International Trade Finance

While a seller “the exporter” can require the purchaser “the importer” to prepay for goods shipped, the purchaser may wish to reduce risk by requiring the seller to document the goods that have been shipped. Banks may assist by providing various forms of support. For example, the importer’s bank may provide a letter of credit to the exporter or the exporter’s bank providing for payment upon presentation of certain documents, such as a bill of laden. The exporter’s bank may make a loan by advancing funds to the exporter on the basis of the export contract. Trade finance refers to financing international trading transactions. In this financing arrangement, the bank or other institution of the importer provides for paying for goods imported on behalf of the importer.

Other forms of trade financing can include:

• Export Working Capital Programs
• Export Factoring
• Forfaiting
• Export Credit Insurance
• Government-Guaranteed Export Working Capital Programs
• Government Assisted Foreign Buyer Financing                                                                         

Ninety five percent of the world population lives outside the United States, so if you are only selling domestically, you are reaching just a small share of potential customers. Free trade agreements have opened in markets such as Australia, Canada, Central America, Chile, Israel, Jordan, Mexico, and Singapore, creating more opportunities for U.S. businesses.

To succeed in today’s global marketplace, exporters must offer their customers attractive 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 export sale, an appropriate payment method must be chosen carefully to minimize the payment risk while also accommodating the needs of the buyer.
Chosen methods of payment in international trade

• Cash-in-Advance
• Letters of Credit
• Documentary Collections
• Open Account                                        

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 create cash flow problems. Foreign buyers are also concerned that the goods may not be sent if payment 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 (LC) - 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.

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 “documents against payment (DP) or on a specified date in the future “documents against acceptance (DA). 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.

An Open Account Transaction - means that the goods are shipped and delivered before payment 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 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 mitigating the risk of nonpayment by the foreign buyer.

Non-negotiable Procedures for processing Orders

• (1) Buyer issues a letter of intent (LOI) or an irrevocable corporate purchase order (ICPO) and a (BCL) detailing the contracted quantity, contract value and monthly revolving amount and confirming the Buyer’s ability to finance the deal.
• (2) Seller sends a full corporate offer (FCO) to Buyer.
• (3) Buyer sends back to Seller the countersigned (FCO) in acceptance of general terms and conditions.
• (4) Seller sends draft contract to buyer.
• (5) Buyer will electronically sign and seal the revised draft contract and return to Seller via email, in word format.
• (6) Seller reviews Buyer’s changes made in the draft contract, if any.
• (7) In case Seller agrees to the changes made by Buyer, Seller signs and sends back final contract to Buyer who also signs the contract and returns it to Seller via email, in word format.
• (8) Within five working days from date of signing and sealing the final contract and having sent it back to Seller, Buyer’s Bank confirms willingness to start transfer of contract quantity and to issue the related payment instrument.
• (9) Within seven working days from receipt of the (RWA) via SWIFT from Buyer’s Bank, Seller’s Bank sends the proof of product (POP) for the contracted quantity to Buyer’s Bank.
• (10) Within five working days from receipt of (POP), Buyer’s Bank sends the operative payment instrument to Seller’s Bank.
• (11) Within ten working days from receipt of the operative payment instrument, Seller’s Bank sends performance bond two percent (2%) of the confirmed value of each shipment to Buyer’s Bank.
• (12) Shipping of goods will start within thirty to forty five days after Seller’s Bank received the acceptable operative payment instrument from Buyer’s Bank.

How to obtain an export working capital facility
Commercial banks offer facilities for export activities. To qualify, exporters generally need to:

• Be in business profitably for at least 12 months
• Demonstrate a need for transaction-based financing
• Provide documents to demonstrate that a viable transaction exists. To ensure repayment of a loan, the lending bank may place a lien on the assets of the exporter, such as inventory and accounts receivable. In addition, all export sales proceeds will usually be collected by the lending bank before the balance is passed on to the exporter. Fees and interest rates are usually negotiable between the lender and the exporter.      

As a reminder and for purpose of clarity, this is not an investment opportunity with BEI Financial Group. Should you meet our qualifications, you will be ideally matched with a financial institution that as agreed to accept your application for funding.

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