1 export - import finance. 2 international trade finance profit is not a sole factor to determine...
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EXPORT - IMPORT FINANCE
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International Trade Finance Profit is not a sole factor to determine
the company’s survival Understand the importance of “Cash
Flow” Exporters always prefer advance
payment Importers always prefer open account Letter of Credit is a compromise Mismatch of Cash outflow and Cash
inflow
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Providers of the Trade Finance
Exporter Open account Collection Consignment
Importer Advance payment Red Clause L/C
Bank Loan L/C Account Receivables Financing Packing credit Trust receipt Shipping Guarantee
Financial Institutions Factoring Forfaiting Leasing Hire Purchase
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Account Receivable Financing
Or invoice financing a short term, post shipment export
financing loan against account receivable as a
collateral The exporter still has to collect the
payment from the buyer on his own and pay back the money to the bank
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Factoring
A purchase of exporter’s account receivable in the form of invoices at a discount from their face value
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High cost of extending credit Exporter is forced to extend credit
terms to its customers 30, 60, 90 days of sometimes 180
days Exporter has become a “bank” with
interest free The result , Cash Flow Crunch The factoring process; Cash now, no
waiting
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Factoring VS Loan
Factoring is not a loan Invoices are business assets With factoring, you are actually sell
those assets, not receiving a loan against them
The money you receive from factor will not have to pay back
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Factoring VS Account Receivable Financing With Account Receivable Financing,
you receive a loan against which your invoices are pledged as collateral
This is money which will have to be repaid at some point in the future
With Factoring, you are selling your asset
There is nothing to repay
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Who qualifies?
Factors actually receive their money from the importer (customers)
As a result, they are more interested in customers’ creditability as opposed to that of exporters
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Factoring : Classifications
Non-recourse Recourse Modified recourse
The difference has to do with who is at risk in case the customer defaults on payment
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Non-Recourse
The factor assumes the risk of customer non-payment
The exception Quality & Quantity dispute Dispute not related to financial reason
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Recourse
When the exporters have a high number of customers that are considered poor credit
The factor has recourse against exporter if the importer defaults on payment
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Modified recourse
The risk is shared between exporter and the factor
In the event of default payment, the factor will have recourse against the export up to a pre-set limit
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Factoring Diagram
Exporter Importer
Transportation
1. Sales contract : Open Account 180 days
2. Shipment
Factor
4. Copy of Invoice
3. Original InvoiceWith instruction to pay factor5. Advance portion
(let’ say 85%)
6. Payment at maturity date
7. Remaining Payment minus
factoring fee
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Summary of Factoring
Normally applied to the payment terms by open account
Financial situation in the country must be well developed
Factors concerning image of the exporter
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Forfaiting A purchase of a series of credit
instruments such as draft drawn under time letter of credit, bill of exchange, promissory note
It has been done on a non-recourse basis
Operated on a discount basis Available up to 100% of the contract
value
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When should forfait be used?
Higher amount than factoring, normally more than $100,000
Normally fixed rate, medium to long term finance
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Information needed
Who is the buyer What goods are being sold Value and currency of contract Due date and duration of contract
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Required documents
Copy of sales contract Copy of signed commercial invoices Copy of shipping documents Letter of guarantee or aval
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Exporter’s perspective Advantages
Improve cash flow Non-recourse Fixed rate finance No administrative
expense on collection
Forfeiting bear all risk of currency exchange and interest rate risk
Simple documents Confidentiality
Disadvantages Regulation in
importing country Difficulty in
ensuring that the importer can obtain a guarantee
Costly
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Importer’s perspective Advantages
Simple documents Obtain fixed rate
extended credit Improve credit lines
Disadvantages Effect of Aval :
some degree on his credit line
Cost of guarantee fee
Costly due to forfaiting fee
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Forfaiter’s perspective Advantages
Simple documents Assets purchases is
easily transferable High margin
Disadvantages Event of default
payment Creditworthiness of
guanrantor Risk of currency
and interest rate fluctuation
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Financing available to the importer
Letter of Credit Trust receipt (T/R) Shipping Guarantee