International trade finacing

International Trade, InstrumentsInternational Trade, Instruments
and Institutionsand Institutions
Kanchan Kandel
BBA

Foreign trade transaction
We understand “Trade” as something wherein
goods are sold in return of some goods or money.
In international trade, there is always dilemma to
importer and exporter who would like to do
business with one another.
Importer is always feared of not receiving the
goods or receiving goods with different qualities so
they want to pay after the goods received.
In other hand, exporters also fear of not receiving
the payment in time or not at all, so they want
payment before the delivery of goods.
2kanchan.kandel399@gmail.com

Foreign trade transaction
Because of the distance between two, it is not
possible to simultaneously hand over goods with
one and accept payment with other.
To address these fundamental dilemmas of being
unwilling to trust a stranger in a foreign land is
solved by using a high respected bank as
intermediary or guarantor.

Payment method for internationalPayment method for international
tradetrade
Prepayment
Letter of credit
Draft (sight/time)
Consignment
Open account

PrepaymentPrepayment
It is also known as advance payment.
Under this method, the exporter will not ship the goods
until the buyer has remitted payment to the exporter.
This method affords the supplier the greatest degree of
protection, and it is normally requested of the first time
buyer whose creditworthiness is unknown.

DraftDraft
A draft is the instrument normally used in
international commerce to effect payment.
A draft is simply an order written by an exporter
(seller) instructing an importer (buyer) or its agent
to pay a specified amount of money at a specified
time.
Thus, it is the exporter’s formal demand for
payment from the importer.
The person or business initiating the draft is known
as the maker, drawer, or originator. Normally, this
is the exporter.

DraftDraft
The party to whom the draft is addressed is the
drawee. Normally, this is the importer.
Draft can be:
 Sight draft : A sight draft is payable on
presentation to the drawee
Time Draft: A time draft, also called a usance draft,
allows a delay in payment.

ConsignmentConsignment
Under a consignment arrangement, the exporter
ships the goods to the importer while still retaining
actual title itself (exporter).
The importer has the access to the inventory but
does not have to pay for the goods until they have
been sold to a third party.
If the importer fails to pay, the exporter has limited
recourse because no draft is involved and the
goods have already been sold.
Due to this nature, consignment is popular for
subsidiary companies trading with the parent
company. 8kanchan.kandel399@gmail.com

Open AccountOpen Account
if there is good relationship between importer
and exporter, they may choose open account
for transaction.
In open account, importer open account in
exporter firm. The value of goods shipped is
added to this account.
An exporter send invoice at the end of each
month or after each transaction. This method
save collection fees as well as cost of letter of
credit.

The financing of internationalThe financing of international
tradetrade
Short term financing
 Account receivable financing
 Factoring
 Letter of credit
 Banker’s acceptance
 Trust received loan
Long term financing
 Forfaiting
 Buyer credit
 Government Financing
 Countertrade (it is fall on both category)

Account receivable financingAccount receivable financing
Exporter can easily provide credit to the importer if
there is good relationship between importer and
exporter.
After providing credit, if exporter needs fund
immediately, it may choose to finance from bank,
known as account receivable financing.
Bank provide loan to the exporter on the base of
account receivable. Bank has provide loan to the
exporter so in case of buyer fails to pay the exporter is
still responsible for repaying loan to the bank.

FactoringFactoring
Exporter can sell their account receivable to a
specialized third party or firm, known as factor.
Factor can purchase receivable in Non-recourse or
recourse basis.
Non- recourse means that factor will take the
credit, political, foreign exchange risk of receivable
it purchases.
Recourse means that the factor can give back
receivable that are not collected.

