Trade Finance Notes - Trade Finance Presented by Professor...

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Trade Finance November 17, 2010 Presented by: Professor Charles Skuba
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Trade Finance Risk Spectrum Source: U.S. Department of Commerce, International Trade Administration, “Trade Finance Guide, A Quick Reference for U.S. Exporters”, April 2007
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Trade Terms and Risk Exporter Risk Trade Term Importer Risk HIGH LOW Open Account Credit Sale on Consignment Time Draft Collection Sight Draft Collection Cash Against Documents Time Letter of Credit Sight Letter of Credit Cash in Advance LOW HIGH How much do the exporter and importer trust each other?
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Cash in Advance Cash in Advance – Payment is received prior to transfer of goods Buyer/importer assumes all the risk. Exporter has no risk. Buyer has no assurance goods will be shipped or services performed. Exporter may lose customers to competitors over payment terms Methods: Wire Transfer (includes bank fee), credit card, check (lengthy process)
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Open Account Goods shipped/services rendered, buyer sent an invoice to be paid at the maturity of the credit (usually 30 to 90 days) Seller is financing the sale for the buyer, relies upon buyer’s willingness and ability to repay the credit. Seller/exporter assumes all the risk. May help exporter win customers but exporter needs to be confident that importer will accept shipment and pay as agreed. Often used with reliable existing customers
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Sale on consignment basis Exporter ships goods to the importer with payment due upon sale of the goods. Exporter retains ownership (title) to the goods. Importer pays only when the goods are sold, so the exporter is financing the inventory. No risk to the importer. Risks to the exporter: Limited control over the goods. Payment contingent upon the sale of the goods.
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Letter of Credit Definition: commitment by a bank to a seller/exporter to pay : a certain amount , within a certain time, with specified documents presented to the bank in accordance with the terms of the “L/C” Key Points: under L/C, banks deal only in documents, not goods/services if the documents are in good order, the bank pays the L/C if not, the bank can refuse to make payment under the L/C an est. 65% of all L/Cs have some discrepancy in documents the L/C should “ mirror” the underlying contact
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Parties in L/C Transactions IMPORTER/BUYER: Requests their bank to issue (“open”) L/C in favor of exporter Enters into a credit agreement with their bank and/or provides cash or other collateral to the Issuing Bank Specifies terms/conditions to be included in the L/C ISSUING BANK: Opens the L/C based on commercial relationship with importer Substitutes its credit for that of the buyer Buyer creditworthiness, collateral critical factors in issuing L/C Has legal obligation to pay the exporter under the L/C Usually located in importer’s country, has correspondent relationships with banks in exporter’s country Forwards L/C to the advising bank
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