYMENT PAYMENT
GOODS
DOCS

17. Important elements of a credit
• Name of issuing bank, confirmation??
• Irrevocable??
• Amount of credit
• Details of goods and unit price.
• Place and time of expiry
• Last date of shipment, submission of
documents.
• Terms of payment – sight, usance
• Documents required - Specified
• Part-shipment/ trans-shipment

18. Benefit to exporters & importers
Exporter:
• Exposure to Bank
• Opening Bank to pay without reference to
the applicant (importer)
Importer
• Ensure proper documents
• Can include “quality inspection” certificates
• Can negotiate for better price

19. Factoring
• A Financial Intermediary
• That buys invoices of a manufacturer
or a trader, at a discount, and
• Takes responsibility for collection of
payments.

20. Factoring Services
• Follow-up and collection of
Receivables
• Help in getting information and credit
line on customers (credit protection)
• Sorting out disputes, if any, due to
his relationship with Buyer & Seller.
• Factor charges Commission (as a flat
percentage of value of Debts
purchased) (0.50% to 1.50%)

21. Types of Factoring
 Recourse Factoring
 Non-recourse Factoring
 Maturity Factoring
 Cross-border Factoring

22. Forfaiting
• “Forfait” is derived from French word ‘A Forfait’
which means surrender of fights.
• Forfaiting is a mechanism by which the right for
export receivables of an exporter (Client) is
purchased by a Financial Intermediary (Forfaiter)
without recourse to him.
• It is different from International Factoring in as
much as it deals with receivables relating to
deferred payment exports, while Factoring deals
with short term receivables.

23. BILLS
DISCOUNTED
FACTORING FORFAITING
1. Scrutiny Individual Sale
Transaction
Service of Sale
Transaction
Individual Sale
Transaction
2. Extent of
Finance
Upto 75 – 80% Upto 80% Upto 100%
3. Recourse With Recourse With or
Without
Recourse
Without
Recourse
4. Sales
Administration
Not Done Done Not Done
5. Term Short Term Short Term Medium Term
6. Charge
Creation
Hypothecation Assignment Assignment

24. Banker’s Acceptance (BAs)
• A time draft, which is accepted and
guaranteed by a bank – as good as
the Bank’s word
• Exposure to the Bank so high credit-
rating
• A short-term debt instrument issued
by a firm that is guaranteed by a
commercial bank

25. Trade Finance
• Pre-shipment /Packing Credit
• Post Shipment credit – Bills
discounting
• L/C’s
• B A’s
• Suppliers Credit
• Buyers credit

26. Buyer's credit
• Credit availed by an importer (buyer)
from overseas lenders for payment of
his imports on due date
• Usually against a letter of comfort /
bank guarantee issued by the
importers bank

27. Suppliers Credit
• A financing arrangement under which
an exporter extends credit to a
foreign importer to finance his
purchase.
• Importer pays a portion of the
contract value in cash and issues a
Promissory note or accepts a draft
• LC with Usance Terms
• Deferred payment