Export and Import Financing

INTRODUCTION.

THEME: “Export and Import Financing”

AIM OF THE PAPER: see differences in the management of international and national credit risk, learn how letter of credit system.

GOALS:

1. Find theoretical information about export and import financing ;
2. Analyze the information about export and import financing
3. Make a conclusion on the theme

 

THESIS: In its own particular issue is the financing of exports and imports. The fact is that the actual movement of money, related to income and expenditure, almost never occur at the same time, payments for goods and services usually occur a few months after placing the order on them and deliver goods or services.

In the international business due to his involvement in a variety of factors, exposure to credit risk and the likelihood of its manifestation are increased. Because the time of delivery and communication between the parties increases, the time between placing orders and receipt of funds also significantly increased. Resolving the issues of increasing the credit period is also complicated by differences in legal systems and practices of the trade. In addition, companies from different countries often do not know each other. The cost of it to compel the other party to perform the contract if it does not do it willingly, sometimes exceed the benefits expected from the sale of such contracts. Additional factors that could cause complications and lead to disputes and defaults, and is uncertainty as to the difference in currency exchange rates and inflation, as well as their changes during the contract.

The difficulty of a case related to credit risk may be so great that the partners are often reluctant to many mutually beneficial transactions. Even within one country this kind of risk is a serious problem. In the United States to encourage individual states to adopt a uniform commercial code were made tremendous efforts in the field of legislation and regulation of the general state of affairs. At the international level, despite the enormous efforts of the UN and other organizations seeking to promote international economic development, failed to adopt a uniform commercial code, operating on an international scale.

 

International credit risk

Revenues for the company referred to in the report on the results of the activities correspond with its costs. This means that, when taken into account income from an activity, all costs associated with obtaining these revenues are deducted at the same time, which allows to determine the profitability of the business. The actual movement of money-related revenues and expenditures, however, almost never occur at the same time, payments for goods and services usually occur a few months after placing the order on them and deliver goods or services. 

 
The gap in time between the implementation of the sale, delivery of goods, services and the actual receipt of funds is reflected in the balance sheet, the following articles: accounts receivable, material stockpiles, and accounts payable.When the company will pay for goods and services after they are received, the obligation of the payment is recorded as an account payable in the balance sheet of the company and as an account receivable on the balance sheet of the company, which provided the said goods and services. When a company begins executing orders, raw materials and manufactured goods produced and already accounted for under "Material stockpiles ^. If any of the parties involved in the transaction will not be able to fulfill its obligation and the related assets and liabilities do not receive monetary support, the income recorded in a time period equivalent to offset losses in another account the time. The risk that one party in the sale will not be able to meet its obligations is called credit risk. Because of the possibility of such developments all businesses spend considerable resources, sometimes even giving up lucrative deals to manage this kind of risk. 

 
In the international business due to his involvement in a variety of factors, exposure to credit risk and the likelihood of its manifestation are increased.Because the time of delivery and communication between the parties increases, the time between placing orders and receipt of funds also significantly increased.Resolving the issues of increasing the credit period is also complicated by differences in legal systems and practices of the trade. In addition, companies from different countries often do not know each other. The cost of it to compel the other party to perform the contract if it does not do it willingly, sometimes exceed the benefits expected from the sale of such contracts. Additional factors that could cause complications and lead to disputes and defaults, and is uncertainty as to the differences B-values ​​of exchange and inflation, as well as their changes during the contract. 
 
  
The difficulty of a case related to credit risk may be so great that the partners are often reluctant to many mutually beneficial transactions. Even within one country this kind of risk is a serious problem. In the United States to encourage individual states to adopt a uniform commercial code were made tremendous efforts in the field of legislation and regulation of the general state of affairs. Internationally, despite the enormous efforts of the UN and other organizations seeking to promote international economic development, failed to adopt a uniform commercial code, operating on an international scale.

 
1.1 Lack of Trust

Firms engaged in international trade have to trust someone they may have never seen, who lives in a different country, who speaks a different language, who abides by (or does not abide by) a different legal system, and who could be very difficult to track down if he or she defaults on an obligation. Consider a US firm exporting to a distributor in France. The US businessman might be concerned that if he ships the products to France before he receives payment for them from the French businesswoman, she might take delivery of the products and not pay him for them. Conversely, the French importer might worry that if she pays for the products before they are shipped, the US firm might keep the money and never ship the products or might ship defective products. Neither party to the exchange completely trusts the other. This lack of trust is exacerbated by the distance between the two parties--in space, language, and culture--and by the problems of using an underdeveloped international legal system to enforce contractual obligations.

