16 Final Trade Finance

8/8/2019 16 Final Trade Finance

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CONTENT

Introduction to International Trade

Methods of Payment

Pre-Shipment Finance

Post-Shipment Finance

Letter of Credit

Open Account

Documentary Collections

Factoring

Top Trading Nations

Risk in International Trade

Countertrade


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INTERNATIONAL TRADE

International trade is exchange ofcapital, goods, and services across international

borders or territories.[1]. In most countries, it represents a significant share ofgross domestic

product (GDP). While international trade has been present throughout much of history

(see Silk Road, Amber Road), its economic, social, and political importance has been on the

rise in recent centuries.

Industrialization, advanced transportation, globalization, multinational corporations,

and outsourcing are all having a major impact on the international trade system. Increasing

international trade is crucial to the continuance ofglobalization. Without international trade,

nations would be limited to the goods and services produced within their own borders.

International trade is in principle not different from domestic trade as the motivation and the

behaviour of parties involved in a trade do not change fundamentally regardless of whether

trade is across a border or not. The main difference is that international trade is typically

more costly than domestic trade. The reason is that a border typically imposes additional

costs such as tariffs, time costs due to border delays and costs associated with country

differences such as language, the legal system or culture.

Another difference between domestic and international trade is that factors of

production such as capital and labourare typically more mobile within a country than across

countries. Thus international trade is mostly restricted to trade in goods and services, and

only to a lesser extent to trade in capital, labour or other factors of production. Then trade in

goods and services can serve as a substitute for trade in factors of production. Instead of

importing a factor of production, a country can import goods that make intensive use of the

factor of production and are thus embodying the respective factor. An example is the import

of labour-intensive goods by the United States from China. Instead of importing Chinese

labour the United States is importing goods from China that were produced with Chinese

labour.

International trade is also a branch ofeconomics, which, together with international finance,

forms the larger branch ofinternational economics.
http://en.wikipedia.org/wiki/Capital_(economics)http://en.wikipedia.org/wiki/Good_(economics)http://en.wikipedia.org/wiki/Service_(economics)http://en.wikipedia.org/wiki/International_bordershttp://en.wikipedia.org/wiki/International_bordershttp://en.wikipedia.org/wiki/International_trade#cite_note-0http://en.wikipedia.org/wiki/International_trade#cite_note-0http://en.wikipedia.org/wiki/Gross_domestic_producthttp://en.wikipedia.org/wiki/Gross_domestic_producthttp://en.wikipedia.org/wiki/Tradehttp://en.wikipedia.org/wiki/Silk_Roadhttp://en.wikipedia.org/wiki/Amber_Roadhttp://en.wikipedia.org/wiki/Industrializationhttp://en.wikipedia.org/wiki/Transporthttp://en.wikipedia.org/wiki/Globalizationhttp://en.wikipedia.org/wiki/Multinational_corporationhttp://en.wikipedia.org/wiki/Outsourcinghttp://en.wikipedia.org/wiki/Globalizationhttp://en.wikipedia.org/wiki/Domestic_tradehttp://en.wikipedia.org/wiki/Tariffhttp://en.wikipedia.org/wiki/Factors_of_productionhttp://en.wikipedia.org/wiki/Factors_of_productionhttp://en.wikipedia.org/wiki/Labour_economicshttp://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/International_financehttp://en.wikipedia.org/wiki/International_economicshttp://en.wikipedia.org/wiki/Capital_(economics)http://en.wikipedia.org/wiki/Good_(economics)http://en.wikipedia.org/wiki/Service_(economics)http://en.wikipedia.org/wiki/International_bordershttp://en.wikipedia.org/wiki/International_bordershttp://en.wikipedia.org/wiki/International_trade#cite_note-0http://en.wikipedia.org/wiki/Gross_domestic_producthttp://en.wikipedia.org/wiki/Gross_domestic_producthttp://en.wikipedia.org/wiki/Tradehttp://en.wikipedia.org/wiki/Silk_Roadhttp://en.wikipedia.org/wiki/Amber_Roadhttp://en.wikipedia.org/wiki/Industrializationhttp://en.wikipedia.org/wiki/Transporthttp://en.wikipedia.org/wiki/Globalizationhttp://en.wikipedia.org/wiki/Multinational_corporationhttp://en.wikipedia.org/wiki/Outsourcinghttp://en.wikipedia.org/wiki/Globalizationhttp://en.wikipedia.org/wiki/Domestic_tradehttp://en.wikipedia.org/wiki/Tariffhttp://en.wikipedia.org/wiki/Factors_of_productionhttp://en.wikipedia.org/wiki/Factors_of_productionhttp://en.wikipedia.org/wiki/Labour_economicshttp://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/International_financehttp://en.wikipedia.org/wiki/International_economics


