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Financing international
transactions
Lecture outline
Overview of the financing methods
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Mode of payment vs. financing
trade
The mode of payment refers to terms of
technical transferring the amount of money due
between the respective transaction parties
Financing trade refers to debtor- creditor
relations between the respective transaction
parties
Some modes of payment require specific types
of financing e.g. documentary credit requires
financing through bank credit
International financial settlements 120881-1165
Financing of international trade
(1)
There is always a time span between payment
and product delivery financing international
trade is always related to a sort of credit
Depending on the payment conditions either the
importer or exporter is granted a sort of credit
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Financing of international trade
(2)
Short term transactions- usually up to 180
days with some exceptions
Long term transactions- up to many years
Usually the ways of financing the import and
export transactions are complex a single
way is insufficient
Forms of financing foreign trade
Several types of credit
Accounts receivable financing
Banker’s acceptances
Factoring
Forfaiting
Leasing
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Financing via credits (1)
Credit is a mode of payment and a financing method
as well
Letters of credit are the oldest form of financing trade
A designated bank makes payments to the exporter on
behalf of the importer under specified conditions
Financing via credits (2)
The letter of credit is an obligation of the bank to
make payments to the exporter upon
presentation of specified documents
The letter of credit constitutes also a guarantee
for the importer to receive his goods upon
presentation of documents
The role of the bank is crucial in credit financing
Bank guarantees make the credit financing one
of the safest financing methods
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Financing via credits (3)
Other possible sorts of credit are:
Standby credits
Hybrid types of credit
Working capital financing
Merchant’s credit
Working capital financing (1)
The working capital is used up during
operational cycle
The working capital is deployed very quickly
The whole operational cycle is financed by a
bank loan
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Working capital financing (2)
The credit is granted for the purchase of the
goods by the importer and the sale of these
goods
The company repays the credit after it sells the
goods
Suitable especially for small caompanies
When is financing via credits
appropriate? (1)
We have to afford the respective types of credit
Some types of credit are expensive e.g. the
documentary credit- we actually have to buy the
bank’s guarantee
Documentary credit is usually used for large
transactions of large market players
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When is financing via credits
appropriate? (2)
Other less expensive types of credit can be
used in smaller transactions
For small companies- the merchant’s credit is
appropriate
Hybrid types of credit enable adjustment to
changing ways of delivery and payment e.g.
transactions with middlemen, deliveries in
installments
Accounts receivable financing (1)
The exporter is granted a loan by a bank
against the assurance of receivables
This way the exporter can receive the
payment for his delivery earlier than
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Accounts receivable financing (2)
The exporter benefits from this method
because he receives payment
immediately this improves his cashflow
A drawback for the exporter is that banks
demand higher interest for financing
foreign transactions than the market
interest rates
The bank has recourse to the exporter
Banker’s acceptances (1)
Financing via banker’s acceptance can be
an element of various payment methods
e.g. documentary collection
A banker’s acceptance is a bill of
exchange or a time draft which is drwan by
the importer and accepted by a bank
This way the bank accepts its obligation
the pay the holder of the bill at maturity
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Banker’s acceptances (2)
A banker’s acceptance is beneficial for the
exporter because the credit risk is
transferred to the bank, moreover the
political risk is eliminated
The exporter can sell the bankers
acceptance on the money market
It is also beneficial for the importer
because otherwise the exporter would not
be willing to grant the credit
When is financing via banker’s
acceptances appropriate? (1)
Banker’s acceptances financing can make many
methods of payment safer e.g. it can be used in
open accounts or advanced payment
It is less safe than documentary credit financing
because the bank is not involved in the
document checking process and potential claims
The most popular use of financing via banker’s
acceptances is the documentary collection
payment method
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When is financing via banker’s
acceptances appropriate? (2)
Banker’s acceptances financing can be
appropriate for companies which can not afford
documentary credits
It can be appropriate for small and large
transactions as well
Factoring (1)
Factoring is a mode of payment and a way of financing
trade as well
It is a type of the accounts receivable method
Since there is time span between delivery and payment
the exporter grants a sort of credit to the importer
To hedge the risk of non-payment the exporter may sell
the accounts receivable to a factor
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Factoring (2)
Factors buy the receivable without recourse, this
means that the exporter does not have to repay
the factor if the importer refuses to pay
The factoring financing method relieves the
exporter from many administrative duties
The credit exposure of the exporter is
eliminated
The immediate payment to exporter improves
his cashflow
When is financing via factoring
appropriate?
Factoring is expensive- factors charge larger
rates for the taking over the debt than the market
inetrest rate
It is an appropriate financing method large
transactions usualy for large companies
Usually factoring is used in short term
transactions (up to 180 days)
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Forfaiting is a mode of payment and a way
of financing trade as well
Usually aimed at medium-term financing
fixed assets (e.g. machinery)
Fixed assets are usually expensive and
therefore the financing period may account
for several years
Forfaiting (1)
Forfaiting (2)
Exporters are not willing to finance importers over such a
long period
This is why the debt of the importer is sold to forfaiters
(usually banks)
Forfaiting financing usually refers to transactions
exceeding 500000 USD
For larger transaction more than one forfaiting
institutions can be involved
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When is financing via forfaiting
appropriate?
Since the transactions concern fixed assets this
financing method is often required by production plants
It is an expensive financing method so it is suitable for
large companies
It is used for long-term transactions
Leasing(1)
Leasing is a financing method of fixed assets
The company which requires the assets pays a series of
contractual intsallments in exchange for the use of the
contractual fixed assets
The lesee- the company which requires the assets
The lesor- the the leasing company which owns the
asstes
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Leasing(2)
The duration of the lease contract can be fixed, periodic
or indefinite
Leasing is usually used for larger transactions were the
company can not obtain credit
The legal rules concerning leasing transactions differ
internationally (tax benefits and various accounting
standards)
The benefits for the lessor and lessee differ
internationally
Leasing is an off-balance sheet financing method
Leasing(3)
Leasing plays a substantial role in international
transactions
Machinery for companies which exports goods abroad
Investment abroad
The use of vehicles for international transports by transportation
agents/ freight forwarders
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Countertrade
Financing via exporting goods or services
Mutual transactions e.g. offset transactions
Suitable for importers from countries with limited foreign
exchange
Suitable for developing countries
Discussion (1)
You run a company planning to buy an energy
windmill as an investment. This is a purchase
which is beyond your current core business.
You are looking for a proper way of financing
this transaction. What financing method would
you choose? Consider the pro and con side of
the respective financing methods.
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