 

Due to the (quite reasonable) lack of trust between the two parties, each has his or her own preferences as to how they would like the transaction to be configured. To make sure he is paid, the manager of the US firm would prefer the French distributor to pay for the products before he ships them (see Figure 15.1). Alternatively, to ensure she receives the products, the French distributor would prefer not to pay for them until they arrive (see Figure 15.2). Thus, each party has a different set of preferences. Unless there is some way of establishing trust between the parties, the transaction might never take place.

 

The problem is solved by using a third party trusted by both--normally a reputable bank--to act as an intermediary. What happens can be summarized as follows (see Figure 15.3). First, the French importer obtains the bank's promise to pay on her behalf, knowing the US exporter will trust the bank. This promise is known as a letter of credit. Having seen the letter of credit, the US exporter now ships the products to France. Title to the products is given to the bank in the form of a document called a bill of lading. In return, the US exporter tells the bank to pay for the products, which the bank does. The document for requesting this payment is referred to as a draft. The bank, having paid for the products, now passes the title on to the French importer, whom the bank trusts. At that time or later, depending on their agreement, the importer reimburses the bank. In the remainder of this section, we will examine how this system works in more detail.

 

1.2 Letter of Credit

A letter of credit, abbreviated as L/C, stands at the center of international commercial transactions. Issued by a bank at the request of an importer, the letter of credit states that the bank will pay a specified sum of money to a beneficiary, normally the exporter, on presentation of particular, specified documents.

 

Consider again the example of the US exporter and the French importer. The French importer applies to her local bank, say the Bank of Paris, for the issuance of a letter of credit. The Bank of Paris then undertakes a credit check of the importer. If the Bank of Paris is satisfied with her creditworthiness, it will issue a letter of credit. However, the Bank of Paris might require a cash deposit or some other form of collateral from her first. In addition, the Bank of Paris will charge the importer a fee for this

Figure 15.1

Preference of the US Exporter

 

Figure 15.2

 

Preference of the French Importer

 

 

 

Figure 15.3

 

The Use of a Third Party

 

Typically this amounts to between 0.5 percent and 2 percent of the value of the letter of credit, depending on the importer's creditworthiness and the size of the transaction. (As a rule, the larger the transaction, the lower the percentage.)

 

Let us assume the Bank of Paris is satisfied with the French importer's creditworthiness and agrees to issue a letter of credit. The letter states that the Bank of Paris will pay the US exporter for the merchandise as long as it is shipped in accordance with specified instructions and conditions. At this point, the letter of credit becomes a financial contract between the Bank of Paris and the US exporter. The Bank of Paris then sends the letter of credit to the US exporter's bank, say the Bank of New York. The Bank of New York tells the exporter that it has received a letter of credit and that he can and ship the merchandise. After the exporter has shipped the merchandise, he draws a draft against the Bank of Paris in accordance with the terms of the letter of credit, attaches the required documents, and presents the draft to his own bank, the Bank of New York, for payment. The Bank of New York then forwards the letter of credit and associated documents to the Bank of Paris. If all of the terms and conditions contained in the letter of credit have been complied with, the Bank of Paris will honor the draft and will send payment to the Bank of New York. When the Bank of New York receives the funds, it will pay the US exporter.

 

As for the Bank of Paris, once it has transferred the funds to the Bank of New York, it will collect payment from the French importer. Alternatively, the Bank of Paris may allow the importer some time to resell the merchandise before requiring payment. This is not unusual, particularly when the importer is a distributor and not the final consumer of the merchandise, since it helps the importer's cash flow position. The Bank of Paris will treat such an extension of the payment period as a loan to the importer and will charge an appropriate rate of interest.

 

The great advantage of this system is that both the French importer and the US exporter are likely to trust reputable banks, even if they do not trust each other. Once the U.S. exporter has seen a letter of credit, he knows that he is guaranteed payment and will ship the merchandise. Also, an exporter may find that having a letter of credit will facilitate obtaining preexport financing. For example, having seen the letter of credit, the Bank of New York might be willing to lend the exporter funds to process and prepare the merchandise for shipping to France. This loan may not have to be repaid until the exporter has received his payment for the merchandise. As for the French importer, the great advantage of the letter of credit arrangement is that she does not have to pay out funds for the merchandise until the documents have arrived and unless all conditions stated in the letter of credit have been satisfied. The drawback for the importer is the fee she must pay the Bank of Paris for the letter of credit. In addition, since the letter of credit is a financial liability against her, it may reduce her ability to borrow funds for other purposes.