Letter of Credit – A ConceptLetter of Credit – A Concept
 A letter of credit is a document that a financial
institution or similar party issues to a seller of
goods or services which provides that the issuer
will pay the seller for goods or services the seller
delivers to a third-party buyer.
 The document serves essentially as a guarantee to
the seller that it will be paid by the issuer of the
letter of credit regardless of whether the buyer
ultimately fails to pay.
 Letters of credit are used primarily in international
trade for large transactions between a supplier in
one country and a customer in another

Parties involved in letter
of credit
Applicant
Issuing bank
Advising bank
Beneficiary
Confirming bank
Negotiating bank

Step-by-step process:
Buyer and seller agree to conduct business. The
seller wants a letter of credit to guarantee
payment.
Buyer applies to his bank for a letter of credit in
favor of the seller.
Buyer's bank approves the credit risk of the
buyer, issues and forwards the credit to its
correspondent bank (advising or confirming).
The correspondent bank is usually located in the
same geographical location as the seller
(beneficiary).
Advising bank will authenticate the credit and
forward the original credit to the seller
(beneficiary).

16
1. Sales Contract
3. Request to advice and, if
applicable, confirm letter of
credit
2. Letter of
credit
application
ISSUING
BANK
ADVISING/
CONFIRMING
BANK
SELLER BUYER
4. Advice of letter
of credit
Step in Import letter of credit
kanchan.kandel399@gmail.com

Cont…Cont…
Seller (beneficiary) ships the goods, then
verifies and develops the documentary
requirements to support the letter of credit.
Documentary requirements may vary greatly
depending on the perceived risk involved in
dealing with a particular company.
Seller presents the required documents to
the advising or confirming bank to be
processed for payment.
Advising or confirming bank examines the
documents for compliance with the terms
and conditions of the letter of credit and
credit seller account. 17kanchan.kandel399@gmail.com

Cont….Cont….
If the documents are correct, the advising or
confirming bank will claim the funds by:
Debiting the account of the issuing bank.
Waiting until the issuing bank remits, after receiving
the documents.
Reimburse on another bank as required in the
credit.
Advising or confirming bank will forward the
documents to the issuing bank.
Issuing bank will examine the documents for
compliance. If they are in order, the issuing bank will
debit the buyer's account.
Issuing bank then forwards the documents to the 18kanchan.kandel399@gmail.com

Step in import letter of creditStep in import letter of credit
19
7. Payment 9. Forward Document
and Debit Buyer
account
8. Send documents
and Debit Issuing bank
SELLER
ADVISING/CONFIRMIN
G BANK
ISSUING
BANK
BUYER
5. Ship the goods
6. Present
document
s
10.
Reimbursement

Type of L/CType of L/C
• Revocable L/C : It may be amended or
cancelled by the opening bank at any moment
and without prior notice to the seller
• Irrevocable L/C : In this case it is not possible
to revoked or amended a credit without the
agreement of the issuing bank, the confirming
bank, and the beneficiary.
• Confirmed L/C : It is a special type of L/c in
which another bank apart from the issuing
bank has added its guarantee
• The cost of confirming by two banks makes it
costlier.

Cont…Cont…
Sight or Term(Usane): Letters of credit can permit the
beneficiary to be paid immediately upon presentation of
specified documents (sight letter of credit), or at a
future date as established in the sales contract
(term/usance letter of credit).

Cont…..Cont…..
Financing opportunities, such as pre-shipment
finance secured by a letter of credit and/or
discounting of accepted drafts drawn under letters
of credit, are available in many countries.
Bank expertise is made available to help complete
trade transactions successfully.
Payment for the goods shipped can be remitted to
your own bank or a bank of your choice.

Cont…Cont…
To the importer:
• Payment will only be made to the seller when
the terms and conditions of the letter of credit
are complied with.
• The importer can control the shipping dates for
the goods being purchased.
• Cash resources are not tied up.

