International Transportation and Trade Part 8.pptx

International
Transportation
and Trade
Trade Finance

Important Dates
▶ Assignment 4/11/2024
▶ Midterm 4/19/2024
▶ Final 4/26/2024
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Terminal Learning
Objectives
▶ Explore Finance
Alternatives
▶ Assessing Pre-shipment
Finance
▶ Discuss Supplier Credits
▶ Assess Refinancing of
Supplier Credits
▶ Explore Buyer Credits
▶ Explore The International
Money Market

Finance alternatives
▶ The length of credit is often divided into
short, medium and long term, even
though such classifications are arbitrary
and depend on the purpose.
▶ Short-term credits are normally for
periods up to one year, even though the
typical manufacturing exporter would
normally trade on short-term credits of 60
or 90 days, perhaps up to a maximum of
180 days.
▶ Periods between one and three, and
sometimes even up to five, years may
be referred to as medium term,
whereas periods of five years and over
are definitively long term.
▶ In general, the buyer often prefers to
split the payment for capital goods
(machinery and installations with a
considerable lifespan) into separate
instalments over longer periods,
perhaps with the intention of matching
the payments against the income
generated from the purchased goods.
In such cases, the seller may have to
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Finance alternatives
▶ The credit period is usually calculated
from the time of shipment of the goods,
or some average date in the case of
several deliveries.
▶ However, in practice, payment is seldom
made at that early stage and some form
of credit is therefore included in most
transactions.
▶ The seller may prefer to refinance such
credits through ordinary bank credit
facilities, especially for shorter periods
and smaller amounts.
▶ However, in other cases the financing
has to be arranged in some other way,
which can also affect the structure of the
transaction.

International trade
practices
▶ Another aspect of trade finance involves different
ways of obtaining security that will enable the seller
to extend such credits, often directly through the
terms of payment, or in combination with separate
credit insurance.
▶ Such risk coverage and the terms under which it can
be obtained have a strong influence on how export
credits can be structured, including the terms of
payment and other conditions related to the
transaction, particularly for longer periods.
▶ Of the alternatives, only one or two may be of interest
in each case, depending on the particular area of
business or trade cycle of the transaction, that is, the
period from when the first costs are incurred for
ordering raw material or other goods, until shipment
and final payment from the buyer
▶ However, the trade cycle also covers the time from
when the first risks have to be incurred, for example
agreements with other suppliers or simply the need
to change internal procedures or preparations for the
new production.
▶ Figure 6.1 provides a summary of the most
frequently used techniques for financing or
refinancing international trade and the following text
is structured accordingly.

Trade finance
▶ The expression ‘trade finance’ generally
refers to the financing of fluctuating working
capital needs for either single or bulk trade
transactions.
This financing should, in principle, be self-
liquidated through the cash flow of the
underlying transactions. Trade finance is a
major issue for both seller and buyer.
Typical trade finance lending is often secured
by the export goods and/ or future receivables
or other trade debt instruments such as bills of
exchange, thereby assuring any external
lender that the incoming cash flow will first be
used for repayment of any outstanding debt
before being released to the seller.
This self-liquidating aspect of trade finance is
generally more secure for the lender
compared to other forms of working capital
facilities and could therefore facilitate a higher
lending ratio and often better terms than
would otherwise be applicable.
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Pre-shipment finance
▶ Pre-shipment finance, also known
as pre-export finance, is a type of
short-term loan or credit facility that
is extended to exporters to finance
various activities in the pre-shipment
phase of an international trade
transaction. These funds are
essential to cover the costs and
expenses associated with
producing, procuring, and preparing
goods for export before they are
actually shipped to the overseas
buyer. Pre-shipment finance helps
exporters ensure the smooth
execution of their export orders and
meet the demands of their
international customers.

▶ Here are some key aspects of pre-shipment
finance:
1. Purpose: Pre-shipment finance is primarily
used to finance activities that occur before
the actual shipment of goods. This can
include the purchase of raw materials, labor
costs, manufacturing expenses, packaging,
quality control, and transportation to the port
of departure.
2. Types: There are various types of pre-
shipment finance options available to
exporters, including:
• Export Packing Credit: This type of finance
helps cover the costs of packing and
packaging materials.
• Raw Material Finance: Provides funds to
purchase the necessary raw materials or
components for manufacturing export
products.
• Vendor Finance: This involves obtaining
credit from suppliers or manufacturers to
secure the goods needed for export.
• Working Capital Loans: Exporters can use
working capital loans to finance various pre-
shipment expenses.
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▶ Here are some key aspects of pre-
shipment finance:
3. Banks and Financial Institutions:
Exporters typically obtain pre-shipment
finance from banks or financial institutions
that specialize in trade finance. These
institutions assess the exporter's
creditworthiness and the viability of the
export transaction before extending the
credit facility.
4. Security: Lenders may require collateral
or other forms of security to mitigate the
risk associated with pre-shipment finance.
Common forms of security include export
orders, invoices, and letters of credit.
5. Interest Rates: The interest rates for pre-
shipment finance can vary depending on
factors such as the exporter's
creditworthiness, the lender's policies,
and prevailing market conditions.

