If 2: Conventional Trade Financing - Wk 4

Front 1

Financing handled through the banking system

Back 1

1. Cash in advance
2. Open account
3. Draft (sight and time)
4. Bankers acceptance/trade acceptance
5. Consignment
6. Letter of credit

Front 2

Cash in Advance, 2 pts

Back 2

1. Last recourse with poor credit risk
2. Suppliers with unique product or services

Front 3

Open Account

Back 3

1. Customer well know to supplier, with excellent credit rating
2. No or minimal exchange risk
3. Amount up to $25,000 to $50,000
4. Terms of payment - within 90 days
5. Profit margin - over 20%

Front 4

Draft or bill of exchange

Back 4

An unconditional order to pay in writing, signed by exporter, addressed to the importer or its agent or bank, to pay on demand or at a fixed or determinable future date, the amount specified on its face
-Draft is a negotiable financial instrument, which can be bought or sold on the financial markets of the world, at a yield to maturity prevailing in the market.
- sight draft: payable on
presentation
- time draft: payable at a future specified date

Front 5

Banker's acceptance/Trade acceptance

Back 5

-A draft that has been accepted by a bank, guaranteeing its payment, is a banker's acceptance
-A draft that has been accepted by a commercial enterprise is a trade acceptance
-Both these forms are negotiable financial instruments, bought and sold in the financial market at prevailing yields to maturity

Front 6

Consignment

Back 6

Goods sent on consignment are only shipped, but not sold, to the importer (consignee). The exporter (consignor) holds title to the goods until the importer has sold them to a third party. This is accomplished through a field warehouse in the importer's country and financed through the warehouse receipts/warrents. Used mainly between related companies.

Front 7

Letter of credit (L/C)

Back 7

-Under this method, two banks, generally in the respective countries of the importer and the exporter, guarantee performance of their respective clients, to minimize risks inherent in international trade.
-Once established, the exporter is guaranteed payment for goods shipped and the importer is guaranteed receipt of goods in conformity with the purchase order.

Front 8

Parties to a letter of credit

Back 8

Vary from 4 to 6:
1. Importer
2. Exporter
3. Issuing bank (importer's bank)
4. Notifying bank (exporter's bank)
5. Confirming bank (guarantor of issuing bank)
6. Investor (discounts time drafts/banker's acceptance)

Front 9

Types of letters of credit

Back 9

1. Revocable/irrevocable
2. Confirmed/unconfirmed
3. Revolving/non-revolving
4. Transferable
5. "Red Clause"
6. Assignable

Front 10

Key documents required by an L/C

Back 10

1. Negotiable bill of lading, issued by the carrier
2. Draft/banker's acceptance
3. Commercial invoice
4. Certificate of insurance, if required
5. Certificate of origin
6. Certificate of quality, if required
7. Packing list
8. Exporter's declaration