After completing this chapter, students will be able to: To describe the methods of payment for international trade; to explain common trade finance methods; and to describe the major agencies that facilitate international trade with export insurance and/or loan programs. | Financing International Trade 26 Lecture Chapter Objectives To describe the methods of payment for international trade; To explain common trade finance methods; and To describe the major agencies that facilitate international trade with export insurance and/or loan programs. Sometimes, the exporter may request that a local bank confirm (guarantee) the L/C. Trade Finance Methods Letters of Credit (L/C) The required documents typically include a draft (sight or time), a commercial invoice, and a bill of lading (receipt for shipment). Example of an Irrevocable Letter of Credit Documentary Credit Procedure Buyer (Importer) Sale Contract Seller (Exporter) Deliver Goods Request for Credit Importer’s Bank (Issuing Bank) Documents & Claim for Payment Present Documents Deliver Letter of Credit Present Documents Send Credit Exporter’s Bank (Advising Bank) Payment Variations include standby L/Cs : funded only if the buyer does not pay the seller as agreed upon transferable L/Cs | Financing International Trade 26 Lecture Chapter Objectives To describe the methods of payment for international trade; To explain common trade finance methods; and To describe the major agencies that facilitate international trade with export insurance and/or loan programs. Sometimes, the exporter may request that a local bank confirm (guarantee) the L/C. Trade Finance Methods Letters of Credit (L/C) The required documents typically include a draft (sight or time), a commercial invoice, and a bill of lading (receipt for shipment). Example of an Irrevocable Letter of Credit Documentary Credit Procedure Buyer (Importer) Sale Contract Seller (Exporter) Deliver Goods Request for Credit Importer’s Bank (Issuing Bank) Documents & Claim for Payment Present Documents Deliver Letter of Credit Present Documents Send Credit Exporter’s Bank (Advising Bank) Payment Variations include standby L/Cs : funded only if the buyer does not pay the seller as agreed upon transferable L/Cs : the first beneficiary can transfer all or part of the original L/C to a third party assignments of proceeds under an L/C : the original beneficiary assigns the proceeds to the end supplier Trade Finance Methods Letters of Credit (L/C) Banker’s Acceptance (BA) This is a time draft that is drawn on and accepted by a bank (the importer’s bank). The accepting bank is obliged to pay the holder of the draft at maturity. If the exporter does not want to wait for payment, it can request that the BA be sold in the money market. Trade financing is provided by the holder of the BA. Trade Finance Methods Banker’s Acceptance In general, all-in-rates are lower than bank loan rates. They usually fall between the rates of short-term Treasury bills and commercial papers. Trade Finance Methods Banker’s Acceptance (BA) The bank accepting the drafts charges an all-in-rate (interest rate) that consists of the discount rate plus the acceptance commission. Life Cycle of a Typical Banker’s Acceptance 8. .
