Foreign trade finance

1. FOREIGN TRADE
FINANCE

2. Trade Finance
Trade finance is the financing of international trade flows
It exists to mitigate, or reduce, the risks involved in an international trade transaction
WHY
?
Payment
Risk
Country
Risk
Corporat
e Risk

3. Risks In Trade Finance
Payment
Risk
Country
Risk
Corporate
Risk
Will the exporter be
paid in full and on
time?
Will the importer get
the goods they
wanted?
A collection of risks
associated with
doing business with
a foreign country,
such as exchange
rate risk, political
risk and sovereign
risk
The risks associated
with the company
(exporter/importer):
what is their credit
rating?
Do they have a
history of non-
payment?

4. Players In Foreign Trade Financing
IMPORTER
EXPORTER
TRADE
Exporter : who requires payment for
their goods or services
Importer: who wants to make sure
they are paying for the correct
quality and quantity of goods TRADE FINANCING
IMPORT
FINANCING
EXPORT
FINANCING

5. Import Financing
•Import finance is the process of funding the gap between receiving the goods and
sending the payments.
• It is a special type of trade finance where any bank or financial institution finances
the purchase of the goods that are being purchased & exported from one country to
be imported into another country.

6. Types Of Import Trade Finance
•Import finance provides credit options to international traders and enables them to
purchase goods without cash flow issues.
•The types are as follows
1. Usance/ Standby Letters of Credit
2. Bank Guarantees
3. Invoice Finance
4. Asset-Backed Facilities

7. Usance/ Standby Letters Of Credit
•When a Usance letter of credit is applied
in a transaction, it helps the importer to
defer the payment against a purchase.
•It means it gives more time to the
importer to inspect or sell the goods
•When a standby LC is issued, the issuing
bank provides a guarantee to the
exporter regarding on-time payment
from the importer only if the buyer
defaults.
•It mitigates the risk of default and
provides peace of mind to the exporters.

8. Bank Guarantees
•When there is a bank guarantee in an international transaction, the exporter are
guaranteed of getting paid on-time for their goods or services from the importer.
•If the buyer is unable to make the payment or fails to meet the terms and conditions
of the agreement, the amount will be paid by the issuing bank to the exporter.
•The only difference between an LC and Bank guarantee is their usage i.e. An LC is
used in international transactions while a bank guarantee is more likely to be used on
real estate or infrastructure projects.

9. Invoice Finance
•Invoice financing is a method where the selling of accounts receivables is involved.
•It means with this finance optional one can sell their accounts receivables to raise
capital.
•Most financial institutions provide up to 50-80% of invoice value as loans and help
traders meeting their business requirements.
•This also helps in improving cash flow and maintaining the working capital of the
company.

10. Asset-backed Facilities
•It is a financial tool of businesses willing to secure a loan against their collateral
(assets).
•This type of funding allows importers to get loans against assets.
•The traders can consider any of these asset-based loan options by securing
inventory, equipment, buildings, accounts receivables, or other assets in the
balance sheet.

11. Export Financing
Export finance is a finance agreement, whereby money is advanced against the
value of unpaid invoices. It's a form of asset-based finance, specifically tailored to
businesses involved with exporting to international markets
There are 5 different types of Export Trade
Finance
1.Pre-shipment export finance
2.Post shipment export finance
3.Export finance against collection of bills.
4.Deferred export finance
5.Export finance against allowances and
subsidies

12. Types Of Export Financing
Pre-Shipment Export Financing
•The exporter is provided finance even
for the purchase of raw materials and
processing them into finished
products, but this finance can be
provided only when the exporter has
firm order from the importer and the
importer has also given an
anticipatory Letter of Credit from his
bank
•So, against the export order received
from the importer, the exporter is
given finance by his bank which is
called pre-shipment export finance.
Post Shipment Export Financing
• After dispatching the goods to the
importer, the exporter draws a bill,
against which the importer will
make payment.
• But this may take a minimum period
of 3 to 6 months and this time gap
will affect the exporter in his
continuation of production.
• For this purpose, after exporting,
the export bill will be presented by
the exporter to his bank.
• The bank will prefer to purchase the
bill or collect the bill or even

13. Export finance against
collection of bills
Export is made to different countries
and loan obtained from the bank
against the bills sent for collection.
Export finance against
allowances and subsidies
Exporters are given subsidies by the
government so that they can sell the
goods on reduced price to importer
and allowances are given for
increasing exports
Deferred export finance
To enable the importer to purchase valuable
goods, hire purchase financing or lease
finance may be arranged.
There are two types of deferred export
finance.
1. Supplier’s finance in exporting
2. Buyer’s Finance in exporting
Types of Export Financing

14. Factoring &
Forfaiting
• Factoring is a process by which a business sells
to a financial institution the value of accounts
receivables for which it has not yet received
payment
• Factoring, sometimes called debtor financing or
receivables factoring, is more common for
domestic trade financing but also is used for
international trade finance
• Forfaiting is a means of financing that enables
exporters to receive immediate cash by selling
their medium and long-term receivables at a
discount through an intermediary.
• Forfaiting also protects against credit risk,
transfer risk, and the risks posed by foreign
exchange rate or interest rate changes.
•The receivables convert into a debt instrument—
such as an unconditional bill of exchange or a
promissory note—which can then be traded on a
secondary market.

