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