Module 3 Flashcards
Three types of risks for exporters
- Trading and credit risk
- Currency risk
- Cultural risk
Types of trading risk (4)
- Physical risk > goods lost/ stolen in transit
- Credit risk > Possibility of payment default
- Trade risk > Customer refusing goods/ cancelling order
- Liquidity risk > inability to finance credit
Can minimise trading risk by (2)
- Getting help from banks, insurance companies or government agencies
- Risk transfer (eg courier pays for damaged goods whilst in transit)
Currency risk
Unexpected movements in exchange rates
Cultural risk
Different customs, laws and language
Contract…
Clearly specifies and describes what is being purchased and the terms of sale
Documents of title
Documents which evidence ownership eg bill of lading, warehouse receipt
Commercial documents
Not documents of title, but may be specified in the contract therefore accompany goods in transit eg invoice, insurance docs, certificate of origin/ quality
Three types of terms on which goods can be sold
- Open account
- Advance payment
- Documentary credit
Open account
Foreign customer given same credit terms as domestic customer
Advance payment
Foreign customer is asked to pay up front before goods/ services are delivered
Documentary credit (letters of credit)
Bank undertakes to pay for goods on behalf of importer provided exporter submits required documents within specified period
Different forms of documentary credits (2)
- Revocable credits
- Irrevocable credits
Revocable credits
Can be amended or cancelled by the importer
Irrevocable credits
Cannot be amended or cancelled without the consent of all parties. Unconfirmed or confirmed.
Greatest security for exporter
Irrevocable letter of credit confirmed by a bank
Documentary credit disadvantages (3)
- Slow to arrange
- Administratively cumbersome
- Expensive process
Documentary credit advantages
- Essential when risk of non-payment is high
- Good when dealing with unknown importer for the first time
Irrevocable credits > confirmed
Exporters’ bank agrees by confirming credit that it will honour documents
Irrevocable credits > unconfirmed
Exporters’ bank advises exporter that credit line has been opened, does not constitute undertaking to pay
Documentary credit > stage 1
- Exporter submits offer for sale
- Credit terms and T&Cs established
- PO raised and contract of sale signed
Documentary credit > stage 2
Documentary credit line opened by importer with its’ bank
Documentary credit > stage 3
Exporter delivers the ordered goods
Documentary credit > stage 4-7
Exporter obtains payment from importer’s bank by presenting complete and correct specified documents
Trade finance
Acts as third party to remove/ mitigate payment risk of importers not paying exporters
Bill of exchange
Document which sets out a commitment to pay a sum of money at a specified point in time eg importer commits itself to paying a supplier
Bill of exchange > stage 1
Goods despatched
Bill of exchange > stage 2
Bill of exchange drawn up and sent to customer
Bill of exchange > stage 3
Customer signers bill and acknowledges indebtedness
Bill of exchange > stage 4
Bill is sold to discount house for less than face value
Bill of exchange > stage 5
Cash is received by seller (from discount house)
Bill of exchange > stage 6
Customer makes payment on bill to discount house
Short term export credit insurance
Protection against the risk that an overseas customer defaults on a payment obligation eg due to insolvency, wars etc
Benefits of short term export credit insurance (2)
- Reduces risk of not getting paid
- May provide access to preferable finance packages from banks
Disadvantages of short term export credit insurance (2)
- Expensive
- Administrative burden
Factoring
Involves the outright sale of accounts receivable at a discount in return from prompt cash
Blockchain in trade finance
Huge potential to allow sharing of encrypted data across many companies, people and institutions
Bank guarantee/ contract bonds
Limited to the payment of a sum of money in the event of non-performance by the exporter
Bank guarantee/ contract bonds > exporter requirements
Exporter must provide importer’s bank with letter of indemnity - allows bank to claim against the exporter should guarantee be called
Four basic types of guarantee
- Tender/ bid bond
- Performance bond
- Advanced payment guarantee bond
- Retention bond
Tender/ bid bond
Designed to prevent exporter withdrawing their tender if transaction becomes unattractive by the time the contract is awarded
Performance bond
Intended to ensure goods are delivered/ service rendered in accordance with terms of contract
Advanced payment guarantee bond
Undertake to refund any advance payment if the goods or services are unsatisfactory
Retention bond
Retention held back until all minor defects at end of an agreed maintenance period have been fixed. Frequently bond is given instead of cash being withheld.
Three main issues exporter needs to consider when providing bonds
- Commercial
- Control
- Accounting
Commercial issues with bonds
Can impede exporter’s ability to take advantage of rights of termination afforded by contract
Control issues with bonds
Exporter must ensure they have control over bonds issued by banks, particularly once they have expired to ensure they are not charged
Accounting issues with bonds
Exporter must decide how to present potential liability in the notes of the accounts > is it a contingent liability?
Medium term credit
In excess of two years but not longer than ten years
UK Export Finance
If export of goods relates to capital goods, eligible for support from UK Export finance (for medium term credit), they provide guarantee to exporter’s bank that if overseas importer fails to pay, UK Export Finance will do so
Free trade
No restriction on imports from or exports to other countries
Protectionist measures
Government actions and policies that restrict/ restrain international trade often with intent of protecting local businesses and jobs from foreign competition
Tariffs/ customs duties
Taxes on imported goods
Import quotas
Restrictions on quantity of a product that is allowed to be imported into a country
Embargo
Total ban in imports from one particular country
World Trade Organisation (WTO)
Deals with the rules of trade between nations
WTO aims (5)
- Reduce existing barriers to free trade
- Eliminate discrimination in international trade
- Prevent the growth of protectionism
- Act as a forum for assisting free trade
- To establish rules and guidelines
General agreement on tariffs and trade (GATT)
Legal agreement with purpose of increasing international trade by eliminating/ reducing trade barriers eg tariffs and quotas
Most favoured nation (MFN) principle
If a country grants another a special favour, must do the same for all other WTO members
Two possible Brexit scenarios
- Comprehensive free trade agreement (FTA)
- Fall back to WTO rules
Free trade agreement
Agreement between two or more countries that aims to liberalise the trade of goods and/ or services (lower tariffs/ quotas removed)
Brexit WTO rules
No preferential access to EU market for goods/ services, and tariffs would apply in trade
