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Foreign trade finance

Trade finance is used to mitigate risks in international trade transactions. It exists to reduce payment risk, country risk, and corporate risk. Payment risk is the risk that an exporter will not be paid in full or on time. Country risk refers to risks associated with doing business in a foreign country, such as exchange rate and political risks. Corporate risk relates to the creditworthiness and payment history of the importing/exporting company. Common trade finance tools include letters of credit, documentary collections, open accounts, trade loans, and factoring. Import financing provides credit to importers, while export financing supports exporters. Common import finance types are usance letters of credit, bank guarantees, and invoice financing. Export finance occurs both before and

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FOREIGN TRADE FINANCE
Trade Finance Trade finance is the financing of international trade flows It exists to mitigate, or reduce, the risks involved in an international trade transaction WHY ? Payment Risk Country Risk Corporat e Risk
Risks In Trade Finance Payment Risk Country Risk Corporate Risk Will the exporter be paid in full and on time? Will the importer get the goods they wanted? A collection of risks associated with doing business with a foreign country, such as exchange rate risk, political risk and sovereign risk The risks associated with the company (exporter/importer): what is their credit rating? Do they have a history of non- payment?
Players In Foreign Trade Financing IMPORTER EXPORTER TRADE Exporter : who requires payment for their goods or services Importer: who wants to make sure they are paying for the correct quality and quantity of goods TRADE FINANCING IMPORT FINANCING EXPORT FINANCING
Import Financing •Import finance is the process of funding the gap between receiving the goods and sending the payments. • It is a special type of trade finance where any bank or financial institution finances the purchase of the goods that are being purchased & exported from one country to be imported into another country.
Types Of Import Trade Finance •Import finance provides credit options to international traders and enables them to purchase goods without cash flow issues. •The types are as follows 1. Usance/ Standby Letters of Credit 2. Bank Guarantees 3. Invoice Finance 4. Asset-Backed Facilities
Usance/ Standby Letters Of Credit •When a Usance letter of credit is applied in a transaction, it helps the importer to defer the payment against a purchase. •It means it gives more time to the importer to inspect or sell the goods •When a standby LC is issued, the issuing bank provides a guarantee to the exporter regarding on-time payment from the importer only if the buyer defaults. •It mitigates the risk of default and provides peace of mind to the exporters.
Bank Guarantees •When there is a bank guarantee in an international transaction, the exporter are guaranteed of getting paid on-time for their goods or services from the importer. •If the buyer is unable to make the payment or fails to meet the terms and conditions of the agreement, the amount will be paid by the issuing bank to the exporter. •The only difference between an LC and Bank guarantee is their usage i.e. An LC is used in international transactions while a bank guarantee is more likely to be used on real estate or infrastructure projects.
Invoice Finance •Invoice financing is a method where the selling of accounts receivables is involved. •It means with this finance optional one can sell their accounts receivables to raise capital. •Most financial institutions provide up to 50-80% of invoice value as loans and help traders meeting their business requirements. •This also helps in improving cash flow and maintaining the working capital of the company.
Asset-backed Facilities •It is a financial tool of businesses willing to secure a loan against their collateral (assets). •This type of funding allows importers to get loans against assets. •The traders can consider any of these asset-based loan options by securing inventory, equipment, buildings, accounts receivables, or other assets in the balance sheet.
Export Financing Export finance is a finance agreement, whereby money is advanced against the value of unpaid invoices. It's a form of asset-based finance, specifically tailored to businesses involved with exporting to international markets There are 5 different types of Export Trade Finance 1.Pre-shipment export finance 2.Post shipment export finance 3.Export finance against collection of bills. 4.Deferred export finance 5.Export finance against allowances and subsidies
Types Of Export Financing Pre-Shipment Export Financing •The exporter is provided finance even for the purchase of raw materials and processing them into finished products, but this finance can be provided only when the exporter has firm order from the importer and the importer has also given an anticipatory Letter of Credit from his bank •So, against the export order received from the importer, the exporter is given finance by his bank which is called pre-shipment export finance. Post Shipment Export Financing • After dispatching the goods to the importer, the exporter draws a bill, against which the importer will make payment. • But this may take a minimum period of 3 to 6 months and this time gap will affect the exporter in his continuation of production. • For this purpose, after exporting, the export bill will be presented by the exporter to his bank. • The bank will prefer to purchase the bill or collect the bill or even
Export finance against collection of bills Export is made to different countries and loan obtained from the bank against the bills sent for collection. Export finance against allowances and subsidies Exporters are given subsidies by the government so that they can sell the goods on reduced price to importer and allowances are given for increasing exports Deferred export finance To enable the importer to purchase valuable goods, hire purchase financing or lease finance may be arranged. There are two types of deferred export finance. 1. Supplier’s finance in exporting 2. Buyer’s Finance in exporting Types of Export Financing
Factoring & Forfaiting • Factoring is a process by which a business sells to a financial institution the value of accounts receivables for which it has not yet received payment • Factoring, sometimes called debtor financing or receivables factoring, is more common for domestic trade financing but also is used for international trade finance • Forfaiting is a means of financing that enables exporters to receive immediate cash by selling their medium and long-term receivables at a discount through an intermediary. • Forfaiting also protects against credit risk, transfer risk, and the risks posed by foreign exchange rate or interest rate changes. •The receivables convert into a debt instrument— such as an unconditional bill of exchange or a promissory note—which can then be traded on a secondary market.