▶ Here are some key aspects of pre-
shipment finance:
6. Repayment: Repayment terms for pre-
shipment finance typically depend on the
exporter's cash flow and the specific
agreement with the lender. It may be
repaid from the proceeds of the export
sale or within a specified period after
shipment.
7. Documentation: Exporters are required
to provide documentation related to the
export transaction, such as invoices,
purchase orders, and shipping
documents, to access pre-shipment
finance.
8. Export Credit Insurance: Export credit
insurance can be used in conjunction with
pre-shipment finance to mitigate the risk
of non-payment by the overseas buyer.
This insurance provides coverage against
various commercial and political risks.

▶ Pre-shipment finance is a crucial
tool for exporters to fulfill
international orders, manage
their working capital, and
compete effectively in the global
market. It helps ensure that they
can meet their production and
quality standards and deliver
goods to customers on time.
Exporters should work closely
with financial institutions and
trade experts to access the most
suitable pre-shipment finance
options for their specific needs.

Working capital
insurance/guarantees
▶ Working capital insurance or
working capital guarantees are
financial instruments that
provide protection to
businesses, particularly
exporters, against risks
associated with their working
capital needs. These tools are
designed to ensure that a
company has the necessary
funds to cover day-to-day
operating expenses, including
paying suppliers and meeting
short-term financial obligations.

Working capital
Here's a closer look at working capital insurance and
guarantees:
1. Working Capital Insurance:
Working capital insurance is a type of financial product that
helps protect a company's liquidity by covering specific risks
that could disrupt its working capital cycle. This insurance can
provide coverage for various risks, including:
• Credit Risk: It protects against the risk of non-
payment by customers, including both domestic
and international buyers. If a customer defaults
on payment, the insurance compensates the
business for the outstanding amount.
• Supply Chain Disruptions: Working capital
insurance can cover risks related to supply chain
disruptions, such as delayed deliveries of
essential materials or components. If these
disruptions affect the business's ability to meet its
financial obligations, the insurance can provide
compensation.
• Political Risk: For businesses involved in
international trade, political risks in foreign
markets can impact working capital. Working
capital insurance can include coverage for
political risks, such as government actions that
affect trade or currency exchange restrictions.
• Interest Rate Risk: Some policies may offer
protection against interest rate fluctuations,
which can affect borrowing costs and interest
payments on working capital loans.
• Currency Risk: For companies with international
operations, currency fluctuations can impact the
value of receivables and payables. Working
capital insurance may offer coverage for

Working capital
Here's a closer look at working capital insurance and
guarantees:
2. Working Capital Guarantees:
Working capital guarantees are financial commitments
made by banks or financial institutions on behalf of a
business to ensure the availability of working capital when
needed. These guarantees can take various forms:
• Payment Guarantees: The bank guarantees that the
business will make payment to its suppliers or lenders
as agreed, providing confidence to these parties that
they will receive their payments.
• Performance Guarantees: In international trade,
performance guarantees assure the counterparty (e.g.,
the buyer or seller) that the business will fulfill its
contractual obligations. These guarantees can be
especially important in cross-border transactions.
• Bid Bonds: When participating in government contracts
or competitive bidding processes, businesses may need
to provide bid bonds as a guarantee that they will honor
their bids if awarded the contract.
• Advance Payment Guarantees: In some cases,
businesses may receive advance payments from
customers. A guarantee ensures that these advance
payments will be properly used for the intended
purpose, such as fulfilling the order.

Working capital
▶ Working capital guarantees and
insurance are valuable tools for
businesses, especially those
involved in international trade or
facing various financial risks.
They provide a safety net to
ensure that a company can
maintain its cash flow, meet its
financial obligations, and
operate smoothly even when
facing unexpected disruptions or
challenges. Businesses should
work with financial institutions
and insurance providers to tailor
these solutions to their specific
needs and risk profiles.

Supplier credits
▶ Supplier credits, also known
as supplier financing or
supplier credit terms, refer to
an arrangement in which a
supplier provides goods or
services to a customer on
credit, allowing the customer
to defer payment for a
specified period. This is a
common practice in
business-to-business (B2B)
transactions and can offer
several advantages for both
the supplier and the
customer.

Supplier credits
▶ Here are key points to understand about supplier credits:
1. Credit Terms: Supplier credits involve the establishment of
specific credit terms between the supplier and the customer.
These terms outline the payment due date, credit period
(e.g., net 30 days), and any applicable interest rates or late
payment penalties.
2. Advantages for the Customer:
• Working Capital Management: Supplier credits can help
customers manage their working capital effectively by
allowing them to delay payments for a set period, freeing
up cash for other business needs.
• Cash Flow Benefits: Customers can benefit from
improved cash flow as they can use the products or
services before making payment, potentially generating
revenue or value from those goods before they need to
pay for them.
• Negotiating Power: Establishing favorable credit terms
can enhance the customer's negotiating position with
suppliers. This can be particularly useful for businesses
that purchase goods or services in bulk.
3. Advantages for the Supplier:
• Competitive Advantage: Offering favorable credit terms
can make a supplier more attractive to customers,
potentially increasing sales and market share.
• Customer Loyalty: Suppliers who extend credit and work
with customers to meet their financial needs may build
stronger, long-term relationships with those customers.
• Reduced Payment Risks: While there is some risk
involved in extending credit, suppliers can mitigate this by
conducting credit checks and setting appropriate credit
limits for customers.