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TRADE FINANCE

Trade financeis related tointernational trade.

While a seller (theexporter) can require the purchaser (animporter) to prepay for

goodsshipped, the purchaser (importer) may wish to reduce risk by requiring the seller to

document the goods that have been shipped.Banksmay assist by providing various forms of

support. For example, the importer's bank may provide aletter of creditto the exporter (or the

exporter's bank) providing for payment upon presentation of certain documents, such as

abill of lading. The exporter's bank may make a loan (by advancing funds) to the exporter on

the basis of the export contract.

Other forms of trade finance can includetrade credit insurance, exportfactoring,forfaitingand

others. In many countries, trade finance is often supported by quasi-government entities

known asexport credit agenciesthat work with commercial banks and other financial

institutions.

In short, trade finance meansmoneylent to exporters or importers.

DEFINITION

Trade Finance is the science that describes the management of money, banking, credit,

investments and assets for international trade transactions.

International Trade

Flow of Commodity Flow of Productive Factors

TRADE RELATIONSHIP

Trade financing shares a number of common characteristics with the traditional value chainactivities conducted by all firms. All companies must search out suppliers for the manygoods and services required as inputs to their own goods production or service provisionprocesses. Issues to consider in this process include the capability of suppliers to producethe product to adequate specifications, deliver said products in a timely fashion, and to workin conjunction on product enhancements and continuous process improvement. All of theabove must also be at an acceptable price and payment terms.
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The nature of the relationship between the exporter and the importer is critical tounderstanding the methods for import-export financing utilized in industry. There are threecategories of relationships (see next exhibit):

Unaffiliated unknown Unaffiliated known Affiliated (sometimes referred to as intrafirm trade)

The composition of global trade has changed dramatically over the past few decades,moving from transactions between unaffiliated parties to affiliated transactions.

ADVANTAGES AND DISADVANTAGES

Advantages

Market expansion Economies of scale Surplus not wasted BOP Global productivity Socio economic setup of country

Disadvantages

Annihilation of infant industry Exchange rate fluctuation Unequal distribution of wealth

EXIM BANKS

Exim Bank is managed by a Board of Directors, which has representatives from theGovernment, Reserve Bank of India, Export Credit Guarantee Corporation of India (ECGC),a financial institution, public sector banks, and the business community.

The Bank's functions are segmented into several operating groups including:

Corporate Banking Group which ABN, MN handles a variety of financing programmes forExport Oriented Units (EOUs), Importers, and overseas investment by Indian companies.Project Finance / Trade Finance Group handles the entire range of export credit servicessuch as supplier's credit, pre-shipment credit, buyer's credit, finance for export of projects &consultancy services, guarantees, forfaiting etc.

Lines of Credit Group Lines of Credit (LOC) is a financing mechanism and exporttransactions in the agricultural sector for financing. Small and Medium Enterprises Group tothe specific financing requirements of export oriented SMEs. The group handles creditproposals from SMEs under various lending programmes of the Bank.

Export Services Group offers variety of advisory and value-added information servicesaimed at investment promotion Fee based Export Marketing Services Bank offers assistanceto prorate Affairs.
http://en.wikipedia.org/wiki/Export_Credit_Guarantee_Corporation_of_Indiahttp://en.wikipedia.org/wiki/Export_Credit_Guarantee_Corporation_of_India


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METHODS FOR INTERNATIONAL TRADE FINANCE

According to stage of financing:

Pre-shipment finance

Post-shipment finance

Instruments/methods of financing:

Letter of credit

Open account

Factoring

Document collections

PRE-SHIPMENT FINANCE :

Definition:

Financial assistance extended to the exporter from the date of receiptof the export order till the date of shipment is known as pre-shipmentcredit.

