Financing Foreign Trade
International Financial Management
What are the key elements of an import or
What are the three key documents in import
or export transactions?
What are some private sector export financing
What are some public sector export financing
International Trade Finance
Trade financing shares a number of common
characteristics with traditional value chain
activities conducted by all firms.
– All companies must search out suppliers for
goods and services.
– Must determine if supplier can provide products
at required specifications and quality.
– All must be at an acceptable price and delivered
in a timely manner.
Elements of an Import/Export
Every export sales transaction covers three basic
• contractual exchange between parties in two countries
• description of goods
• price quotations and terms in the contract should conform to
• provides shipping and delivery instructions
Bills of lading (B/L)
– issued to the exporter by a
common carrier transporting the
– issued by the exporter and
contains a precise description of
– must be as specified in the
contract of sale and must be
issued by insurance companies or
– issued in the exporting
country by the consulate of
the importing country
– may be required so that the
contents of containers can
International Trade Risks
The Trade Transaction Timeline
Time and Events
Documentation of Foreign
– Letter of Credit
– Bill of Lading
– Risk of noncompletion
– Foreign exchange rate
– Financing foreign trade
Letter of Credit (L/C)
A letter of credit is a bank’s conditional promise to pay
issued by a bank at the request of an importer in which the
bank promises to pay an exporter upon presentation of
documents specified in the L/C.
The essence of a L/C is the promise of the issuing bank to
pay against specific documents.
Issuing bank must receive a fee for issuing L/C
Bank’s L/C must contain specified maturity date
Bank’s commitment must have stated maximum amount
Bank’s obligation must arise only on presentation of specific
documents and bank cannot be called on for disputed items
– Bank’s customer must have unqualified obligation to reimburse
bank on same condition of bank’s payment
Letter of Credit (L/C)
Commercial L/C’s are classified as:
– Irrevocable vs. Revocable –
• irrevocable letters of credit are non-cancelable while its opposite
can be cancelled at any time
– Confirmed vs. Unconfirmed
• issued by one bank and confirmed by another bank
Advantages of L/Cs:
– it reduces risk of default
– a confirmed L/C helps secure financing
Disadvantages of L/Cs:
– the fees charged
– reduces the available credit of the importer
Relationships Among the Three
Parties to a Letter of Credit
The relationship between
the issuing bank and the
exporter is governed by the
terms of the letter of credit,
issued by that bank
The relationship between
the importer and the issuing
bank is governed by the
terms of the application and
agreement for the letter of
The relationship between the importer and the exporter
is governed by the sales contract
Bill of Exchange
A draft, or bill of exchange (B/E), is a written
order by an exporter instructing an importer or its
agent to pay a specified amount at a specified
The party initiating the draft is the maker, drawer,
or originator while the counterpart is the drawee.
– Trade draft
• Buyer is drawee of draft
– Bank draft
• Buyer’s bank is drawee of draft
If properly drawn, drafts can become negotiable
– As such they provide a convenient instrument for
financing the international movement of merchandise.
– To become a negotiable instrument, there are four
Must be written and signed by buyer
Must contain unconditional promise to pay
Must be payable on demand or at a fixed date
Must be payable to bearer
Types of Drafts
– which is payable on presentation to the drawee.
– which allows a delay in payment.
– it is presented to the drawee who accepts it with a
promise to pay at some later date.
• When a time draft is drawn on a bank, it becomes a
• When drawn on a business firm it becomes a trade
When a draft is accepted by a bank, it becomes a
Example: Acceptance of $100,000 for exporter
Face amount of acceptance
Less 1.5% p.a. commission for 6 months
Amount received by exporter in 6 months
Less 7% p.a. discount rate for 6 months
Amount received by exporter at once
Exporter may discount the acceptance note in
order to receive the funds up-front.
Bill of Lading
Bill of Lading (B/L) is issued to the exporter
by a common carrier transporting the merchandise.
– It serves the purpose of being a receipt, a contract and a
document of title
• As a receipt the B/L indicates that the carrier has received the
• As a contract the B/L indicates the obligation of the carrier to
provide certain transportation
• As a document of title, the B/L is used to obtain payment or
written promise of payment before the merchandise is released to
Characteristics of the Bill of Lading
A straight B/L
– provides that the carrier deliver the merchandise to the
designated consignee only.
An order B/L
– directs the carrier to deliver the goods to the order of a
designated party, usually the shipper.
A B/L is usually made payable to the order of the
Additional Financing Techniques
Used in International Trade
– Converting a trade draft into cash.
– Selling export receivables at a discount to a factor.
– Expensive but may be of great value to the occasional
– Discounting at a fixed rate without recourse of mediumterm export receivables denominated in fully convertible
Government Programs for
Export Credit Insurance
– Provides assurance to the exporter or the exporter’s bank
that an insurer will pay should the foreign customer
– In the US the Foreign Credit Insurance Association
(FCIA) provides this type of insurance.
– Known as the Eximbank, it facilitates the financing of US
exports through various loan guarantee and insurance