Supplier credits
▶ Here are key points to understand about supplier
credits:
4. Types of Supplier Credits:
• Trade Credit: This is the most common
form of supplier credit, where the supplier
extends a credit period for the goods or
services provided.
• Revolving Credit: Some suppliers offer
revolving credit lines, allowing customers to
make multiple purchases within an
approved credit limit.
• Deferred Payment Plans: In some cases,
suppliers may allow customers to defer
payment beyond standard credit terms for
specific orders or circumstances.
5.Creditworthiness Assessment: Suppliers typically
assess the creditworthiness of their customers before
offering credit terms. This may involve reviewing the
customer's financial statements, credit history, and
payment track record.
6.Payment Terms and Discounts: Suppliers may
also offer discounts for early payment or charge
interest or penalties for late payments, depending on
the terms negotiated.
7.Credit Application: Customers interested in
supplier credit may need to submit a credit application
to the supplier. This application typically includes
information about the customer's financial stability and
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Supplier credits
▶ Supplier credits play a crucial
role in facilitating smooth
business operations by
allowing customers to access
necessary goods and
services while managing
their cash flow effectively.
Effective management of
supplier credit terms is
essential for both buyers and
suppliers to ensure mutually
beneficial and sustainable
business relationships.

Short-term supplier
credits
▶ Short-term supplier credits,
often referred to as short-term
trade credit or simply short-term
credit, are credit arrangements
between a supplier and a
customer where the supplier
extends credit to the customer
for a relatively brief period,
typically less than one year.
These credit terms allow the
customer to defer payment for
goods or services received for a
limited duration, and they are
commonly used in various
industries for managing working
capital and facilitating business
transactions.

Short-term supplier
credits
▶ Here are some key aspects of short-term
supplier credits:
1.Duration: Short-term supplier credits typically have
a duration of less than one year. Common credit
terms may include "net 30 days," "net 60 days," or
"net 90 days," indicating the number of days the
customer has to make payment after receiving the
goods or services.
2.Purpose: Short-term supplier credits are primarily
used to assist businesses in managing their cash flow
and working capital. By allowing customers to delay
payment for a short period, suppliers enable their
customers to use the goods or services before making
payment.
3.Advantages for the Customer:
• Working Capital Management:
Customers can allocate their cash
resources more effectively, as they don't
need to immediately pay for the goods or
services received.
• Cash Flow Benefits: Short-term credits
provide temporary cash flow relief, which
can be especially valuable during seasonal
or cyclical fluctuations.
• Negotiating Power: Customers may
negotiate favorable credit terms, such as
early payment discounts, based on their

Short-term supplier
credits
▶ Here are some key aspects of short-term
supplier credits:
4. Advantages for the Supplier:
• Sales Incentive: Offering short-term credits can
attract more customers and increase sales
volumes, especially when competitors provide
similar credit terms.
• Customer Loyalty: Suppliers who work with
customers to accommodate their cash flow needs
may foster stronger, long-term relationships.
• Reduced Payment Risks: While there is some risk
in extending credit, suppliers can minimize this risk
through credit assessments and credit limits.
5. Credit Application: Customers interested in
short-term supplier credits may need to submit a
credit application to the supplier, providing financial
information and credit references to assess their
creditworthiness.
6. Interest or Penalties: Suppliers may charge
interest or impose penalties for late payments,
depending on the terms negotiated. Early payment
discounts may also be offered to incentivize
prompt payment.
7. Credit Limit: Suppliers often set a credit limit for
each customer, which represents the maximum
amount of credit extended to that customer at any

Short-term supplier
credits
▶ Short-term supplier credits are
an essential component of B2B
transactions, helping businesses
manage their finances and
maintain smoother operations.
They provide flexibility and
liquidity to both buyers and
suppliers and are instrumental in
building strong business
relationships. However, it's
crucial for both parties to
manage credit terms responsibly
to ensure financial stability and
minimize credit risks.

Medium- and long-
term supplier credits
▶ Medium- and long-term supplier
credits are credit arrangements
between suppliers and
customers where the supplier
extends credit for a more
extended period than the typical
short-term supplier credits.
These credit terms are often
used for larger-scale
transactions and investments
where the repayment period
extends beyond one year.

Medium- and long-
▶ Medium-Term Supplier Credits:
1. Duration: Medium-term supplier credits
generally have a repayment period ranging from
one year to five years. The exact duration can
vary based on the agreement between the
supplier and the customer.
2. Purpose: These credits are often used for
financing medium-sized capital investments,
such as the purchase of machinery, equipment,
vehicles, or technology. They provide
businesses with the necessary financing to
acquire assets that will generate long-term value.
3. Interest Rates: Interest rates for medium-term
supplier credits may vary depending on factors
such as the creditworthiness of the customer
and prevailing market conditions. They are
typically lower than short-term interest rates due
to the longer repayment period.
4. Security: Suppliers may require collateral or
security to mitigate the risk associated with
extending medium-term credit. Common forms
of security include liens on the purchased assets
or personal guarantees.

Medium- and long-
▶ Long-Term Supplier Credits:
1. Duration: Long-term supplier credits have a
repayment period that extends beyond five years
and can even span several decades. These are
typically used for financing large-scale projects
and infrastructure developments.
2. Purpose: Long-term supplier credits are often
employed for substantial capital investments,
including real estate development, construction
projects, energy infrastructure, and major
equipment purchases. They allow businesses
and governments to fund projects with long-term
payback periods.
3. Interest Rates: Long-term supplier credits may
have fixed or variable interest rates, and the
rates are influenced by market conditions and
the creditworthiness of the borrower. Fixed rates
provide stability over the life of the credit, while
variable rates may fluctuate.
4. Security: Given the substantial sums involved in
long-term credits, suppliers typically require
significant collateral, guarantees, or other forms
of security. This helps protect their interests and
ensure repayment.