Such finance is extended to an exporter for the purpose of procuring raw materials,processing, packing, transporting, warehousing of goods meant for exports. Maximumperiod of 180 days Exporter can obtain 90% of the FOB value of the order or 75% of the CIFvalue of the order.

This is extended to the customers for procuring goods, purchase of raw materials,processing them and converting them into finished goods for the purpose of exports Thetype of limit depends upon the nature of production and procurement system concerning thecommodity to be exported. Clean Export Packing Credit (EPC) can be granted when first

class clients have to give advance payment to the suppliers.

The clean advance is converted to EPC hypothecation/ pledge or secured shipping loandepending upon the nature of the commodity. Packing credit hypothecation is extendedwhere raw materials, work-in-process and finished goods meant for exports are available assecurity. The processing/ manufacturing may be undertaken by the exporter himself orthrough sub-contractors as captive units.

Sometimes exporters have to obtain the raw materials in bunched lots or the materialprocured may be sizeable in nature. In such cases packing credit loan can be granted in theform of pledge. Once the goods are ready for shipment and the exporter/ supplier hashanded over the goods to the transporter/ clearing and forwarding agents for effecting the

shipment, the advance can be granted as secured shipping loan.


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Pre-shipment advance is usually granted up to a maximum of 180 days or expiry of relativeLC or order, whichever is earlier. In some cases EPC can go up to 360 days. Pre-shipmentCredit can be in Indian Rupees or in Foreign Currency. This facility was given as exporterscomplained that interest in India was high.

All pre-shipment finance is self-liquidating in nature from post-shipment finance. If pre-shipment advances are not adjusted by submission of export documents, the advances willcease to qualify for concessional rate of interest ability. Ordinarily, each packing creditsanctioned should be maintained as a separate account for the purpose of monitoring ofsanction and end-use of funds.

IMPORTANCE OF PRE-SHIPMENT FINANCE

o Purchase raw material, and other inputs

o Assemble the goods in the case of merchant exporters.

o Store the goods in suitable warehouses till the goods are shipped.

o Packing, marking and labeling of goods.

o Pre-shipment inspection charges.

o Purchase of heavy machinery and other capital goods

o Consultancy services.

o Export documentation expenses.

Post-shipment finance means any credit provided by a bank to an exporter from the date ofextending the credit after shipment of goods to the date of realization of sale proceeds.

Post-shipment advance mainly take the form of

(i) Export bills purchased/ discounted/ negotiated(ii) Advances against bills for collection(iii) Advances against duty drawback receivable from Government

Export Credit in Foreign Currency

With a view to making credit available to exporters at internationally competitive rates, Adshave been permitted to extend pre-shipment credit in foreign currency (PCFC) to exportersfor domestic and imported inputs of exported goods at LIBOR related rates of interest.

The facility may be extended in one of the convertible currencies, viz. US Dollars, PoundSterling, Japanese Yen, Euro, etc.


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POST-SHIPMENT FINANCE :

Definition:

Post Shipment Finance is a kind of loan provided by a financialinstitution to an exporter or seller against a shipment that has alreadybeen made.

Export finance is granted from the date of extending the credit after shipment of the goods tothe realization date of the exporter proceeds. Exporters dont wait for the importer to depositthe funds.

FEATURES:

Purpose of FinancePost shipment finance is meant to finance export sales receivable after the date of shipmentof goods to the date of realization of exports proceeds. In cases of deemed exports, it isextended to finance receivable against supplies made to designated agencies.

Basis of FinancePost shipment finances is provided against evidence of shipment of goods or supplies madeto the importer or seller or any other designated agency.

Types of FinancePost shipment finance can be secured or unsecured. Since the finance is extended againstevidence of export shipment and bank obtains the documents of title of goods, the finance is

normally self liquidating.