Risk in L/cRisk in L/c
Fraud Risks: The payment will be obtained for
nonexistent or worthless merchandise against presentation
by the beneficiary of forged or falsified documents.
Sometime Credit itself may be forged.
Sovereign and Regulatory Risks: Performance of the
Documentary Credit may be prevented by government
action outside the control of the parties.
Legal Risks: Possibility that performance of a
Documentary Credit may be disturbed by legal action
relating directly to the parties and their rights and
obligations under the Documentary Credit
Force Majeure and Frustration of Contract:
Performance of a contract including an obligation under a
Documentary Credit relationship is prevented by external

Cont…Cont…
Risks to the Applicant:
Non-delivery of Goods
Short Shipment
Inferior Quality
Early /Late Shipment
Damaged in transit
Foreign exchange
Failure of Bank viz Issuing bank / Collecting Bank
Risks to the Issuing Bank:


Risk to the:Risk to the:
Beneficiary:
Failure to Comply with Credit Conditions
Failure of, or Delays in Payment from, the Issuing Bank
Advising Bank: The Advising Bank’s only obligation
if it accepts the Issuing Bank’s instructions is to check
the apparent authenticity of the Credit and advising it
to the Beneficiary.
Confirming Bank: If Confirming Bank’s main risk is
that, once having paid the Beneficiary, it may not be
able to obtain reimbursement from the Issuing Bank
because of insolvency of the Issuing Bank or refusal of
the Issuing Bank because of a dispute as to whether or
not payment should have been made under the Credit.

BankerBanker’’ AcceptanceAcceptance
In L/C will the exporter present time draft along
with shipping documents to its local bank, and the
exporter’s bank send the time draft along shipping
documents to the importer’s bank. The importer’s
bank accepts the draft, thereby creating the
banker acceptance.
If the exporter does not want to wait until the
specified date to receive payment, it can sold the
banker’s acceptance in the money market at
discount.

Benefit to exporterBenefit to exporter
The exporter does not need to worry about the
credit risk of the importer.
The exporter faces little exposure to political risk
or to exchange controls imposed by a government
because banks normally are allowed to meet their
payment commitments even if control could
prevent an importer from paying,
Exporter can sell the banker’s acceptance at a
discount before payment is due and thus obtain
funds up front from the issuing bank. 28kanchan.kandel399@gmail.com

Benefit to ImporterBenefit to Importer
Banker’s acceptance by providing greater access to
foreign markets when purchasing supplies and
other product.
Due to the documents presented along with the
banker’ acceptance, the importer is assured that
goods have been shipped.
It allows the importer to pay at a later date, the
importer’s payment is financed until the maturity
date of the banker’s acceptance.

Benefit to BankBenefit to Bank
The bank accepting the drafts benefits in that it earns a
commission for creating an acceptance.

Trust Received loanTrust Received loan
Trust Receipt (TR) is a type of short-term import loan to
provide the buyer with financing to settle goods imported
under Letter of Credit where title of goods is held by the
bank.
Under a TR arrangement, the Bank retains title to the goods
but allows the buyer to take possession of the goods on
trust for resale before paying the Bank on TR due date

Medium and long term financingMedium and long term financing
Buyer credit
Government Financing
Forfaiting
Countertrade (it is fall on both category)

Buyer CreditBuyer Credit
When expensive capital equipment is being
purchased an exporter sometime arranges for a
financial institutions to grant credit to the importer,
known as buyer credit.
By arranging the credit for the importer, the
exporter is ultimately paid cash up front, and the
financial intermediaries bear most of the default risk
of the importer.

ForfaitingForfaiting
Forfaiting is a method of trade finance that allows
exporters to obtain cash by selling their medium-
term foreign accounts receivable at a discount on
a “without recourse”
A forfaiter is a specialized finance firm or a
department in a bank that performs non-recourse
export financing through the purchase of medium-
term trade receivables.
The forfaiter will deduct interest (discount) in
advance for the whole period of credit and
disburse the net proceeds immediately 34kanchan.kandel399@gmail.com

1. Sales agreement between Importer and exporter
2. Importer prepared the promissory notes and summit
to bank. In most case importer bank which is located
in importer country.
3. Importer bank signed (make guarantee or avalled) on
promissory notes and send back to importer
4. Importer forward guaranteed Notes to exporter.
5. Exporter exchange guaranteed notes with cash from
forfaiting bank (generally this notes are cashed at
discount due to early received of cash and interest
earn on early received will compensate the discount. 35kanchan.kandel399@gmail.com

