INTERNATIONAL TRADE FINANCE

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INTERNATIONAL TRADE FINANCE

• Topics to be Discussed in Chapter
• Letter of Credit
• Uniform Customary and Practices for Documentary
  Credits
• Standby Letters of Credit
• Alternative Methods of Guaranteeing Performance
• Alternative Methods of Financing
• Seller
• Buyer
• Government Programs

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LETTERS OF CREDIT

• Letters of Credit a commercial bank guarantee of
  either payment by the buyer or performance by the
  seller.
• Purposes
• Guarantees payment by the buyer (letter of
  credit) or to guarantee performance by seller
  (standby letter of credit.
• Once letter of credit is issued, the seller can
  use instrument to finance production of goods.

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LETTERS OF CREDIT

• Functions of Letters of Credit
• Payment Instrument
• In absence of letter of credit, sight or time
  drafts used. No Guarantee of Payment.
• Letters of Credit Involves Bank in Transaction.
• Performance Guarantee
• In Documentary Transaction no guarantee of
  performance.
• Payment by bank would not be released until goods
  and document conforms to specifications on letter
  of credit.
• Finance Instrument
• Seller can use letter of credit as collateral to
  finance production and exportation of good.

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LETTERS OF CREDIT

• Types of Letters of Credit
• Irrevocable Letter of Credit-bank cannot revoke
  letter of credit. To change letter of credit,
  must get written agreement.
• Most Popular in International Commercial
  Transaction
• Revocable Letter of Credit-bank can revoke letter
  of credit.
• Very Seldom Used.

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LETTERS OF CREDIT

• Letter of Credit Transaction
• After formation of contract, buyer arranges for
  bank to open letter of credit.
• Buyers bank prepares irrevocable letter of
  credit.
• Buyers bank sends irrevocable letter of credit
  to a US bank for confirmation.
• US bank prepares a letter of confirmation to
  exporter along with irrevocable letter of credit
• Exporter arranges for freight forwarded to
  deliver goods. Freight Forwarder prepares
  documents.
• Exporter presents document to Bank indicating
  full compliance. Bank bound by rule of strict
  compliance
• Bank reviews documents and authorizes payment

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UNIFORM CUSTOMS AND PRACTICES FOR DOCUMENTARY
CREDITS

• Uniform Customs and Practices for Documentary
  Credits are rules and procedure published by
  International Chamber of Commerce
• Provisions
• Care should be taken in specifying expiration
  dates
• The applicant must specify if the letter of
  credit is transferable.
• The applicant must specify that the letter be
  confirmed
• The currency of the letter of credit should be
  designated using ISO currency code.
• The applicant should designate the nominating bank

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UNIFORM CUSTOMS AND PRACTICES FOR DOCUMENTARY
CREDITS

• Uniform Customs and Practices for Documentary
  Credits-provisions continued.
• Applicant must specify clearly whether the letter
  of credit will be available for partial shipment.
• The letter of credit should provide transport
  details
• Under rule of strict compliance, banks are
  authorized to reject documents if there are any
  discrepancies.
• Facial Compliance Rule-bank only required to
  review documents.
• Banks are not required to investigate trade
  customs or usage

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UNIFORM CUSTOMS AND PRACTICES FOR DOCUMENTARY
CREDITS

• Uniform Customs and Practices for Documentary
  Credits-provisions continued
• Description of the Goods should be clear and
  brief as possible.
• In the listing of documents, should list the
  contents of each document.
• Transportation Documents must be clear.
• Insurance Documents must be clear.
• Time periods for presentation of documents must
  be specified.
• Title of Letter of Credit should specify
  irrevocable.

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STANBY LETTER OF CREDIT

• Standby Letter of Credit is a letter of credit
  that represents an obligation to the beneficiary
  on the part of the issuer
• International Standby Practices
• Standby Letters of Credit secures contractual
  obligations in construction contracts, service
  contracts, warranties, counter-trade trade
  obligations, secures international loans and
  supplies.

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ALTERNATIVE METHODS OF GUARANTEEING PERFORMANCE

• Alternative Methods of Guaranteeing Performance
• Types
• Performance Bond-a guarantee from an insurance
  company to pay insured in case of default.
• Bid Bond-insure against the risk that a bidder
  may not honor its bid.
• Credit Surety-guarantees the repayment to a bank
  or lender who finances an export transaction or
  development project. Exim Bank of World Bank

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ALTERNATIVE METHODS OF GUARANTEEING PERFORMANCE

• Types-Continued
• Retention Fund-in large or government projects, a
  percentage is deducted from each payment due to
  the supplier or contractor and is retained in a
  fund pending completion of project.
• Demand Guarantee secures performance of a
  non-monetary obligation.

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SOURCES OF TRADE FINANCE

• Commercial Banks
• Export Financing
• Borrowing against trade documents
• Factoring-exporter transfers title to its account
  receivable to a factoring company at a discount.
• Forfaithing-selling at a discount, of longer term
  receivables or promissory notes to a foreign
  buyer.
• Transferable Credit-suppliers accept part of the
  letter of credit that seller receives from buyer
  in export transaction.
• Back to Back Letter of Credit-buyer makes
  arrangements with third bank to make loan.

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SOURCES OF TRADE FINANCE

• Government Assistance Programs
• Eximbank in United States-
• Arranges loans, guarantees, working capital and
  insurance
• Foreign Corporation Insurance Agency
• Protects against default on exports sold under
  open accounts
• Overseas Private Insurance Corporation
• Offers performance bonds
• Small Business Administration
• Revolving line of credit

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