Medium- and long-
▶ Both medium- and long-term supplier
credits are more complex than short-term
credits due to their extended durations
and the larger sums of money involved.
They require thorough financial analysis
and risk assessment by both parties
involved. These types of credits are
common in various industries, including
manufacturing, construction,
infrastructure development, and energy
projects. They enable businesses and
governments to undertake significant
investments while managing cash flow
over an extended period.
It's essential for both suppliers and
customers to carefully negotiate the terms
and conditions of medium- and long-term
supplier credits to ensure that they align
with the financial objectives and risk
tolerances of both parties. Legal and
financial advisors are often consulted to
draft comprehensive agreements that
protect the interests of all stakeholders.

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Transports

Refinancing of supplier
credits
▶ Refinancing of supplier
credits refers to the process
of replacing or restructuring
existing supplier credits with
new financing arrangements.
This can be done for various
reasons, such as improving
cash flow, reducing interest
costs, extending repayment
terms, or obtaining more
favorable credit terms.

credits
▶ Here's an overview of the refinancing of supplier
credits:
Reasons for Refinancing Supplier Credits:
1. Reducing Interest Costs: One common motivation
for refinancing supplier credits is to lower the overall
cost of borrowing. If the business can secure a new
financing arrangement with lower interest rates, it
may choose to refinance existing supplier credits.
2. Extending Repayment Terms: In some cases, a
business may need to extend the repayment period
for supplier credits to ease its cash flow or align with
the revenue generation from the assets or projects
financed by those credits. Refinancing can help
achieve this by negotiating longer repayment terms.
3. Access to Better Terms: Refinancing offers an
opportunity to negotiate more favorable credit terms
with suppliers or lenders. This can include reducing
the interest rate, changing the repayment schedule,
or adjusting collateral requirements.
4. Consolidation: If a business has multiple supplier
credits or loans with different terms and lenders, it
may choose to consolidate these debts into a single,
more manageable credit facility. This simplifies
repayment and can improve financial management.

credits
▶ Here's an overview of the refinancing of supplier credits:
Steps Involved in Refinancing Supplier Credits:
1. Assessment: Before refinancing, the business should assess its
current financial situation, including the terms and interest rates
of existing supplier credits. This evaluation helps determine
whether refinancing is a viable option and what goals it hopes to
achieve through the process.
2. Negotiation: The business may engage in negotiations with its
existing suppliers or lenders to discuss the possibility of
refinancing. This involves proposing new terms and conditions
that are more favorable or better suited to its financial needs.
3. Seeking New Financing: If negotiations with existing suppliers
or lenders are not successful, the business can explore other
financing options. This may involve applying for new loans or
lines of credit from different financial institutions or exploring
alternative financing sources.
4. Due Diligence: The business should conduct due diligence on
any new financing offers to ensure they meet its requirements
and are cost-effective. This includes reviewing interest rates,
fees, and repayment terms.
5. Closing the Refinancing: Once the business has selected a
refinancing option, it can move forward with closing the
refinancing transaction. This typically involves signing new loan
agreements, providing any required documentation or collateral,
and ensuring the repayment of existing supplier credits.
6. Monitoring and Management: After refinancing, the business
should closely monitor its new credit arrangement to ensure
compliance with the terms and continued financial stability.
Effective management of the refinanced credits is essential to
achieving the desired financial goals.

credits
▶ Refinancing supplier credits can
be a strategic financial move for
businesses looking to optimize
their debt structure, reduce
costs, or improve cash flow.
However, it's crucial for
businesses to carefully evaluate
their financial situation and the
terms of new financing
arrangements to ensure that
refinancing aligns with their
overall financial objectives.
Consulting with financial
advisors and legal professionals
can be helpful in the refinancing
process to ensure that all legal
and financial considerations are
addressed.

Bank loans and trade
finance limits
▶ Bank loans and trade
finance limits are two
distinct financial
instruments offered by
banks to businesses,
each serving different
purposes in supporting
their financial needs,
especially in the context
of international trade.

finance limits
▶Here's an explanation of both:
Bank Loans:
1.Purpose: Bank loans are a form of debt financing provided
by banks to businesses for various purposes. These loans
can be used for general working capital needs, capital
expenditures, expansion, debt consolidation, or any other
business-related financing requirements.
2.Duration: Bank loans come in various terms, including
short-term loans (typically less than one year), medium-term
loans (1-5 years), and long-term loans (more than 5 years).
The specific loan term depends on the nature of the business
need and the agreement between the borrower and the bank.
3.Interest Rates: The interest rates on bank loans can be
fixed or variable, and they depend on factors such as the
creditworthiness of the borrower, prevailing market
conditions, and the specific terms negotiated with the bank.
4.Collateral: Banks often require collateral to secure loans.
Collateral can include real estate, equipment, inventory, or
other valuable assets. The type and value of collateral
required may vary depending on the loan amount and the risk
perceived by the bank.
5.Repayment: Repayment of bank loans typically involves
regular installments, which may be monthly, quarterly, or
annually, depending on the loan agreement. The borrower is
required to repay both the principal amount borrowed and the
accrued interest over the loan term.
6.Use: Bank loans are versatile and can be used for a wide
range of purposes, making them suitable for general business

