Week 9 - Financing International Trade Flashcards
Why is the availability of trade finance important in international trade? (3)
- Facilitates transactions
- Mitigates risks
- Ensures that exporters and importers are paid - especially when dealing with cross-border transactions
What are the main methods of payment for international trade? (6)
- Supplier credit
- Prepayments
- Letters of credit (L/C)
- Drafts (bills of exchange)
- Consignments
- Open accounts
What is supplier credit in international trade?
supplier credit occurs when the supplier (exporter) funds the entire trade cycle, providing credit to the buyer for the purchase of goods
What are prepayments in international trade and what risks to they expose to exporter and importer alike? (3)
- Prepayments occur when the buyer pays the seller before the goods are shipped
- Exporter risk - none
- Importer risk - reliant on the exporter to ship goods as agreed
What is a Letter of Credit (L/C) and what risks do they pose to importers and exporters? (3)
- Bank-issued document that guarantees payment to the exporter once the required shipping documents are presented
- Risk to exporter - none
- Risk to importer - relies on the exporter to ship the goods as per documented
What are drafts (bills of exchange) in international trade? (2)
- unconditional promises drawn by the exporter, instructing the buyer to pay a certain amount
- Banks act as intermediaries in these transactions
What are sight drafts and time drafts in international trade? (2)
- Sight drafts: Payment is due upon presentation of the draft to the buyer.
- Time drafts: The buyer accepts the draft, promising to pay at maturity.
What are consignments in international trade and what risk do they pose to importers and exporters?
- In a consignment arrangement, the exporter retains ownership of the goods until the buyer sells them to a third party
- Risk to exporter: Allows the buyer to sell before paying.
- Risk to importer: None.
What is an open account in international trade and what risk do the pose to importers and exporters? (3)
- In an open account transaction, the exporter ships the goods and expects payment at an agreed-upon time
- Risk to exporter: Relies entirely on the buyer to pay as agreed.
- Risk to importer: None.
What are the different trade finance methods used in international trade? (4)
Accounts receivable financing
Factoring (cross-border factoring)
Letters of Credit (L/C)
Banker’s acceptance (B/A)
What is accounts receivable financing in international trade?
allows an exporter to obtain immediate funds by securing a loan against the receivables (money owed by the buyer).
What is factoring in international trade?
involves selling the accounts receivable to a third-party factor, who assumes the responsibility for collecting payments from the buyer.
What is the process of a Letter of Credit (L/C)? (2)
- issued by a bank on behalf of the importer, guaranteeing payment to the exporter upon presentation of shipping documents
- typically irrevocable, and the exporter is required to provide documents like invoices and a bill of lading.
What is an irrevocable Letter of Credit (L/C)?
- An irrevocable L/C cannot be altered or cancelled without the consent of all parties involved
- It provides security to both the exporter and importer.
What are variations of Letters of Credit (L/C)? (3)
Standby L/C: Only funded if the buyer does not pay.
Transferable L/C: The first beneficiary can transfer the L/C to another party.
Assignments of proceeds under an L/C: The exporter assigns the proceeds of the L/C to the supplier.
What is a banker’s acceptance (B/A) in international trade? (2)
- time draft drawn on and accepted by a bank, guaranteeing payment at maturity
- exporter may sell the B/A in the money market for immediate cash.
How does a banker’s acceptance (B/A) provide trade financing? (2)
- B/A is sold in the money market, and the exporter receives immediate cash
- Accepting bank charges an all-in rate, including both a discount rate and an acceptance commission
What are the government agencies involved in international trade finance?
UK’s Export Credit Guarantee Department (ECGD), offer export credit, finance, and guarantee programs to reduce risks and stimulate foreign trade.
What is the role of ECGD (Export Credit Guarantee Department)?
guarantees payment for UK exporters, helping them trade internationally by reducing the risk of non-payment from foreign buyers.
What is the moral rationale for government export guarantees in international trade?
Export credit guarantees help stimulate trade with developing countries, like Heavily Indebted Poor Countries (HIPCs), by offering financing and reducing the risk for exporters.