 

 

1.3 Draft

A draft, sometimes referred to as a bill of exchange, is the instrument normally used in international commerce to effect payment. A draft is simply an order written by an exporter instructing an importer, or an importer's agent, to pay a specified amount of money at a specified time. In the example of the US exporter and the French importer, the exporter writes a draft that instructs the Bank of Paris, the French importer's agent, to pay for the merchandise shipped to France. The person or business initiating the draft is known as the maker (in this case, the US exporter). The party to whom the draft is presented is known as the drawee (in this case, the Bank of Paris).

 

International practice is to use drafts to settle trade transactions. This differs from domestic practice in which a seller usually ships merchandise on an open account, followed by a commercial invoice that specifies the amount due and the terms of payment. In domestic transactions, the buyer can often obtain possession of the merchandise without signing a formal document acknowledging his or her obligation to pay. In contrast, due to the lack of trust in international transactions, payment or a formal promise to pay is required before the buyer can obtain the merchandise.

 

Drafts fall into two categories, sight drafts and time drafts. A sight draft is payable on presentation to the drawee. A time draft allows for a delay in payment--normally 30, 60, 90, or 120 days. It is presented to the drawee, who signifies acceptance of it by writing or stamping a notice of acceptance on its face. Once accepted, the time draft becomes a promise to pay by the accepting party. When a time draft is drawn on and accepted by a bank, it is called a banker's acceptance. When it is drawn on and accepted by a business firm, it is called a trade acceptance.

 

Time drafts are negotiable instruments; that is, once the draft is stamped with an acceptance, the maker can sell the draft to an investor at a discount from its face value. Imagine the agreement between the US exporter and the French importer calls for the exporter to present the Bank of Paris (through the Bank of New York) with a time draft requiring payment 120 days after presentation. The Bank of Paris stamps the time draft with an acceptance. Imagine further that the draft is for $100,000.

 

The exporter can either hold onto the accepted time draft and receive $100,000 in 120 days or he can sell it to an investor, say the Bank of New York, for a discount from the face value. If the prevailing discount rate is 7 percent, the exporter could receive $96,500 by selling it immediately (7 percent per annum discount rate for 120 days for $100,000 equals $3,500, and $100,000 - $3,500 = $96,500). The Bank of New York would then collect the full $100,000 from the Bank of Paris in 120 days. The exporter might sell the accepted time draft immediately if he needed the funds to finance merchandise in transit and/or to cover cash flow shortfalls.

 

Bill of Lading

 

The third key document for financing international trade is the bill of lading. The bill of lading is issued to the exporter by the common carrier transporting the merchandise. It serves three purposes: it is a receipt, a contract, and a document of title. As a receipt, the bill of lading indicates that the carrier has received the merchandise described on the face of the document. As a contract, it specifies that the carrier is obligated to provide a transportation service in return for a certain charge. As a document of title, it can be used to obtain payment or a written promise of payment before the merchandise is released to the importer. The bill of lading can also function as collateral against which funds may be advanced to the exporter by its local bank before or during shipment and before final payment by the importer.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Letter of credit SYSTEM

Nevertheless, to control credit risk and to facilitate international trade in transnational banks over the years developed a proper integrated system. This system is based on the method of conducting international business transactions, known as letters of credit. In applying the letter of credit from the credit risk of the buyer and the seller is transferred to the bank. And because international banks operate continuously in many countries and is constantly involved in many transactions, they usually have an expert system for assessing international business operations and save on economies of scale, manifested in the reduction of long-term average cost per operation for a large number of examinations conducted. Banks can also distribute the profits and costs across many companies engaged in such transactions. 
 
In the following paragraphs due to a simplified system of letter of credit to the activities of the U.S. electrical goods retailer, which he imports from Japan. After describing the fundamentals of this system we will do an overview and a look at some of its infinite variations, used around the world. 
 
Asking for a letter of credit 
 
Suppose an American vendor with a small volume of retail trade wants to import and sell electric motors, which are made a small company in Japan. If the seller has contacted the Japanese company, it is likely that the Japanese side wanted to get an advance payment in yen, as it sought to avoid sending their products to an unfamiliar partner loan in a faraway country, where it would be too costly and time-consuming to obtain their money in the event of default by the American side.The U.S. is the seller would not be willing to pay an advance, since retailers little room to get the money elsewhere, and also because for him it would be burdensome to force a Japanese partner to motors, if he had not fulfilled hisobligations. 
 