finance limits
▶Here's an explanation of both:
Trade Finance Limits:
1.Purpose: Trade finance limits, also known as trade credit
facilities, are specialized financial arrangements provided by
banks to support a business's international trade activities. These
limits are specifically designed to facilitate import and export
transactions.
2.Duration: Trade finance limits are typically short-term and are
structured to match the timing of specific trade transactions. They
are often used to provide financing during the different stages of
an international trade deal, from the purchase of raw materials to
the sale of finished goods.
3.Interest Rates: Interest rates for trade finance limits can vary
but are usually competitive and reflect the short-term nature of
the financing. Banks may offer trade finance products like letters
of credit, export financing, or import financing, each with its own
pricing structure.
4.Collateral: Collateral requirements for trade finance limits are
generally tied to the specific transaction or trade deal being
financed. Banks may use the goods, invoices, or other trade-
related documents as collateral.
5.Repayment: Repayment of trade finance facilities is typically
linked to the trade cycle. For example, when goods are sold and
payment is received from the buyer, the bank is repaid from the
proceeds of the sale.
6.Use: Trade finance limits are specifically designed to support
international trade activities. They provide businesses with the
necessary financing to secure and fulfill trade contracts, including
covering the costs of purchasing raw materials, manufacturing,
shipping, and receiving payment from overseas customers.

finance limits
▶ In summary, bank loans are
general-purpose financing
tools that can be used for a
wide range of business needs,
whereas trade finance limits
are specialized facilities
tailored to support import and
export transactions. The
choice between the two
depends on the specific
financial requirements of a
business, with trade finance
limits being particularly
relevant for companies
engaged in international trade
and seeking to manage the
risks and cash flow associated
with cross-border transactions.

Invoice discounting
▶ Invoice discounting, also
known as accounts receivable
financing or invoice financing, is
a financial arrangement that
allows businesses to access the
cash tied up in their unpaid
invoices. It provides a way for
companies to improve their cash
flow by receiving a portion of the
money owed to them by
customers before the actual
payment due date on the
invoices.

Invoice discounting
▶ Here's how invoice discounting works:
1. Issuing Invoices: The business provides
goods or services to its customers and
issues invoices with payment terms
specifying the due date when the
customer is expected to pay.
2. Invoice Discounting Agreement: The
business enters into an agreement with a
financial institution, often a bank or a
specialized factoring company, to
discount its invoices. This agreement
outlines the terms and conditions of the
invoice discounting arrangement.
3. Invoice Submission: After delivering
goods or services and generating
invoices, the business submits these
invoices to the financial institution that is
providing the discounting service.
4. Verification: The financial institution
verifies the authenticity of the invoices,
checks the creditworthiness of the
customers, and assesses the risk
associated with the outstanding invoices.

Invoice discounting
▶ Here's how invoice discounting works:
5. Advance Payment: Once the invoices are
verified, the financial institution advances a
percentage of the invoice value to the
business. This percentage can vary but
typically ranges from 70% to 90% of the total
invoice amount, depending on the terms of
the agreement.
6. Reserve Amount: The remaining portion of
the invoice value, known as the reserve
amount, is retained by the financial institution
as a security against potential non-payment
by customers.
7. Collection of Payment: On the due date
specified on the invoice, the customers make
payment directly to the financial institution
rather than to the business. The financial
institution collects the full invoice amount
from the customers.
8. Reconciliation and Settlement: Once the
customers' payments are received, the
financial institution deducts its fees and the
reserve amount, and the remaining balance
is returned to the business. The business
has now received the full invoice amount
minus the fees charged by the financial

Invoice discounting
▶ Key Points to Note:
•Confidentiality: Invoice discounting can be done
confidentially, meaning the customers may not be
aware of the financing arrangement. This is often
preferred by businesses that want to maintain direct
relationships with their customers.
•Control: Unlike factoring, where the financial
institution takes over the responsibility for collecting
payments from customers, invoice discounting allows
the business to retain control over its collections
process. The business continues to manage customer
relationships and collections.
•Fees: The financial institution charges fees for
providing invoice discounting services. These fees are
typically based on the invoice value and the time the
invoice remains unpaid.
•Creditworthiness: The creditworthiness of the
business's customers is an important factor in invoice
discounting. The financial institution assesses the risk
associated with the customers' ability to pay.
•Availability: Invoice discounting is typically available
to businesses that have a consistent sales track
record and a reasonably predictable accounts
receivable process.

Invoice discounting
▶ Invoice discounting can be a
valuable tool for businesses to
access working capital quickly
and efficiently, enabling them to
meet their short-term financial
needs, invest in growth
opportunities, and manage cash
flow effectively. However,
businesses should carefully
consider the fees and terms
associated with invoice
discounting to determine if it
aligns with their financial goals
and circumstances.

Export factoring
▶ Export factoring, also known
as international factoring or
cross-border factoring, is a
financial arrangement that
allows exporters to improve their
cash flow by selling their export
accounts receivable (invoices)
to a factoring company or
financial institution. This
financing method is particularly
useful for businesses engaged
in international trade.