15. Documentar
y
Collections
&
Countertrad
e
• Documentary Collection (DC) occurs when a
seller instructs his bank to forward documents
related to the exporting of goods or services to
the buyer’s bank, then requesting to present
these documents to the buyer for their payment.
•Counter-trade is related to those foreign trade
transactions in which the exporter gets the value
for export in the form of specific commodities as
per agreement concluded.

16. Counter Trade Variants
•Counter Trade of purely Commercial Nature:
1. Classical Barter – involves once only exchange of goods.
2. Counter Purchase – no mention of specific goods to be exported or to be
imported. Separate contracts for export and import.
3. Pre-compensation – Imports are paid for immediately.
 Industrial Counter Trade:
1. Buy-Back agreement – Involve larger amount corresponding to sale of industrial
equipment in exchange for products manufactured.
2. Framework agreement – It is a long term bilateral agreement normally between
two governments.

17. Mode Of Payments In International
Trade
Modes of payment vary from one transaction to another.
It depends upon the bargaining power and credit worthiness of the exporter and
the importer and upon the requirements of exchange control.
The different modes are
1. Cash in Advance
2. Payments under consignment sale
3. Drafts
4. Letter of Credit
5. Open account

18. Cash In Advance
•Here the cash is paid prior to shipment of goods or before the arrival of
goods by importer to the exporter.
•This helps the exporter to negate the credit risk in payment.
•It is adopted when the importing country is facing political instability
causing obstruction to transfer of funds.
•It is also common where the goods are specifically designed and
manufactured to order from abroad.

19. Payments Under Consignment Sale
•In this consignment sale, title of the goods remains with the exporter even
after the goods are received by the importer.
•The importer remits money only after selling the goods.
•This means that the exporter’s capital is tied until goods are finally sold.
•If importer defaults in such cases, it will be difficult for the exporter to
collect the money.
•In India it is more frequently found in export of traditional goods.

20. Drafts
•Draft (Bill of Exchange) is an instrument whereby an exporter instructs the
importer to make specific payments at a specific date.
•The exporter is called drawer and importer is called drawee.
•Sometimes the amount can be paid to the agent which is bank and in this
case the payee is the bank not the exporter.
•Properly drawn draft is negotiable instrument.

21. Procedure For Properly Drawn
Draft
It should
 Be in writing and signed by the drawer which is exporter.
Incorporate an unconditional promise or order to pay a specific amount of
money.
Be payable either at sight or at a specified time.
Be payable to order: payment is made to the specified person.
Be payable to bearer: payment is made to any person presenting the draft.

22. Types Of Draft
•Sight or demand draft : Immediate payment on presentation of draft.
•Time Draft: Payment is made after a specified time ( Tenor or Usance).
•Clean Draft: A draft to which no other documentation is attached. Generally used in Intra Firm
trade.
•Documentary Draft:
1. Shipping documents are enclosed with draft.
2. When documents are delivered to importer only after payment – D/P.
3. When documents are delivered to importer after the acceptance – D/A.

23. Types Of Documents
•Bill of Lading :
1. It is a shipping document issued by the carrier.
2. Clean BOL assumes goods have been received by carrier in good condition and they need
not check it.
3. Foul BOL allows the carrier to check the goods.
•Commercial Invoice: Description of goods and terms of sale.
•Insurance: Gives the details of the insurance and risk covered.
•Consular invoice: Issued by the consulate of the importing country & provides
customs information.
•Packing list: Shows the contents of the container.

24. Letter Of Credit
•It is an instrument signed by the importer’s banker wherein it promises the
exporter to make payments if he abides by the conditions.
•It is a letter of promise.
•The issuing bank receives a fee for issuing it. LC contains specified
expiration date and amount of money.
•The exporter gets assurance for the payment and the importer has to make
payments only when the goods are in good conditions.

25. How L/C Operate?
Importer after
placing Import order
requests its banker
to issue L/C
Importer’s bank
delivers L /C to
exporters bank
Exporter’s bank
passes L/C to the
exporter
Exporter ships
goods to importer
and passes on L/C &
other documents to
its banker
Exporter’s bank
delivers L/C & other
documents to
importer’s bank.
Importer’s bank
makes payment for
the import and
debits importer’s
account.

26. Variants Of L/C
•Clean L/C : Does not require the documents.
•Documentary L/C : Documents are required.
•Revocable L/C: May be cancelled or amended by the issuing bank at any time
without prior notice.
•Irrevocable L/C: Cannot be cancelled or amended.
•Confirmed L/C : gives an added guarantee of payment.
•Unconfirmed L/C :not been guaranteed or confirmed by any bank.
•Fixed L/C: limits the amount of bill to be drawn under the L/C.

27. Variants Of L/C
•Transferable L/C : Exporter has the right to transfer the L/C to third parties. This happens
when the exporter is just and intermediary procuring goods from producers or suppliers and
exporting them.
•Back to Back L/C: involves two letters of credit to secure financing for a single transaction.
These are usually used in a transactions involving an intermediary between the buyer and
seller.
•Red clause L/C: authorizes the negotiating bank to extend advances to exporter in form of
pre shipment credit.

28. Open Account
•In an open account relationship, the goods are shipped and the title documents are
sent independent of payment to the buyer in order that he can clear customs in his
country.
•It is concerned with credit sales to the importer when the importer makes payment
on a pre determined future date.
•Exporter ships directly to the Importer.
•Importer takes the delivery without making payment.
•In this case the entire risk is borne by exporter.
•If the export turns out to as bad debt loss then exporter hires attorney.

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