The way out of this impasse may be recourse to multinational bank with branches in Japan and the United States, which can guarantee the fulfillment of obligations by both parties or, in other words, to assume the credit risk, the presence of which otherwise would break the deal. The process begins American salesperson who goes to the bank and asks for a letter of credit. If the bank gives him, then takes responsibility for the fact that the U.S. side will make the payment. Naturally, the bank, as well as anyone in the issuance of short-term loan or line of credit at the opening, conduct a thorough credit check and decide whether you can deal with this partner, and in some cases the bank will charge a fee for treatment, as well as it does when transactions with certain types of loans. American seller must convince the bank that his business is profitable and legal. 
 
If the bank came to the conclusion that the loan is requested to conduct a profitable and legitimate business and that the seller kreditosposoben, he may grant the request and issue a letter of credit and notify. This Japanese manufacturer. The letter of credit will be determined by the type of product, its quality and price, means of delivery and payment terms. Now, the Japanese side knows that if she sends the goods on credit, and will perform it on the conditions stipulated in the Credit, provided it receives the payment, even if the U.S. partner will not fulfill its obligations. In the event of disagreement on the terms of the transaction the producer will have to deal only with a bank located in Japan and Japanese laws and customs. 
 
Shipping documents 
 
The American company can just send your order the Japanese manufacturer by telex or fax. The manufacturer carries out the order and delivers it to the transport company in Japan. Then, the shipper prepares the bill of lading for the manufacturer. Bill of lading - a document that specifies the number and condition of cargo, their destination, and in some cases reported and to whom belongs the right of ownership to the consignment. 
 
Manufacturer, and sometimes the shipper, provides insurance and receives transportation or consular or commercial invoice, which are often necessary for the delivery of certain goods across international borders. Transport insurance provides for reimbursement of both intentional and accidental loss or damage to cargo during its transportation. 
 
Bill 
 
After that, the Japanese company is shipping documents, as well as the letter of credit to Japanese branch of the multinational bank and puts a bill on account of its American partner. Bills of exchange are usually referred to drafts, and are of two kinds. Promissory notes to bearer, which are orders to pay 
 
at the request of a certain size, very similar to the checks 
 
except that it does not require the signature of the account holder, and sometimes consumers are allowed to mortgage companies and utility companies to exhibit a bill payable to bearer on their current accounts. This is done in order to save time and money on processing invoices for payment and postage receipt. The Bank will not accept a bill, offered an exporter, as long as the Japanese manufacturer does not submit all the documents and did not fulfill all the conditions defined in the Credit. 
 
The second and more common form of the bill is a time draft. It is an order to pay a specified amount at a certain time in the future. She looks like a future dated check number, except that in this case also does not require the signature of the account holder. Most letters of credit, provide for urgent a bill that provides adequate time for delivery of goods and their sale to funds to cover the drafts can be deposited into the account. 
 
However, usually the exporter does not want to wait for an urgent payment of bill of exchange to get the money owed to him. Therefore, it is often inferior to their urgent a bill to the bank at a discount. Discounting of a bill means that the bank acquires an urgent a bill before the expiry of its maturity for an amount less than that prescribed for the payment of this tragge. This discount is for the Japanese exporter costs as a percentage of the value of a bill to receive the money before the maturity of a bill. 
 
If the U.S. importer detects the inconsistency before the maturity date of a draft, the bank in relation to the Japanese the right of recourse to the exporter does not usually have. In cases where the exporter is a large company's credit, it can offer to the bank to obtain a right of recourse in the event of insolvency of a partner of this company. In this case, the exporter guarantees payment of a bill by the due date of repayment. This is usually done in order to induce the bank to discount a bill with a smaller discount. Exporter warrants urgent a bill, making her endorsement, after which it gets accepted by the name of the shopping bill.

2.1 Bank acceptance

Large multinational bank at any time, usually owned by drafts discounted futures worth millions of dollars. Most banks tend to eliminate some of these bills of exchange discounted before the expiration of term maturity. They can do this by selling them to other banks, large corporations or, in some cases, central banks.To sell the time draft, the banks always give a guarantee that they will be repaid with the onset of the period, and do it regardless of what the importer. The Bank carries out this guarantee, making for an urgent bill of exchange discounted endorsement (endorsement) and placing it on its own brand name. For now, the bank takes recourse in the event of insolvency of the person against whom put this bill, that endorsed and discounted time draft is called a bank acceptance. 
 