Quantum of FinanceAs a quantum of finance, post shipment finance can be extended up to 100% of the invoicevalue of goods. In special cases, where the domestic value of the goods increases the valueof the exporter order, finance for a price difference can also be extended and the pricedifference is covered by the government.

Period of FinancePost shipment finance can be off short terms or long term, depending on the payment termsoffered by the exporter to the overseas importer. In case of cash exports, the maximumperiod allowed for realization of exports proceeds is six months from the date of shipment.

Concessive rate of interest is available for a highest period of 180 days, opening from thedate of surrender of documents. Usually, the documents need to be submitted within 21daysfrom the date of shipment.

TYPES OF POST SHIPMENT FINANCE :

1. Export Bills Purchased/ Discounted.(DP & DA Bills)Export bills (Non L/C Bills) is used in terms of sale contract/ order may be discounted orpurchased by the banks. It is used in indisputable international trade transactions and theproper limit has to be sanctioned to the exporter for purchase of export bill facility.

2. Export Bills Negotiated (Bill under L/C)


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The risk of payment is less under the LC, as the issuing bank makes sure the payment. Therisk is further reduced, if a bank guarantees the payments by confirming the LC. Because ofthe inborn security available in this method, banks often become ready to extend the financeagainst bills under LC.

3. Advance Against Export Bills Sent on Collection BasisBills can only be sent on collection basis, if the bills drawn under LC have somediscrepancies. Sometimes exporter requests the bill to be sent on the collection basis,anticipating the strengthening of foreign currency.

Banks may allow advance against these collection bills to an exporter with a concessionalrates of interest depending upon the transit period in case of DP Bills and transit period plususance period in case of usance bill. he transit period is from the date of acceptance of theexport documents at the banks branch for collection and not from the date of advance.

4. Advance Against Export on Consignments BasisBank may choose to finance when the goods are exported on consignment basis at the risk

of the exporter for sale and eventual payment of sale proceeds to him by the consignee.However, in this case bank instructs the overseas bank to deliver the document only againsttrust receipt/undertaking to deliver the sale proceeds by specified date, which should bewithin the prescribed date even if according to the practice in certain trades a bill for part ofthe estimated value is drawn in advance against the exports. In case of export throughapproved Indian owned warehouses abroad the times limit for realization is 15 months.

5. Advance against Undrawn BalanceIt is a very common practice in export to leave small part undrawn for payment afteradjustment due to difference in rates, weight, quality etc. Banks do finance against theundrawn balance, if undrawn balance is in conformity with the normal level of balance leftundrawn in the particular line of export, subject to a maximum of 10 percent of the export

value. An undertaking is also obtained from the exporter that he will, within 6 months fromdue date of payment or the date of shipment of the goods, whichever is earlier surrenderbalance proceeds of the shipment.

6. Advance Against Claims of Duty DrawbackDuty Drawback is a type of discount given to the exporter in his own country. This discount isgiven only, if the inhouse cost of production is higher in relation to international price. Thistype of financial support helps the exporter to fight successfully in the internationalmarkets.In such a situation, banks grants advances to exporters at lower rate of interest fora maximum period of 90 days. These are granted only if other types of export finance arealso extended to the exporter by the same bank.After the shipment, the exporters lodge their claims, supported by the relevant documents to

the relevant government authorities. These claims are processed and eligible amount isdisbursed after making sure that the bank is authorized to receive the claim amount directlyfrom the concerned government authorities.

LETTER OF CREDIT :

Definition:A formal document issued by a bank on behalf of customer, stating theconditions under which the bank will honour the commitment of thecustomer.


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The letter of credit is also known as bankers commercial credit or documentary letter ofcredit. L/C used in domestic trade are called inland L/Cs.

The essence of the L/C is the promise of the issuing bank to pay against specifieddocuments, which must accompany any draft drawn against the credit. To constitute a trueL/C transaction, all of the following five elements must be present with respect to the issuingbank:

Must receive a fee or other valid business consideration for issuing the L/C The L/C must contain a specified expiration date or definite maturity The banks commitment must have a stated maximum amount of money The banks obligation to pay must arise only on the presentation of specific documents The banks customer must have an unqualified obligation to reimburse the bank on thesame condition as the bank has paid.