Export factoring
▶ Here's how export factoring works:
1. Exporting Goods or Services: The
exporting company provides goods or
services to its international customers and
issues invoices for payment. These
invoices typically have payment terms
specifying the due date when the
customer is expected to pay.
2. Factoring Agreement: The exporting
company enters into an export factoring
agreement with a factoring company or
financial institution. This agreement
outlines the terms and conditions of the
factoring arrangement, including the fees,
advance rates, and credit terms.
3. Invoice Submission: After delivering the
goods or services and generating
invoices, the exporting company submits
the export invoices to the factoring
company.
4. Verification: The factoring company
verifies the authenticity of the invoices
and assesses the creditworthiness of the
international customers. This helps

Export factoring
▶ Here's how export factoring works:
5. Advance Payment: Once the invoices are
verified, the factoring company advances a
percentage of the invoice value to the exporting
company. This advance amount is typically
between 70% to 90% of the total invoice value,
depending on the terms of the agreement.
6. Credit Protection: One of the key benefits of
export factoring is that it often includes credit
protection services. The factoring company
assumes the credit risk associated with the
international customers' ability to pay. If a
customer does not pay due to insolvency or other
reasons, the factoring company absorbs the loss.
7. Collections: The factoring company takes over
the responsibility of collecting payment from the
international customers. Customers make
payments directly to the factoring company on
the due date specified on the invoices.
8. Reconciliation and Settlement: When the
customers' payments are received, the factoring
company deducts its fees, including the discount
fee for the advance and a service fee for credit
protection and collection services. The remaining
balance is returned to the exporting company,
completing the settlement.

Export factoring
• Fees: Export factoring involves fees for
services provided by the factoring company.
These fees typically include a discount fee
(interest on the advance), a service fee for
credit protection and collections, and other
administrative charges.
• Credit Risk Transfer: Export factoring
provides credit risk protection to the
exporting company. If a customer defaults
on payment, the factoring company absorbs
the loss, which can be especially valuable in
international trade where credit risks can be
higher.
• Customer Relationships: Export factoring
may involve the factoring company
contacting the customers for payment.
Some exporters may prefer confidential
factoring, where the customers are unaware
of the financing arrangement.
• Use of Funds: Export factoring provides
immediate access to cash, enabling
exporters to fund working capital needs,
fulfill new orders, and expand their

Forfaiting
▶ Forfaiting is a specialized
form of trade finance that is
primarily used in international
trade transactions. It involves
the sale of trade receivables,
typically in the form of medium-
to long-term export bills of
exchange or promissory notes,
to a forfaiting institution (often a
bank or a specialized forfaiting
company). The forfaiting
institution purchases these trade
receivables at a discount,
providing immediate cash to the
exporter and assuming the
credit risk associated with the
buyer.

Forfaiting
▶ Here's how forfaiting works:
1.Export Transaction: An exporter sells goods or services to an
overseas buyer and extends credit terms by creating trade
receivables, such as bills of exchange or promissory notes.
These trade receivables specify the amount, due date, and terms
of payment.
2.Forfaiting Agreement: The exporter and the forfaiting
institution enter into a forfaiting agreement. This agreement
outlines the terms and conditions of the forfaiting transaction,
including the discount rate (the difference between the face value
of the receivables and the discounted purchase price) and the
terms of payment.
3.Sale of Trade Receivables: The exporter sells the trade
receivables to the forfaiting institution at a discount from the face
value of the receivables. This provides the exporter with
immediate cash flow and eliminates the risk of non-payment by
the overseas buyer.
4.Transfer of Risk: The forfaiting institution assumes the credit
risk associated with the overseas buyer. If the buyer fails to make
the agreed payments, it is the responsibility of the forfaiting
institution to pursue collections.
5.Payment to Exporter: The forfaiting institution pays the
exporter the discounted purchase price of the trade receivables.
The exporter receives cash upfront, which can be used for
various purposes, such as financing production, reducing debt, or
investing in new projects.
6.Holding Period: Forfaiting transactions typically involve
medium- to long-term financing, with maturities ranging from one
to several years. The exact holding period depends on the terms
of the agreement.
7.Risk Mitigation: Forfaiting provides exporters with a means to
mitigate political and commercial risks associated with
international trade, as the forfaiting institution assumes the

Forfaiting
•Discount Rate: The discount rate applied to the
trade receivables varies based on factors such as
the creditworthiness of the buyer, the maturity of
the receivables, and prevailing market conditions.
•Confidentiality: Forfaiting can be done
confidentially, allowing the exporter to maintain a
direct relationship with the buyer. The buyer may
not be aware of the forfaiting arrangement.
•Trade Finance Tool: Forfaiting is particularly
useful for exporters engaged in large-scale
international trade transactions, especially when
dealing with buyers in countries with higher credit
risk.
•Cash Flow and Risk Management: Forfaiting
helps exporters improve their cash flow and
offload credit risk, allowing them to pursue more
international business opportunities and reduce
exposure to non-payment.
•Non-Recourse: Forfaiting is often non-recourse
financing, meaning the forfaiting institution has no
recourse to the exporter if the buyer defaults on
payment. The exporter's liability is limited to the
discount applied to the trade receivables.

Buyer credits
▶ Buyer credits, also
known as buyer financing
or import buyer credits, are
financial arrangements in
international trade where
the buyer of goods or
services obtains financing
from a lending institution to
facilitate the purchase of
products from a foreign
seller. These credits are
common in cross-border
transactions and play a
crucial role in supporting
global trade.