Documentar y Collections & Countertrad e • Documentary Collection (DC) occurs when a seller instructs his bank to forward documents related to the exporting of goods or services to the buyer’s bank, then requesting to present these documents to the buyer for their payment. •Counter-trade is related to those foreign trade transactions in which the exporter gets the value for export in the form of specific commodities as per agreement concluded.
Counter Trade Variants •Counter Trade of purely Commercial Nature: 1. Classical Barter – involves once only exchange of goods. 2. Counter Purchase – no mention of specific goods to be exported or to be imported. Separate contracts for export and import. 3. Pre-compensation – Imports are paid for immediately.  Industrial Counter Trade: 1. Buy-Back agreement – Involve larger amount corresponding to sale of industrial equipment in exchange for products manufactured. 2. Framework agreement – It is a long term bilateral agreement normally between two governments.
Mode Of Payments In International Trade Modes of payment vary from one transaction to another. It depends upon the bargaining power and credit worthiness of the exporter and the importer and upon the requirements of exchange control. The different modes are 1. Cash in Advance 2. Payments under consignment sale 3. Drafts 4. Letter of Credit 5. Open account
Cash In Advance •Here the cash is paid prior to shipment of goods or before the arrival of goods by importer to the exporter. •This helps the exporter to negate the credit risk in payment. •It is adopted when the importing country is facing political instability causing obstruction to transfer of funds. •It is also common where the goods are specifically designed and manufactured to order from abroad.
Payments Under Consignment Sale •In this consignment sale, title of the goods remains with the exporter even after the goods are received by the importer. •The importer remits money only after selling the goods. •This means that the exporter’s capital is tied until goods are finally sold. •If importer defaults in such cases, it will be difficult for the exporter to collect the money. •In India it is more frequently found in export of traditional goods.
Drafts •Draft (Bill of Exchange) is an instrument whereby an exporter instructs the importer to make specific payments at a specific date. •The exporter is called drawer and importer is called drawee. •Sometimes the amount can be paid to the agent which is bank and in this case the payee is the bank not the exporter. •Properly drawn draft is negotiable instrument.
Procedure For Properly Drawn Draft It should  Be in writing and signed by the drawer which is exporter. Incorporate an unconditional promise or order to pay a specific amount of money. Be payable either at sight or at a specified time. Be payable to order: payment is made to the specified person. Be payable to bearer: payment is made to any person presenting the draft.
Types Of Draft •Sight or demand draft : Immediate payment on presentation of draft. •Time Draft: Payment is made after a specified time ( Tenor or Usance). •Clean Draft: A draft to which no other documentation is attached. Generally used in Intra Firm trade. •Documentary Draft: 1. Shipping documents are enclosed with draft. 2. When documents are delivered to importer only after payment – D/P. 3. When documents are delivered to importer after the acceptance – D/A.
Types Of Documents •Bill of Lading : 1. It is a shipping document issued by the carrier. 2. Clean BOL assumes goods have been received by carrier in good condition and they need not check it. 3. Foul BOL allows the carrier to check the goods. •Commercial Invoice: Description of goods and terms of sale. •Insurance: Gives the details of the insurance and risk covered. •Consular invoice: Issued by the consulate of the importing country & provides customs information. •Packing list: Shows the contents of the container.
Letter Of Credit •It is an instrument signed by the importer’s banker wherein it promises the exporter to make payments if he abides by the conditions. •It is a letter of promise. •The issuing bank receives a fee for issuing it. LC contains specified expiration date and amount of money. •The exporter gets assurance for the payment and the importer has to make payments only when the goods are in good conditions.
How L/C Operate? Importer after placing Import order requests its banker to issue L/C Importer’s bank delivers L /C to exporters bank Exporter’s bank passes L/C to the exporter Exporter ships goods to importer and passes on L/C & other documents to its banker Exporter’s bank delivers L/C & other documents to importer’s bank. Importer’s bank makes payment for the import and debits importer’s account.
Variants Of L/C •Clean L/C : Does not require the documents. •Documentary L/C : Documents are required. •Revocable L/C: May be cancelled or amended by the issuing bank at any time without prior notice. •Irrevocable L/C: Cannot be cancelled or amended. •Confirmed L/C : gives an added guarantee of payment. •Unconfirmed L/C :not been guaranteed or confirmed by any bank. •Fixed L/C: limits the amount of bill to be drawn under the L/C.
Variants Of L/C •Transferable L/C : Exporter has the right to transfer the L/C to third parties. This happens when the exporter is just and intermediary procuring goods from producers or suppliers and exporting them. •Back to Back L/C: involves two letters of credit to secure financing for a single transaction. These are usually used in a transactions involving an intermediary between the buyer and seller. •Red clause L/C: authorizes the negotiating bank to extend advances to exporter in form of pre shipment credit.
Open Account •In an open account relationship, the goods are shipped and the title documents are sent independent of payment to the buyer in order that he can clear customs in his country. •It is concerned with credit sales to the importer when the importer makes payment on a pre determined future date. •Exporter ships directly to the Importer. •Importer takes the delivery without making payment. •In this case the entire risk is borne by exporter. •If the export turns out to as bad debt loss then exporter hires attorney.
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