Trade finance guide export

Pdf File 708.42 KByte, 28 Pages

Creator: Adobe InDesign CS2 (4.0)
Producer: Adobe PDF Library 7.0
CreationDate: Wed Apr 11 10:54:24 2007
ModDate: Mon Dec 7 15:41:01 2009
Tagged: yes
Form: AcroForm
Pages: 28
Encrypted: no
Page size: 612 x 792 pts (letter) (rotated 0 degrees)
File size: 725427 bytes
Optimized: yes
PDF version: 1.4

  • PDF Role of Trade Finance for Inclusive Growth
  • PDF TRADE FINANCE ROLES OF BANKS - World Bank
  • TRADE FINANCE - INTRODUCTION What is trade finance?

TRADE FINANCE - INTRODUCTION What is trade finance?

Trade Finance Guide
A Quick Reference for U.S. Exporters
Table of Contents
Introduction ......................................................................................................1
Chapter 1: Methods of Payment in International Trade................................. 3
Chapter 2: Cash-in-Advance................................................................................. 5
Chapter 3: Letters of Credit.................................................................................. 7
Chapter 4: Documentary Collections................................................................ 9
Chapter 5: Open Account.................................................................................... 11
Chapter 6: Export Working Capital Financing................................................ 13
Chapter 7: Government-Guaranteed Export Working Capital Programs 15
Chapter 8: Export Credit Insurance.................................................................. 17
Chapter 9: Export Factoring............................................................................... 19
Chapter 10: Forfaiting............................................................................................ 21
Chapter 11: Government Assisted Foreign Buyer Financing......................... 23
Published April 2007
The International Trade Administration's mission is to create prosperity by strengthening the competitiveness of U.S. industry,
promoting trade and investment, and ensuring fair trade and compliance with trade laws and agreements. To learn more about
the ITA write to: International Trade Administration, Office of Public Affairs, U.S. Department of Commerce, Washington, DC 20230,
or visit the ITA's Internet site at .
TRADE FINANCE GUIDE
Introduction
Opportunities, Risks, and
Trade Finance
elcome to the first edition of the Trade Finance Guide: A Quick Reference for
U.S. Exporters. This guide is designed to help U.S. companies, especially small
and medium-sized enterprises (SMEs), learn the basic fundamentals of trade
Wfinance to turn their export opportunities into actual sales and to achieve the ultimate goal:
to get paid for their export sales, especially on time. This guide provides general informa-
tion about common techniques of export financing.
Accordingly, you are advised to assess each technique in
light of your specific situation or needs. The Trade Finance
Guide will be revised and updated annually. Future A Quick Glance
editions may include new chapters discussing other trade
finance techniques and related topics. Trade Finance Guide
A comprehensive but easy-to-understand
Benefits of Exporting elementary guide for trade finance, designed
especially for U.S. SME exporters.
Ninety five percent of the world's consumers live outside
of the United States, so if you are only selling domesti- Trade Finance
cally, you are reaching just a small share of potential A means to turn export opportunities into actual
customers. Exporting enables SMEs to diversify their sales by effectively managing the risks associated
portfolios and insulates them against periods of slower with doing business internationally--the risks of
growth. Free trade agreements have opened in markets getting paid, especially on time.
such as Australia, Canada, Central America, Chile, Israel,
Jordan, Mexico, and Singapore, creating more oppor- Opportunities
tunities for U.S. businesses. The Trade Finance Guide is ? Reaching the 95 percent of customers worldwide
designed to provide U.S. SMEs with the knowledge who live outside the United States
necessary to grow and become competitive in
overseas markets. ? Diversifying customer portfolios
Risks
Key Players in the Creation of the Trade ? Nonpayment or delayed payment by
Finance Guide foreign buyers
The International Trade Administration (ITA) is an ? Political and commercial risks; cultural influences
agency within the U.S. Department of Commerce whose
mission is to foster economic growth and prosperity
through global trade. ITA provides practical information
to help you select your markets and products, ensures that you have access to international
markets as required by our trade agreements, and safeguards you from unfair competition
in the form of dumped and subsidized imports. ITA is made up of the following four units:
(1) The Commercial Service--the trade promotion unit that helps U.S. businesses at every
stage of the exporting process; (2) Manufacturing and Services--the industry analysis unit
that supports U.S. industry's domestic and global competitiveness; (3) Market Access and
Compliance--the country-specific policy unit that keeps world markets open to U.S.
products and helps U.S. businesses benefit from our trade agreements with other coun-
tries; and (4) Import Administration--the trade law enforcement unit that ensures that
U.S. businesses face a level playing field in the domestic marketplace. Visit
for more information.
For More Information about the Guide
The Trade Finance Guide was created by ITA's Office of Finance. A part of ITA's
Manufacturing and Services unit, the Office of Finance is dedicated to enhancing the
domestic and international competitiveness of U.S. financial services industries and
providing internal policy recommendations on U.S. exports and overseas investment sup-
ported by official finance. For more information about the guide, contact Yuki Fujiyama,
tel. (202) 482-3277; e-mail Yuki.Fujiyama@mail..
How to Obtain the Trade Finance Guide
The Trade Finance Guide is available online at , the U.S. government's export
portal. Printed copies will be available from the Trade Information Center, 1-800-USA-
TRADE, and from the Commercial Service's global network of domestic Export Assistance
Centers and overseas posts. To find the nearest Export Assistance Center or overseas
Commercial Service office, visit or call the Trade Information Center at
1-800-USA-TRADE.
Private-Sector Partner
The Trade Finance Guide was created in cooperation with FCIB, an Association of
Executives in Finance, Credit, and International Business. Headquartered in Columbia,
Maryland, FCIB is a prominent not-for-profit business educator of credit and risk manage-
ment to exporting companies of every size. For more information on FCIB, visit its Web site
at .

