Foundations of Multinational Financial Management Alan Shapiro John Wiley

1
Foundations of Multinational Financial
Management Alan Shapiro John Wiley Sons

• Power Points by
• Joseph F. Greco, Ph.D.
• California State University, Fullerton

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Financing Foreign Trade

• Chapter 18

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PAYMENT TERMS

• I. PAYMENT TERMS
• A. Five Principal Means
• 1. Cash in advance
• 2. Letter of Credit
• 3. Drafts
• 4. Consignment
• 5. Open Account

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PAYMENT TERMS

• B. Cash in Advance
• 1. Minimal risk to exporter
• 2. Used where there is
• a. Political unrest
• b. Goods made to order
• c. New unfamiliar customer

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PAYMENT TERMS

• C. Letter of Credit (L/C)
• 1. A letter addressed to seller
• a. written and signed by
• buyers bank
• b. promising to honor sellers
• drafts.
• c. Bank substitutes its own
• commitment
• d. Seller must conform to terms

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PAYMENT TERMS

• 2. Advantages of an L/C to Exporter
• a. eliminates credit risk
• b. reduces default risk
• c. payment certainty
• d. prepayment risk protection
• e. financing source

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PAYMENT TERMS

• 3. Advantages of L/C to Importer
• a. shipment assured
• b. documents inspected
• c. may allow better sales terms
• d. relatively low-cost financing
• e. easy cash recovery if discrepancies

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PAYMENT TERMS

• 4. Types of L/Cs
• a. documentary
• b. non-documentary
• c. revocable
• d. irrevocable
• e. confirmed
• f. transferable

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PAYMENT TERMS

• D. DRAFTS
• 1. Definition
• - unconditional order in writing
• - exporters order for importer to pay
• - at once (sight draft) or
• - in future (time draft)

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PAYMENT TERMS

• 2. Three Functions of Drafts
• a. clear evidence of financial obligation
• b. reduced financing costs
• c. provides negotiable and unconditional
  financial instrument
• (ie. May be converted to a bankers
  acceptance)

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PAYMENT TERMS

• 3. Types of Drafts
• a. sight
• b. time
• c. clean (no documents needed)
• d. documentary

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PAYMENT TERMS

• E. CONSIGNMENT
• 1. Exporter the consignor
• 2. Importer the consignee
• 3. Consignee attempts to sell
• goods to a third party keeps some profit,
  remits rest to consignor.
• 4. Use Between affiliates

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PAYMENT TERMS

• F. OPEN ACCOUNT
• 1. Creates a credit sale
• 2. To importers advantage
• 3. More popular lately because
• a. major surge in global trade
• b. credit information improved
• c. more global familiarity with exporting.

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PAYMENT TERMS

• 4. Benefits of Open Accounts
• a. greater flexibility in making a trade
• b. lower transactions costs
• 5. Major disadvantage
• highly vulnerable to government currency
  controls.

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DOCUMENTS

• II. DOCUMENTS USED IN INTL TRADE
• A. Four most used documents
• 1. Bill of Lading (most important)
• 2. Commercial Invoice
• 3. Insurance Certificate
• 4. Consular Invoice

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DOCUMENTS

• B. Bill of Lading
• Three functions
• 1. Acts as a contract to carry the goods.
• 2. Acts as a shippers receipt
• 3. Establishes ownership over goods if
  negotiable type.

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DOCUMENTS

• 2. Type of Bills
• a. Straight
• b. Order
• c. On-board
• d. Received-for-shipment
• e. Clean
• f. Foul

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DOCUMENTS

• C. COMMERCIAL INVOICE
• Purpose
• 1. Lists full details of goods shipped
• 2. Names of importer/exporter given
• 3. Identifies payment terms
• 4. List charges for transport and insurance.

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DOCUMENTS

• D. INSURANCE
• 1. Two Categories
• a. Marine transport by sea
• b. Air transport by air
• 2. Insurance Certificate
• issued to show proof of insurance

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DOCUMENTS

• E. CONSULAR INVOICE
• Local consulate in host country issues
• a visa for the exporters invoice.
• Requires fee to be paid to consulate.

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SHORT-TERM FINANCING TECHNIQUES

• III. FINANCING TECHNIQUES
• A. Four Types
• 1. Bankers Acceptances
• a. Creation drafts accepted
• b. Terms Payable at maturity to
  holder

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SHORT-TERM FINANCING TECHNIQUES

• 2. Discounting
• a. Converts exporters drafts to cash
• minus interest to maturity and
• commissions.
• b. Low cost financing with few fees
• c. May be with (exporter still liable) or
  without recourse(bank takes
• liability for nonpayment).

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SHORT-TERM FINANCING TECHNIQUES

• 3. Factoring
• -firms sell accounts receivable to another
  firm known as the factor.
• a. Discount charged by factor
• b. Nonrecourse basis Factor
• assumes all payment risk.
• c. When used
• 1.) Occasional exporting
• 2.) Clients geographically dispersed.

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SHORT-TERM FINANCING TECHNIQUES

• 4. Forfaiting
• a. Definition
• discounting at a fixed rate without
• recourse of medium-term accounts
  receivable denominated in a fully convertible
  currency.
• b. Use Large capital purchases
• c. Most popular in W. Europe

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GOVERNMENT SOURCES

• IV. GOVERNMENT SOURCES OF EXPORT
• FINANCING AND CREDIT INSURANCE
• A. Export-Import Bank of the U.S.
• -known as Ex-Im Bank
• -finances and facilitates U.S. exports
  only.

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GOVERNMENT SOURCES

• 1. Ex-Im Bank Programs
• a. Direct loans to exporters
• b. Intermediate loans to exporters
• c. Loan guarantees
• d. Preliminary commitments
• e. Political and commercial insurance

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GOVERNMENT SOURCES

• B. Private Export Funding Corporation
• (PEFCO)
• 1. Finances large sales from private sources
• 2. May purchase loans of U.S. importers
• 3. ExIm Bank provides loan guarantees.

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GOVERNMENT SOURCES

• C. Foreign Credit Insurance Association
• (FCIA)
• 1. Offers commercial and political
• risk insurance
• 2. When insured, exporter often
• able to obtain financing faster.

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COUNTERTRADE

• V. COUNTERTRADE
• A. Three Specific Forms
• 1. Barter
• direct exchange in kind
• 2. Counterpurchase
• sale/purchase of unrelated
• goods but with currencies
• 3. Buyback
• repayment of original purchase through
  sale of a related product.

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COUNTERTRADE

• B. When to Use Countertrade
• 1. With soft-currency developing
  countries
• 2. When foreign contractor must
• perform.