8.1 Characteristics of international transactions financing. 8.2 Techniques of short-term financing. 8.3. Technique Techniquess of medium to long-term fi financing. nancing. 8.4 Project financing, consortium loan and co financing.
8.1 Characteristics of international transactions financing.
International trade financing represents all mechanisms, mechanism s, techniques techniques and tools through which are purchased necessary funds funds to realize social and economic activities, in particular, business activities. When in this process is implied the external element, eleme nt, we are talking about the internat international ional financing f inancing the use of two or more
currencies exchange rate rate currency risk .
International trade financing
Sources Sourc es of financing: internal external ; In terms of the length of financing, it can be distinguished one of the following types: short term (12-18 months), medium term (5-7 years) long term (over 7 years).
Generally, in export and import operations are mostly used techniques for short to medium term financing, financing, while for international investments and industrial cooperation activitiess ar activitie aree specifi specificc long term financing f inancing techni techniques ques..
Export financing is often a key factor in a successful sale.
Exporters and importers impor ters have different expectations regarding payment Competition between seller sellerss - appropriate payment
methods. non-payment risk
8.2 Techniques of short-term financing (180 days or less ). trade finance pre-shipment post-shipment finance
Pre-shipment finance (for finance (for e.g. financing required to cover cov er the install installation ation of p plant lant and equipmen equipmentt as well as the cost of producti production, on, packing, storage and transportati transportation on of goods to the port of shipment shipment). ). Post-shipment Post-ship ment ffinance inance is is for the financing of the stages after the good has been shippe shipped d for international transport while awa awaiting iting pa payment. yment.
Forms of international trade finance Goods not produced yet Producer signs export contract Goods in up-country warehouses Goods being processed locally Goods in local transit
All these phases can result in documents which can support a financing.
Goods in export warehouses
Pre-shipment finance
Post-shipment finance Goods in transit through 3rd country Goods stored in transit port Goods at sea Goods in import warehouses Goods in overland transport to buyer Goods received by buyer Goods byby buyer Goods processed already sold buyer
When goods are loaded for international shipment, the transport agent issues a “railway bill”, a “bill of lading”or a similar document. document. This document acts as a title document:: one normally document needs it to receive the goods from the transport agent on discharge. A financier can thus it for security security to touse provide post-shipment financing.
Pre-shipment finance
Pre-shipment finance f inance is supposed to enable the exporter to prepare the goods goods fo forr export. export. Banks can provide:
Bank overdrafts overdrafts overdraft is a limit on borrowing on a bank A bank overdraft current account. An overdraft occurs when money is withdrawn from a bank account and the available availabl e balance balance g goes oes bel below ow zero zero.. In this situation situation th thee ac account count is said to be "overdrawn". authorized overdraft limit, The interest is interest is charged charged only on the daily overdraft overdraft (debit) (debit ) balance.
If the negative balance balan ce exceeds the agreed terms, additional fees may be charged charged and higher interest rates may be applied. a fixed period (usually (usual ly one year) year) If the overdraft overdraft is secured by an asset or property, property, the lender has the right to foreclose foreclos e on the collateral in case the account holder does not pay.
BANK LOANS
A bank loan is a fixed f ixed amount for a fixed term with regular
fixed repayments. The interest in terest on a loan tends to be llow ower er than an overdraft. Example of a loan: A business business borrows borrows £12,000 from a bank over 3 years at an interest rate of 5%. The approx. approx. repayments on this loan loan would would
be £392 a month for 36 months mont hs (£14,112). A fixed fixed term means how how many many months or years years before be fore the loan has to be repaid in full.
Overdrafts vs loans Overdrafts
Advantages Advantag es
Loans
Flexibility – can change the amount borrowed within limits
Larger amounts can be borrowed
Interest is only paid on amounts borrowed
Lower interest rates than overdrafts Regular repayments help plan cash f lows
Disadvantages Disadvant ages
Cannot be used for large borrowing
Less f lexible than an overdraft
Rates of interest higher than in the case of loans
Have to to pay back in stated time or risk further financial problems
Bank can change chan ge limit at any time or ask for money to be paid back sooner than expected
Discount loans loans
A discount loan is a loan arrangement where the interest and any other related charges are calculated calculated at the time the loan l oan is granted. The total of o f the t he interest and other charges are subtracted from the face amount of the discounted loan. Instead of receiving the face value of the loan, the borrower borrower
receiv receives es the bthe ut is still respo responsible nsible for repaying thereduced full faceamount, value of but loan. schedule of payments
dividing the face value by the number of installment payments to payments to be made. This approach makes it possible possibl e for the borrower borrower to begin paying on the principle prin ciple immediately immedi ately,, without any of the installment install ment payments going to cover cover interest charges.
Discount loans. loans.
For the lender lender,, the discount loan is also beneficial, in this type of loan does not usually usually allow allow for breaks on the interest charges applicable to the loan. Since the applicable interest and related ccharges harges are accounted for up front, there is no need for the lender to have to
apply early payoff pays or tooff recalculate the rate ofpenalties interest ifforthe borrower the loan ahead of schedule. For example:
If you close a loan for the amount of 50,00 50,000MDL. 0MDL. If the interest and financing financing charges are 10,000MDL, you would rec receive eive 40,000MDL from the lender lender,, but still have to to pay back the whole 50, 50,000MDL. 000MDL.
lines Credit lines
A line of credit is an agreement between a financial institution and a borrower allowin allowing g the latter to access credit up to an agreed amou amount; nt;
Interest is paid only on money actually withdr withdrawn awn. Lines of credit can be secured by collateral or can be unsecured. Lines of credit are often extended for creditworthy customers in order to address liquidity problems; The term is also used to mean the credit limit of a customer, that is, the maximum amount of credit a customer is allowed . This credit arrangement allows to finance within this balance several contracts subsequently entered into by the client. Lines of credit may set up for purchasing miscellaneous goods (g e n e r al or a l p u r p o s e l i n e s o f c r e d i t ) or for contracts associated with one project (p r o j e c t l i n e s o f c r e d i t ). ).