Buyer credits
▶ Key Features of Buyer Credits:
1. Purpose: Buyer credits are used by importers to finance
the purchase of goods or services from foreign suppliers.
They enable buyers to access the necessary funds to
complete international transactions.
2. Lending Institution: Buyer credits are typically provided
by banks or other financial institutions. The lender
assesses the creditworthiness of the buyer and the terms
of the transaction before extending credit.
3. Terms: The terms of buyer credits vary based on the
agreement between the importer, exporter, and the
lending institution. These terms include the loan amount,
interest rate, repayment schedule, and any collateral or
guarantees required.
4. Interest Rates: The interest rates on buyer credits may
be fixed or variable and are influenced by factors such as
market conditions, the creditworthiness of the importer,
and the specific terms negotiated with the lender.
5. Collateral: Lenders may require collateral to secure the
buyer credit. Collateral can include assets or financial
instruments that the buyer pledges to the lender as
security for the loan.
6. Repayment: Repayment terms are specified in the buyer
credit agreement. Repayment schedules can vary but are
often structured to align with the importer's cash flow and
the expected revenue from the imported goods or
services.
7. Use: Buyer credits are typically used for financing specific
import transactions, such as the purchase of machinery,
equipment, technology, or large quantities of goods. They
help importers secure the necessary funds to complete

Buyer credits
▶ Benefits of Buyer Credits:
1. Facilitate International Trade: Buyer credits
help ease the financial burden on importers
and enable them to engage in cross-border
trade by providing access to funds when
needed.
2. Improve Cash Flow: Importers can use buyer
credits to manage their working capital
effectively and ensure they have sufficient
liquidity to meet payment obligations.
3. Negotiating Power: Importers can negotiate
more favorable terms with foreign suppliers,
such as extended payment periods or
discounts for early payment, when they have
access to buyer credits.
4. Risk Mitigation: Buyer credits can help
mitigate risks associated with fluctuations in
currency exchange rates and interest rates, as
these risks can be managed through the terms
of the credit agreement.
5. Asset Financing: Importers can use buyer
credits to finance the acquisition of capital
assets, such as machinery or equipment,
which can enhance their operational
capabilities.

Buyer credits
▶ Overall, buyer credits are
an important tool for
importers in international
trade. They provide a means
to secure financing for the
purchase of goods and
services from foreign
suppliers, support working
capital needs, and facilitate
the growth of global
commerce. Importers should
carefully consider the terms
and costs associated with
buyer credits to ensure they
align with their business
objectives and financial
capabilities.

Export credit
banks/financial
institutions
▶ In most countries the actual lending of
export credits is made through commercial
banks, either on their own without additional
support, or with such support, mostly in the
form of guarantees from export credit
agencies, when the credit risk (commercial
and/or political) is otherwise deemed too high.
These agencies, on the other hand, are
basically insurance or guarantee institutions,
but they seldom give direct loans themselves.
In many of the larger exporting countries,
however, the financing is also done through
special export credit banks or similar financial
institutions, owned or partly government
owned as official export institutions, even if the
practical aspects of loan documentation and
loan administration may remain in the hands
of the cooperating commercial banks during
the lifetime of the loan. But the official lender is
then the export credit bank, which also funds
that lending on the international markets,
being capitalized in such a way that they
achieve the very best terms for their funding.

Export credit
banks/financial
institutions
▶ As official institutions, their structure and activities
may include:
● administration of state-supported export credit
schemes as well as extending loans on commercial
terms based on market funding, both floating and
fixed rates of interest;
● lines of credit (see Chapter 7) established with
major banks in their main importing countries,
providing export finance facilities also for smaller
export transactions based on prearranged loan
documentation;
● administration of grants in tied or untied mixed or
concessionary credits to developing countries on
behalf of the government aid agency
● financing of long-term investments and acquisitions
made by domestic businesses in their
internationalization process.
Most export credit banks also have the additional
advantage that, as official export institutions, they may
avoid having to pay withholding tax on interest that
would otherwise be applicable in some buyer
countries, resulting in even lower interest rates being
offered to their customers.

Normal terms and
conditions in buyer
credits
▶ The terms and conditions of buyer
credits in international trade can vary
depending on the specific agreement
between the buyer, the lending
institution, and potentially the
seller/exporter. It's important to note
that buyer credit terms and conditions
can be highly customized to meet the
specific needs and circumstances of
the parties involved. As such, it's
essential for both buyers and lenders
to carefully review and negotiate the
terms of the agreement to ensure that
they align with their respective
interests and risk tolerances.
Additionally, legal and financial advice
is often sought to navigate the
complexities of international trade
financing agreements.

Normal terms and
conditions in buyer
credits
▶ However, here are some typical terms and conditions
that are often included in buyer credit agreements:
1. Loan Amount: Specifies the total amount of the loan
provided to the buyer to facilitate the purchase of goods
or services.
2. Interest Rate: Specifies whether the interest rate is
fixed or variable and outlines the method used to
calculate interest charges. Interest rates can be based
on various benchmarks, such as LIBOR (London
Interbank Offered Rate) or the lender's prime rate.
3. Repayment Schedule: Outlines the repayment terms,
including the frequency of payments (e.g., monthly,
quarterly, annually) and the duration of the loan.
Repayment schedules can vary widely depending on
the agreement.
4. Maturity Date: Specifies the date on which the entire
loan must be repaid in full. This date is often
determined by the importer's cash flow and the
expected revenue from the imported goods or services.
5. Collateral: If required, the agreement may specify the
collateral or security that the buyer must provide to the
lending institution. Collateral can include assets,
financial instruments, or guarantees that serve as
security for the loan.