5. Exporter shipped the goods
6. Forfaiting bank either sells the notes to investor in
money market or waits until the maturity.
7. At maturity, forfaiting bank present notes to importer
bank.
8. Importer bank inform importer about arrived of notes
and debit his/her account.
9. Importer bank pay or credit the forfaiting account

Step involved in forfeitingStep involved in forfeiting
37
4. Deliver Guarantee Notes
7 Ship the
goods
1. Sales
contract
2. Notes send for
guarantee
3 Guaranteed notes
return
9 Payment made
Exporter
Importer bankImporter
6 Cash payment
5 Present guarantee Notes
Forfeiting bank
8 Notes
Present
10
Payment
made

CountertradeCountertrade
The term countertrade denotes all type of
foreign transaction in which sales of goods to
the country is linked to the purchase or
exchange of goods from the same country.
Countertrade may or may not involve money in
the transaction but there is guarantee of two
ways commodity flow.
Popular countertrade are:
Barter
Switch trading
Counter purchased

BarterBarter
The simplest form of countertrade is involved the
direct exchange of goods or services from one
country for the goods or services of another.
Trade is balance in the sense that the value of what
is being imported equal to the value of what is
being exported.
Although money is not involved, money may be the
base that determines the value of the goods

SwitchingSwitching
Switching trading involves a third party, a switch
trader, who facilitates the eventual clean of an
imbalance of trade, between two parties to a
bilateral clearing agreement.
For example, Nepal and China might agree to
exchange Nepalese tea for Chinese garment during
the coming year; at the time of delivery value of
Nepalese tea exceeds the value of Chinese
garments.
Now Nepalese exporter has two alternatives to
settle this balancing figure.

SwitchingSwitching
First, Nepalese exporter can used this balancing
value to purchase other goods from china or from
other third country say India with the help of
switch trader or
 Second, it can directly sells this credit to switch
trade in cash. Later on switch trader used this
balancing value to purchase goods from china.

CounterpurchasedCounterpurchased
 Barter require a double action of wants in that two
parties in the transaction must each want what the
other party has to provide, and want it at the same
time and in the same amount.
Because of these difficulties, there is another form
of countertrade, called counterpurchase. Counter
purchased is agreement between seller and buyer
either to:

CounterpurchaseCounterpurchase
Make purchase from a company nominated by the
buyer, later buyer settle up the company it has
nominated.
Take product from the buyer in future, that is the
seller accept credit in term of product.

OffsetOffset
An Offset is a requirement of an importing
country that the price of its import be offset in
some way by the exporter.
In offset, there might be contract between
importer and exporter, where exporter,
purchase raw material from Importer Company
or country, in return exporter may supply
finished goods.
In other case exporter agree to purchase goods
in the importers country, to increase its
imports from that country, to transfer
technology to the country or to conduct 44kanchan.kandel399@gmail.com

BuybackBuyback
In this agreement, the seller of the capital
equipment agrees to buy the product made
with the equipment it supplies.
This form of countertrade is common with
capital equipment used in mining and
manufacturing.
Buyback can be exits in three ways:
Exporter receive product, directly from the factory that
was constructed and these product are similar to
exporter industry.

BuybackBuyback
Mix of resultant product and other product of the country
A famous example of a buyback is the agreement
by several western European countries to supply
the Soviet Union with pipe, compressor, controls,
and other equipment necessary to build natural gas
pipeline from the Soviet Union to Western Europe.
The payment for the pipeline was natural gas
delivered through the pipeline to Western Europe
over the course of several years.

Practices in NepalPractices in Nepal
 Short term financing: Banker’s Acceptance (In
case of Time L/C)
 TR Loan: This is Trust Receipt Loan under
which a Bank allows the importer (its
customer) to get the goods released from the
Transporter and sell it for repaying to the
Bank. The term of such loans vary from 30
days to 180 days.
 Pre-shipment financing (Loans given to
exporter to produce goods for the export)
 Post – Shipment Financing (Loans or discount47kanchan.kandel399@gmail.com

International trade finacing

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