FINANCING OF
FOREIGN TRADE
WHAT IS FOREIGN TRADE?
• Foreign trading is basically the import and export of
goods and services between an individual or company
in one country and the party in a foreign country.
• When a buyer in another country wants to import
something that a seller in a different country is selling,
trade between the two parties is enabled.
• International trade gives access to markets of other
countries from where you can source products which
may not be available domestically, or is available for a
cheaper price overseas.
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FOREIGN TRADE
INCLUDES:
1) Payment Methods
2) Trade-Finance
Methods
3) Documents
4) EXIM Banks
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PAYMENT METHODS FOR FOREIGN TRADE
Letter of Credit Drafts Open Account
Prepayment Consignment
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PAYMENT METHODS FOR FOREIGN TRADE
LETTER OF CREDIT DRAFTS OR BILL OF
PREPAYMENT
(L/C) EXCHANGE (B/E)
• A letter of credit is an instrument • In this method, the exporter • It is a written order by an
issued by a bank on behalf of the will not ship the goods until exporter instructing an importer
importer promising to pay the the buyer has remitted or its agent to pay a specified
exporter (beneficiary) upon payment to the exporter. amount at a specified time.
presentation of shipping documents • • a. Sight Draft:
Minimal Risk to Exporter
in compliance with the terms It is payable on presented to
stipulated. • Used where there is the drawee.
a. Political Unrest b. Time Draft:
• Irrevocable vs Revocable
b. New Customers It is presented to drawee who
Transferable & Confirmed accepts it with a promise to
c. Goods made to order
• Advantages pay at later day.
- It reduces the Risk of Default.
- Financing are secured.
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PAYMENT METHODS FOR FOREIGN TRADE
CONSIGNMENTS OPEN ACCOUNT
• In this technique, Consignor • The opposite of prepayment is the open
(Exporter) sends goods to consignee account transaction in which the
(Importer) and consignee attempts to exporter ships the merchandise and
sell goods to a third party; keeps some expects the buyer to remit payment
profit then remits rest of the amount according to the agreed-upon terms.
to consignor. • More popular lately because
• Involves high risk for exporter. a. Major surge in global trade
b. Credit information improved
• Mostly used between affiliated people c. More global familiarity with
or subsidiary-parent company. exporting.
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COMPARISON OF PAYMENT METHODS:
Usual Time of Goods Available to
Method Risk to Exporter Risk to Importer
Payment Buyers
Relies completely on
Prepayment Before shipment After payment None exporter to ship
goods as ordered
Assured shipment
Very little or none, made, but relies on
When shipment is
Letter of Credit After payment depending on credit exporter to ship
made
terms goods described in
documents
Same as L/C unless
On presentation of If draft unpaid, must importer can inspect
Sight draft After Payment
draft to buyer dispose goods goods before
payment
Relies on buyer to
Time draft On maturity of drafts Before payment Same as sight draft
pay draft
Allows importer to
At time of sale by
Consignment Before payment sell inventory before None
buyer
paying exporter
Relies completely on
Open Account As agreed Before payment buyer to pay account None
as agreed
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Credit procedure of ‘Letter of credit (L/C)’
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TRADE-FINANCE METHODS
Accounts Receivable
Banker’s Acceptance Countertrade
Financing
Factoring Forfaiting
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TRADE-FINANCE METHODS
ACCOUNTS RECEIVABLE
FACTORING
FINANCING
• When the exporter is willing to extend credit • When exporter sells goods on credit, his
to buyer but requires funds immediately, account receivable increases, the exporting
then exporter can get a loan from bank based firm can decide to sell accounts receivable
on their own creditworthiness. If buyer fails to third party.
to pay the exporter, the exporter is still • Third party verifies all the details including
responsible for repaying the bank.
creditworthiness of the buyer then assumes
• It involves additional risk of government all administration responsibilities.
restrictions and exchange control which may
• Factoring party usually purchase at a
prevent buyer from paying the exporter.
discount and also receives processing fees.
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TRADE-FINANCE METHODS
BANKER’S
FORFAITING COUNTERTRADE
ACCEPTANCE
• It is a bill of exchange, or • It is the purchase of • Countertrade include
time draft, drawn on and financial obligations, such barter, compensation, and
accepted by bank. as bills of exchange or counter-purchase.
• Bank is obliged to pay the promissory notes, without • It includes exchange of
holder of the draft at recourse to the original goods by both parties
maturity. holder, issued by importer. which is mostly
• Period ranges from three equivalent in monetary
to seven years. terms.
• Exporter then sells the • Primary participants are
notes to forfaiting bank. Government and MNCs.
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DOCUMENTS INVOLVED IN FOREIGN TRADE
Commercial
Bill of Lading Invoices
Insurance Consular
Certificate Invoices
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DOCUMENTS INVOLVED IN FOREIGN TRADE
BILL OF LADING COMMERCIAL INVOICES
• It serves as a receipt for shipment and • It consists description of the
a summary of freight charges; most merchandise being sold to the buyer
importantly, it conveys title to the by exporter.
merchandise. • It includes, Name and address of
• The carrier presents the bill to the seller & buyer, date, terms of
exporter (shipper), who in turn payment, price, freight chargers,
presents it to the bank along with the quantity, weight, insurance, etc., and
other required Documents. all additional charges.
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DOCUMENTS INVOLVED IN FOREIGN TRADE
INSURANCE CERTIFICATE CONSULAR INVOICES
• An insurance document which • It is a document required by some
certifies that the shipment has been foreign countries, showing shipment
insured under given policy to cover information such as consignor,
loss or damage to the cargo while in consignee and value description etc.
transit. • It is certified by consular officials of
• It generally covers the same amount the importing country stationed in the
as the price of merchandise. foreign country, it is used by the
• Prepared by insurance agent. country’s customs officials to verify
the value, quantity and nature of the
shipment.
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EXIM BANK OF
INDIA
Export import bank of India is the
premier export finance institution in
India, established in 1982 under Export-
Import Bank of India Act 1981. It started
operation with head office in Mumbai
from 1st March, 1982.
Exim bank of India has been both catalyst
and key player in the promotion of cross
border trade and investment.
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OBJECTIVE
• To provide financial assistance to exporters and
importers and for functioning as the principal
financial institution for coordination the
working of institutions engaged in financing
export and import of goods and services with a
view to promoting country’s international trade.
• To act on business principles with due regards
to public interest.
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SERVICES PROVIDED
FINANCIAL SERVICES OTHER SERVICES
• Overseas Investment Services • Research Analysis
• Project Exports • Market Advisory Services
• Lines of Credit • Export Advisory Services
• Corporate Banking • Team Deposit Schemes
• Buyer’s Credit
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THANK YOU
Presentation by:
Shaishav Vadodariya (GV-
002)
Rahul Sonavane (GS-128)