EXAMPLE S: S:
1. the international international bank extended extended in 1995 a US$10 million line of credit directly to South Africa Sugar Association at a price price of LIBOR LIBOR + 0.875% (excluding commitment fees). fees). 2. the Zambian subsidiary of an international bank granted in 1996 a US$1.5 mln cotton input facility to a local cotton producer at LIBOR +1.5% (excluding arrangement fees).
Cash-in-Advance Cash-in-Advance
cash in advance may be considered a payment mechanism
that provide credit to theprior exporter since thewhich e xporter exporter receiv receive e part of payment to shipment, willwill enable e nable him to produce. Applicability
Recommended in high-risk high-ris k trade relationships or export markets,for anduse ideal for Internet-based businesses. Risk Exporter is exposed to virtually virtual ly no risk as the burden of risk is is placed nearly completely on the importer. importer. Pros Payment before shipment Eliminates risk of non-payment Cons May lose customers to competitors over over payment terms No additional earnings through financing operations
When to Use Use Cash-in-Advance Cash-in-Advance Terms
The importer is a new customer and/or has a lessestablished operating history. Theunverifiable. importer ’s creditworthiness is importer’s i s doubtful, unsatisfactor unsat isfactoryy, or The political and commercial risks of the importer’s home country are very high.
The exporter’s product is unique, not n ot availabl availablee elsewhere, or in heavy demand. Such loans are granted to high-value products with long manufacturing cycle. Pre-fin Prefinancing ancing loan’s loan’s (cash (cas h in advance) role is to cover cover cash needs of the producer when when the advance received from the buyer signing the contract is not covering covering the production. The exporter operates an Internet-based Internet-base d business where the use of convenient payment methods is a must to remain competitive.
Post-shipment finance
Post-shipment finance fi nance is generally generally provided provided against ag ainst shipping documents, as proof that the shipment has indeed been made. As the buyer normally takes possession of the goods before he reimburses the credit, the th e shipping document documentss only provide security to the bank for a limited period, pe riod, basical basically ly while the g goods oods are in international internation al transit.
Post-shipment finance can be given to the buyer or or the exporter : It can be given to the buyer who then can promptly promptly pay the seller seller.. It therefore allows the buyer not to commit his own funds to pay for the goods goods until some time ti me after they have been shipped preferably,, until after he has already preferably al ready sold the goods. Exporter ope operate rate in a very very competitive buyer's market and in order to conclude conclude an export sale sale,, iitt is criti critical cal to offer attractive credit terms to the overseas buyer buyer.. Thus, Post-shipment Post-ship ment finance
can beto given to the seller so that he can sell on deferred payment terms the buyer.
Post-shipment finance
Discounting is one of th thee most used techniques in short short--
term financing financing of exports. Usually, Usually, selling on credit is accompanied acc ompanied by issuing a trade document (promissory (promissor y notes, drafts, bills) bil ls) according to which the importer is obliged to pay pay,, when du due, e, the value of goods. The mechanism of discounting The loan that is granted by the bank bank therefore has a real value calculat calculated ed fr from om the amount of the bill (nominal value) minus fee, also is charg charged ed a fee to co cover ver the bank's riskthe in discount such operations. Vr=Vn-S,
where: Vr – – real value of the loan;
Vn – nominal value of the bill;
– number of days from discounting day till maturity; Nz –
S – the discount; Ts – rate;; – discounting rate
Acceptance credit similar in principle principl e to the technique of discounting. This credit may be granted in favor of the exporter or importer. Acceptanc Ac ceptancee credit in favor favor of the exporter. If the contract partner, partner, for various reasons, do not accept the use of debt securitie se curitiess (efecte de comert), the exporter is able to dra draw w a bill on his bank (also (al so called the blue bill, bill , the color color that
distinguishes them from other bills). Depending on the laws of different diffe rent countries, countries, acceptance credit can be obtained obtain ed in i n two ways: ways: - Whether the bank itself accepts the rediscounting of the debt security to the central central bank or other exports financing f inancing institution, institu tion, and on this basis, the exporter receives the credit; - Whether Whe ther the exporter, exporter, with the acceptance received from its bank, discounts the bill to another bank. In this case, the bank of theates, exporter, exporter , although it i t does on notthe finance f inance facilit facilitates, through its signature bill ofthe theoperations, exporter, exporter, toit
obtain financing from another bank.
In SUMMARY, Pre- and Post- shipment Finance Compared
Pre-shipment Finance Finance
Post-shipment Finance
Finance is disbursed prior pri or to shipment to enable collection of materials for
Finance is disbursed after shipment. Involves mainly payment
export. Involves Involv es both b oth performance perf ormance and payment risk of the exporter .
risk of the buyer Repayment comes from proceeds of exports Risk is i s lower, lower, especially especi ally if buyer is well known, hence financing cost is lower.
Source of repayment is the proceed of the contract. Relatively a higher risk with higher higher costs. costs.
Topics for reports
Specifics of the export financing in the context of the economic and financial crisis Peculiarities of trade financing in Republic of Moldova: opportunities and constraints