Commercial letters of credit are also classified:

Irrevocable versus revocable Confirmed versus unconfirmed The primary advantage of an L/C is that it reduces risk the exporter can sell against a banks promise to pay rather than against the promise of acommercial firm.

The major advantage of an L/C to an importer is that the importer need not pay out fundsuntil the documents have arrived at the bank that issued the L/C and after all conditionsstated in the credit have been fulfilled.

PARTIES TO A LETTER OF CREDIT :

Importer is called the opener of the L/C on whose behalf the credit is opened by his bank.Issuing bank: the importers bank which issues the credit.

Beneficiary: The exporter in whose favour the L/C is opened.Advising Bank: The bank located in exporters country & correspondent bank of the L/Cissuing bank or its own branch who advises the credit to the beneficiary or his bankNegotiating: The L/C will mention the name of the bank authorized to handle & negotiatethe documents drawn under the L/C & pay to the exporter & claim the reimbursement fromissuing bank. Sometimes the L/C may be freely negotiable & the exporters bank may alsonegotiate the documents.Issuing Bank: The relationship between the importer and the issuing bank is governed bythe terms of the application and agreement for the letter of credit (L/C).


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LETTER OF CREDIT THE PROCESS:

TYPES OF LETTER OF CREDIT:

1. Irrevocable: It is the one that cannot be revoked, cancelled or modified w/o the express

consent of all the concerned parties to that credit.

2.Revocable: It may be altered at the will of any party

3. Negotiation: assures anyone who negotiates drafts under it that they will be honored bythe opening bank provided they comply with all the terms.

4. Confirmed credit has added strength of another bank of repute who adds its confirmationto pay even if the L/C opening bank does not pay. When the opening bank is of undoubtedreputation & financial strength, a confirmation by other bank is not necessary & hence iscalled unconfirmed credit.

5. In case of repeat shipments b/w the same buyer & seller then a revolving credit is used.

6. Another vehicle under which the beneficiary of a L/C can take advantage of the creditworthiness of the importer is the back to back credit.

7. This instrument is similar to a normal L/C except that it contains a clause ( originallytyped/printed in red) authorizing the negotiating bank to make clean advance to the exporter.This enables the exporter to avail advance for purchasing, processing raw material meantfor exports. Here , the importer is giving the unsecured loan to exporter for buying necessarymerchandise.

8. A transferable L/C is one under which the beneficiary has the right to instruct the payingor advising bank to make the credit available to one or more other beneficiaries


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9. A travelers L/C provides funds for business people & others who travel abroad forrelatively long periods of time.

OPEN ACCOUNT:

Definition:Open Account is a form of trade whereby sales are made to the buyerwithout entering into any formal contract. The system works oncomplete trust between buyer & seller.

An open account transaction means that the goods are shipped and delivered beforepayment is due, usually in 30 to 90 days.

Open Account is the most advantageous option to the importer in cash flow and cost terms.It is consequently the highest risk option for an exporter.

Exporters may also wish to seek export working capital financing to ensure that they haveaccess to financing for both the production for export and for any credit while waiting to bepaid.

Due to the intense competition for export markets, foreign buyers often press exporters foropen account terms since the extension of credit by the seller to the buyer is more commonabroad. Therefore, exporters who are reluctant to extend credit may face the possibility ofthe loss of the sale to their competitors. However, with the use of one or more of theappropriate trade finance techniques, such as export credit insurance, the exporter can offeropen competitive account terms in the global market while substantially mitigating the risk ofnon-payment by the foreign buyer.

Open account terms may be offered in competitive markets with the use of one or more ofthe following trade finance techniques:

1. Export Working Capital Financing2. Export Credit Insurance3. Export Factoring4. Forfaiting

Pros: This method of payment will definitely enhance export competitiveness, but exportersshould thoroughly examine the political, economic, and commercial risks, as well as culturalinfluences to ensure that payment will be received in full and on time. Open account termsmay help win customers in competitive markets

Cons: Exporter faces significant risk as the buyer could default on payment obligation aftershipment of the goods. Risk mitigation measures that is using one & more appropriate tradefinance techniques so as to mitigate the risk of non-payment can add to additional costs


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DOCUMENTARY COLLECTIONS :

Definition:

A documentary collection is a transaction whereby the exporterentrusts the collection of a payment to the remitting bank (exportersbank), which sends documents to a collecting bank (importers bank),along with instructions for payment. Funds are received from theimporter and remitted to the exporter through the banks involved in thecollection in exchange for those documents.