U.S. Department of Commerce
International Trade Administration
TRADE FINANCE GUIDE
Chapter 1
Methods of Payment in
International Trade
o succeed in today's global marketplace, exporters must offer their customers attrac-
tive sales terms supported by the appropriate payment method to win sales against
foreign competitors. As getting paid in full and on time is the primary goal for each
Texport sale, an appropriate payment method must be chosen carefully to minimize the
payment risk while also accommodating the needs of the buyer. As shown below, there are
four primary methods of payment for international transactions. During or before contract
negotiations, it is advisable to consider which method in the diagram below is mutually
desirable for you and your customer.
PAYMENT RISK DIAGRAM
Open Account Cash-in-Advance
Documentary
Collections Letters of Credit
Least Exporter Most
Secure Importer Secure
Letters of Credit Documentary
Collections
Cash-in-Advance Open Account
Key Points
? International trade presents a spectrum of risk, causing uncertainty over the timing
of payments between the exporter (seller) and importer (foreign buyer).
? To exporters, any sale is a gift until payment is received.
? Therefore, the exporter wants payment as soon as possible, preferably as soon as an
order is placed or before the goods are sent to the importer.
? To importers, any payment is a donation until the goods are received.
? Therefore, the importer wants to receive the goods as soon as possible, but to delay
payment as long as possible, preferably until after the goods are resold to generate
enough income to make payment to the exporter.
Cash-in-Advance
With this payment method, the exporter can avoid credit risk, since payment is received
prior to the transfer of ownership of the goods. Wire transfers and credit cards are the most
commonly used cash-in-advance options available to exporters. However, requiring
payment in advance is the least attractive option for the buyer, as this method creates cash
flow problems. Foreign buyers are also concerned that the goods may not be sent if pay-
ment is made in advance. Thus, exporters that insist on this method of payment as their
sole method of doing business may find themselves losing out to competitors who may be
willing to offer more attractive payment terms.
Letters of Credit
Letters of credit (LCs) are among the most secure instruments available to international
traders. An LC is a commitment by a bank on behalf of the buyer that payment will be
made to the exporter provided that the terms and conditions have been met, as verified
through the presentation of all required documents. The buyer pays its bank to render this
service. An LC is useful when reliable credit information about a foreign buyer is difficult
to obtain, but you are satisfied with the creditworthiness of your buyer's foreign bank. An
LC also protects the buyer since no payment obligation arises until the goods have been
shipped or delivered as promised.
Documentary Collections
A documentary collection is a transaction whereby the exporter entrusts the collection of
a payment to the remitting bank (exporter's bank), which sends documents to a collecting
bank (importer's bank), along with instructions for payment. Funds are received from
the importer and remitted to the exporter through the banks involved in the collection in
exchange for those documents. Documentary collections involve the use of a draft that
requires the importer to pay the face amount either on sight (document against payment--
D/P) or on a specified date in the future (document against acceptance--D/A). The draft
lists instructions that specify the documents required for the transfer of title to the goods.
Although banks do act as facilitators for their clients under collections, documentary
collections offer no verification process and limited recourse in the event of nonpayment.
Drafts are generally less expensive than letters of credit.
Open Account
An open account transaction means that the goods are shipped and delivered before pay-
ment is due, usually in 30 to 90 days. Obviously, this is the most advantageous option to
the importer in cash flow and cost terms, but it is consequently the highest risk option for
an exporter. Due to the intense competition for export markets, foreign buyers often press
exporters for open account terms since the extension of credit by the seller to the buyer is
more common abroad. Therefore, exporters who are reluctant to extend credit may face the
possibility of the loss of the sale to their competitors. However, with the use of one or more
of the appropriate trade finance techniques, such as export credit insurance, the exporter
can offer open competitive account terms in the global market while substantially mitigat-
ing the risk of nonpayment by the foreign buyer.

U.S. Department of Commerce
International Trade Administration

Download Pdf File Online Preview