When a bank sells or discounts as urgent a bill banker's acceptance, he gets more money for it than he pays for the exporter, ie it is less a discount. And because the risk to the new owner (in this case to another bank) is reduced, as well as time to maturity of a bill, as the former owner is typically a time kept it until the last transaction. Therefore, the bank may discount the banker's acceptance of a higher price. Acquiring bank bill, another bank may, in turn, after a while to sell it to the next owner. Usually, the second bank puts on it a brand name, endorsement, ie guarantee its redeemable at the right time. This process can take place after 3 or 4 banks, each of which guarantees payment of the original bill of exchange. Consequently, bankers' acceptances - is one of the most risk-free short-term capital market instruments, which may become an investor..

 

2.2 International market short-term capital

The bank also allows the importer and the exporter to circumvent many of the difficulties in dealing with foreign currency and long-term capital market. The importer can pay in dollars and calculate their income from a deferred payment basis from the U.S. rate of return. The exporter receives payment in yen and can count the cost of discounting on the basis of Japan's rate of return. The ability of the bank to discount a bill in the international market allows unlimited short-term capital to deliver the funds to finance international trade. 
 
Variants of the basic system 
 
To understand the letter of credit system, discussed in previous sections, the procedures were simplified. In practice, the system has many varieties and is faced with some difficulties. In this section we discuss some of the most common variants of letters of credit. 
 
In most cases, the transaction involves more than one bank. Bank of the importing country, which receives and supports an application for credit, known as the issuing bank. If the issuing bank has no branches in the country of the exporter, he shall notify, or a correspondent bank in the country or the exporter's bank, known as bank-acceptor. Bank-acceptor acting in the interests of the issuing bank, but does not guarantee payment, while the latter does not confirm a letter of credit established by the way, by making the appropriate fee. 
 
Letters of credit can be revocable or irrevocable. Irrevocable letter of credit guarantees that the exporter will make payments in the performance of its obligations, even if the importer wants to abandon the transaction. Therefore, the exporter, who performs a special order for which you most likely will not be another buyer, prefer exactly this kind of credit. Revocable letter of credit allows the importer to cancel the order prior to delivery of shipping documents to the issuing bank (or bank-acceptor, if the credit is confirmed). Once the relevant documents will be submitted to the bank to accept an agreement for the issuance of drafts and guarantee payment. 
 
Irrevocable confirmed letter of credit determines the price and the value of the order. If the company prefers to resolve repetitive orders at the prices and volumes, changing with time, it is more appropriate means taking into account the letter of credit in the form of bank drafts, exhibited exporter to the buyer. This type of credit allows you to duplicate orders on prices, quantities and values ​​of exchange rates, which are installed at the time of order. Very large and creditworthy importers can afford to have their credit transferred to another person, that is, widest cool exporters may fulfill their orders and to stand for these bills of exchange orders.

2.3 Forfeiting

In some situations, the bank may not want or do not have the ability to issue letters of credit. This especially applies to importers, which are located in countries with underdeveloped economies or countries with nonmarket economies, as well as those projects that are associated with exporting capital on a long term basis, such of its forms as factories, utilities and transport networks. And in this case for trade facilitation and monitoring of credit risk has a number of alternatives. 
 
Forfeiting 
 
Forfaiting is in some respects resembles the letter of credit agreement for the medium-and long-term financing of export-import operations. Application of this method was necessary in Eastern Europe finance exports of capital equipment, and sometimes the entire industrial complexes. And because the currency has often been non-convertible at market prices, and the administrative secrecy prevented the free flow of information, in order to facilitate trade and provide funding for these projects, several banks in Germany, Switzerland and Austria have established special units, which are called forfeytorami. 
 
Forfeytory foreign investment fund programs without recourse to the exporter, which means that the exporter does not need to worry about the creditworthiness of the importer. The term "forfaiting" is derived from a French term meaning "to give the right" in this case the right of recourse against the exporter. 
 
The first step is to forfeiting an agreement between the exporter and importer of the price and the general scheme of execution and payment for the investment program. After this, the exporter is associated with forfeytorom and together they discuss the terms of the contract, to discount the payments in the currency of the importer exporter. If the exporter, importer and forfeytor come to an agreement on the terms, preparing contracts and official bonds. Then, the importer receives these commitments, endorsed (guaranteed 
 
en) State Bank and relevant government agencies. Then the debt transferred to the exporter, who discounts them Forfaiter. After that, the parent bank Forfaiter can endorse these commitments, just as is done in the acceptance of bank and sell them on the international market of short-term obligations. 
 
With the exception of long-term nature of the transaction and provided financing, forfaiting performs the same function as the letter of credit system. The exporter in this case is free from credit risk, the importer receives goods on credit, both with no risk of exchange rates and international market for short-term capital provides unlimited credit.