Documents should be consistent with each other and complete. Conform with the terms ofthe credit. Comply with the provisions of UCP. Banks must examine all documents stipulatedin the Credit with reasonable care. Each bank will have a reasonable time not exceedingseven banking days following the day of receipt to examine the documents (Article 13b).Concept of discrepant documents (Article 14).

Documentary collections involve the use of a draft that requires the importer to pay the faceamount either on sight (document against paymentD/P) or on a specified date in the future(document against acceptanceD/A).

Importer can collect documents by following payment terms:

A. Document against acceptance (D/A): Importer pays the face amount on a specifieddate in the future. Transfer of title of goods and documents is done on receipt ofpayment.

B. Document against payment (D/P): Importer pays the face amount on sight of goods.

Transfer of title of goods and documents is done immediately.

Advantages & Disadvantages:

The draft lists instructions that specify the documents required for the transfer of title to thegoods. Although banks do act as facilitators for their clients under collections, documentarycollections offer no verification process and limited recourse in the event of non-payment.Drafts are generally less expensive than letters of credit.

Ask beneficiaries to make corrections. Accept minor discrepancies and pay under reserve.Obtain indemnity from seller. Telex/fax details of discrepancies to the issuing bank andrequest permission to pay. Send the documents on collection

A trade transaction could conceivably be handled in many ways. The transaction that wouldbest illustrate the interactions of the various documents would be an export financed under adocumentary commercial letter of credit, requiring an order bill of lading, with the exportercollecting via a time draft accepted by the importers bank.


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FACTORING :

Definition:Financial transaction whereby a business sells its accounts receivable

to a third party called a factor (financial institution) at a discount inexchange for immediate money with which to finance continuedbusiness.

Factoring is a financial transaction whereby a business sells its accounts receivable (i.e.,invoices) to a third party (called a factor) at a discount in exchange for immediate moneywith which to finance continued business.

Factoring is a financial option for the management of receivables. In simple definition it is theconversion of credit sales into cash. In factoring, a financial institution (factor) buys theaccounts receivable of a company (Client) and pays up to 80%(rarely up to 90%) of theamount immediately on agreement. Factoring company pays the remaining amount

(Balance 20%-finance cost operating cost) to the client when the customer pays the debt.

Factoring differs from a bank loan in three main ways. First, the emphasis is on the value ofthe receivables (essentially a financial asset)[1], not the firms credit worthiness. Secondly,factoring is not a loan it is the purchase of a financial asset (the receivable). Finally, a bankloan involves two parties whereas factoring involves three.

The three parties directly involved are: the one who sells the receivable, the debtor, and thefactor. The receivable is essentially a financial asset associated with the debtors Liability topay money owed to the seller (usually for work performed or goods sold).

Disclosed factoring is the arrangement under which the exporter enters into a factoringagreement with the financial house and assigns the benefit of the debts created by the saletransaction to them. The importer is then notified and effects payment to the factor.
http://en.wikipedia.org/wiki/Accounts_receivablehttp://en.wikipedia.org/wiki/Debtorhttp://en.wikipedia.org/wiki/Accounts_receivablehttp://en.wikipedia.org/wiki/Assethttp://en.wikipedia.org/wiki/Liabilityhttp://en.wikipedia.org/wiki/Accounts_receivablehttp://en.wikipedia.org/wiki/Debtorhttp://en.wikipedia.org/wiki/Accounts_receivablehttp://en.wikipedia.org/wiki/Assethttp://en.wikipedia.org/wiki/Liability


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The arrangement is usually on a non-recourse basis. This means that the factor cannotclaim the assigned funds from the exporter if the importer fails to pay, in other words, heassumes the credit risk in the transaction. Those debts that are not approved by the factorare assigned on a recourse basis, so he can claim against the exporter in case of anydefault of the importer.