Normal terms and
conditions in buyer
credits
▶ However, here are some typical terms and conditions
that are often included in buyer credit agreements:
6. Covenants and Conditions: Buyer credit agreements
may include covenants and conditions that the buyer
must meet, such as maintaining a certain level of
working capital or providing financial reports to the
lender periodically.
7. Fees and Charges: Outlines any fees and charges
associated with the buyer credit, such as origination
fees, commitment fees, or service fees. These fees can
vary by lender and agreement.
8. Currency: Specifies the currency in which the loan is
denominated. In international trade, the currency used
in the agreement may be different from the importer's
or exporter's domestic currency.
9. Default and Remedies: Defines the circumstances
under which the buyer would be considered in default
and outlines the remedies available to the lending
institution in the event of default. Remedies may
include accelerating the loan, demanding immediate
repayment, or pursuing legal action.
10. Applicable Law and Jurisdiction: Specifies the
governing law and jurisdiction that will apply in case of
disputes or legal issues related to the buyer credit
agreement. This can be important in cross-border
transactions.

Normal terms and
conditions in buyer
credits
▶ However, here are some typical terms and
conditions that are often included in buyer credit
agreements:
11.Confidentiality: Addresses the confidentiality
of the agreement, including whether the terms
of the credit agreement are confidential
between the parties involved.
12.Insurance: May require the buyer to obtain
insurance coverage, such as credit insurance
or political risk insurance, to mitigate certain
risks associated with the transaction.
13.Consents and Approvals: Specifies any
consents or approvals required from regulatory
authorities or third parties for the transaction to
proceed.
14.Notices: Outlines the process for giving
notices under the agreement, including the
addresses and methods of communication.
15.Termination: Specifies the conditions under
which the buyer credit agreement can be
terminated, and the procedures for doing so.

The international
money market
▶ The international money market,
often referred to as the "forex market"
or "foreign exchange market," is a
global decentralized financial
marketplace where participants can
buy, sell, exchange, and speculate on
the value of different currencies. It
serves as the primary mechanism for
the exchange of one currency for
another, facilitating international
trade, investment, and currency
conversion.

The international
money market
▶ Here are key aspects of the international money market:
1. Decentralized Nature: The international money market is
decentralized, meaning it doesn't have a physical location or a
central exchange. Instead, it operates 24 hours a day, five days a
week, across various financial centers worldwide, with major hubs
in London, New York, Tokyo, and Singapore.
2. Currency Pairs: Currencies are quoted in pairs, such as EUR/USD
(Euro/US Dollar) or USD/JPY (US Dollar/Japanese Yen). The first
currency in the pair is the base currency, and the second is the
quote currency. The exchange rate represents the value of one
currency relative to another.
3. Participants: The market participants include central banks,
commercial banks, financial institutions, multinational corporations,
governments, individual traders, and speculators. Central banks
play a significant role in managing their country's currency and may
intervene to stabilize exchange rates.
4. Market Functions:
• Currency Exchange: The primary function is the exchange of one
currency for another, facilitating international trade and investment.
Businesses and individuals use the forex market to convert their
domestic currency into foreign currency and vice versa.
• Hedging: Participants use the forex market to hedge against
currency risk. Businesses may use forward contracts or options to
protect themselves from adverse exchange rate movements.
• Speculation: Traders and investors engage in currency trading to
profit from fluctuations in exchange rates. Speculators aim to buy low
and sell high or sell high and buy low to generate returns.
5. Trading Instruments: The forex market offers a variety of trading
instruments, including spot transactions, forward contracts, futures
contracts, and options contracts. The spot market involves
immediate delivery and settlement of currency transactions, while
the others allow for future delivery at predetermined rates.

The international
money market
▶ Here are key aspects of the international money market:
6. Liquidity: The forex market is one of the most liquid
markets globally, with a daily trading volume exceeding
trillions of dollars. High liquidity ensures that
participants can easily enter and exit positions without
significant price disruptions.
7. Market Influences: Exchange rates are influenced by
various factors, including economic indicators (e.g.,
GDP, inflation, employment data), central bank policies
(e.g., interest rates, interventions), geopolitical events,
and market sentiment.
8. Trading Hours: The forex market operates
continuously, moving through different trading sessions
based on major financial centers. These sessions
include the Asian session, European session, and
North American session, each with its own
characteristics and trading volume.
9. Risk and Leverage: Forex trading carries a high
degree of risk, and leverage is commonly used,
allowing traders to control large positions with a
relatively small amount of capital. While leverage can
amplify profits, it also increases the potential for losses.
10. Regulation: The forex market is subject to varying
degrees of regulation in different countries. Regulations
aim to protect traders and maintain market integrity.
Major financial centers often have stringent regulatory
frameworks for forex brokers and participants.
This Photo by Unknown Author is licensed under CC BY-ND

The international
money market
▶ Overall, the international money
market is a dynamic and vital
component of the global financial
system. It plays a pivotal role in
facilitating international trade and
finance, managing currency risk, and
providing opportunities for traders and
investors to participate in the currency
markets. Traders and investors in the
forex market should be aware of its
complexities and the associated risks
involved in currency trading.
This Photo by Unknown Author is licensed under CC BY-ND

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