Recourse factoring is more accurately described as invoice discounting. Factoringarrangements are usually made on a whole turnover basis. This arrangement connotes anobligation of the exporter to offer all his receivables to the factor who receives a commission.

Undisclosed factoring, which is usually undertaken on a recourse basis, does not involve theimporter. The agreement is made between the factor and the exporter and the importerremains bound to pay as agreed under the sales contract. In receipt of payment, theexporter holds the funds in a separate bank account as trustee for the factor.

TWO FACTORS SYSTEMS:

This entails the use of two factors, one in each country, dealing with the exporter and theimporter respectively. The export factor on obtaining the information from the exporter on thetype of his business and the proposed transaction will contact the import factor designatedby the importer and agree the terms of the deal. The importer advances funds to the importfactor who then transmits them to the export factor, minus his charges. In the two factorsystem the import factor and the importer do not come into direct contact.

The system involves three agreements, one between the exporter and the importer, onebetween the export factor and the exporter and one between the factors themselves. It isimportant to bear in mind that the import factors obligations are to the export factor aloneand they include determining the importers credit rating and the actual collection of thedebts. The import factor assumes the credit risk in relation to approved debts and is

responsible for the transfer of funds to the export factor. On the other hand, the export factoris responsible to the import factor for the acceptance of any recourse.

DIRECT IMPORT AND EXPORT FACTORING:

Direct import factoring connotes the situation where the exporter assigns debts to a factor inthe country of the debtor. This is usually the case where there is a substantial volume ofexports to a specific country. This solution is a cheap and time efficient method of debtcollection but it does not serve the aim of providing finance to the exporter. The factorprovides a debt collection service and does not enquire into the creditworthiness of theimporter. Prepayments are not possible because that would expose the factor to high risks.

Direct export factoring on the other hand, does operate as an alternative to the two factorsystem. In this situation, the factor is appointed in the exporters own country and deals withall the aspects of the factoring arrangement including the provision of financing and theassessment of the financial position of the importer. This system is inexpensive andfacilitates the communication between the exporter and the factor. However, all theadvantages of the two factor system relating to the import factors proximity to the importerand his jurisdiction can be listed here as disadvantages. Communication problems with thedebtor, credit risks and the occurrence of disputes are the most important problems.

Back to back factoring is an arrangement most suitable for debts owed by the exclusivedistributors of products to their suppliers. The structure of the agreements is similar to theones already considered with one material difference. The exporter enters into a factoringagreement with the export factor who contracts with the import factor in the usual way. Thedifference lies in the existence of a separate factoring agreement between the import factor


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and the distributor. Included in that arrangement is a right to set off credits arising from thedomestic sales of the distributor with his debts to the supplier.

TOP TRADING NATIONS :


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INTERNATIONAL TRADE RISK :

The following exhibit illustrates the sequence of events in a single export transaction.

From a financial management perspective, the two primary risks associated with aninternational trade transaction are currency risk (currency denomination of payment) and riskof noncompeting (timely and complete payment).

The risk of default on the part of the importer is present as soon as the financing periodbegins. Companies doing business across international borders face many of the same risks aswould normally be evident in strictly domestic transactions. For example,

Buyer insolvency (purchaser cannot pay);

Non-acceptance (buyer rejects goods as different from the agreed upon specifications);

Credit risk (allowing the buyer to take possession of goods prior to payment);

Regulatory risk (e.g., a change in rules that prevents the transaction);

Intervention (governmental action to prevent a transaction being completed);

Political risk (change in leadership interfering with transactions or prices); and

War and other uncontrollable events.

In addition, international trade also faces the risk of unfavorable exchange rate movements (and, the

potential benefit of favorable movements).

COUNTERTRADE :

The word countertrade refers to a variety of international trade arrangements in which goodsand services are exported by a manufacturer with compensation linked to that manufactureraccepting imports of other goods and services.

In other words, an export sale is tied by contract to an import. The countertrade may takeplace at the same time as the original export, in which case credit is not an issue; or thecountertrade may take place later, in which case financing becomes important.