FOREIGN TRADE UNIVERSITY
HO CHI MINH CITY CAMPUS
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ENGLISH PRESENTATION REPORT
TOPIC:
FINANCING IN FOREIGN TRADE
GROUP 19
Member
Student ID
Nguyễn Văn Thành
1501015494
Trần Quyền Linh
1501015273
Nguyễn Trường Nguyên
1501015373
Trần Hoàng Sơn
1501015470
Phạm Hoàng Phúc
1501015428
Nguyễn Minh Thắng
1501015488
Nguyễn Thanh Phương
1501015436
Trần Ngọc Thuỳ Linh
1501015271
TABLE OF CONTENTS
1. PAYMENT TERMS IN FOREIGN TRADE
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1.1 CASH IN ADVANCE
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1.2 LETTER OF CREDIT (LC)
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1.3 BILL OF EXCHANGE
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1.3.1 DEFINITION
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1.3.2 ADVANTAGES:
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1.3.3 DISADVANTAGES:
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1.4 OPEN ACCOUNT
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2. DOCUMENTS USED IN FOREIGN TRADE
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2.1 BILL OF LADING
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2.2 COMMERCIAL INVOICE
10
2.3 A CERTIFICATE OF INSURANCE
10
3. FINANCING TECHNIQUES
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3.1 BANKER'S ACCEPTANCE
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3.2 DISCOUNTING
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3.3 FACTORING
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3.4 FORFAITING
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TOPIC:
FINANCING FOREIGN TRADE
Group 19
1. Payment Terms in Foreign Trade
* Four Principle Means:
- Cash - in - advance
With cash-in-advance payment terms, an exporter can avoid credit risk because payment is
received before the ownership of the goods is transferred.
- Letter of Credit (LC)
Letters of credit (LCs) are one of 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 stated in the LC have been met, as verified
through the presentation of all required documents.
- Drafts
A draft may be written with virtually any term or condition agreeable to both parties. A draft
is a check that is drawn on a bank’s funds and guaranteed by the bank that issues it.
- Open account
An open account transaction is a sale where the goods are shipped and delivered before payment
is due, which in international sales is typically in 30, 60 or 90 days.
1.1 . Cash in advance
The seller requires receipt of payment from the buyer before shipping goods. Payment may be
made by wire-fund transfer from the buyer’s bank to the seller’s bank, or by company check,
credit card, or other agreed upon means.
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Method
CASH
IN
ADVANCE
Usual Time
Goods
Risk
of Payment
Available
to
To Buyer
Seller
Before
After
None
shipment
payment
Risk to Buyer
Complete
Comments
-
Seller's goods must
relies on seller
be special in one
to ship exactly
way or another, or
the
special
expected,
quoted
ordered
goods
as
and
circumstances
prevail
over
normal
trade
practices
(example,
goods
manufactured
to
buyer-only
specification).
1.2
. Letter of Credit (LC)
LC’s definition: Briefing : A letter addressed to seller:
-
Written and signed by buyer’s bank
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Promising to honour seller’s drafts
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Bank substitutes it’s own commitment
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Seller must conform to terms
A written commitment to pay, by a buyer's or importer's bank (called the issuing bank) to the
seller's or exporter's bank (called the accepting bank, negotiating bank, or paying bank).
A letter of credit guarantees payment of a specified sum in a specified currency, provided the
seller meets precisely-defined conditions and submits the prescribed documents within a fixed
timeframe. These documents almost always include a clean bill of lading or air waybill,
commercial invoice, and certificate of origin. To establish a letter of credit in favor of the seller
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or exporter (called the beneficiary) the buyer (called the applicant or account party) either pays
the specified sum (plus service charges) up front to the issuing bank, or negotiates credit.
We have 9 clause in a contract of payment term:
1. Type of LC
2. Name of issuing bank
3. Name of advising bank
4. The currency of LC
5. The value of LC
6. The beneficiary
7. The validity of LC
8. Date and place of expiry
9. Documents required
Procedures of payment against documents:
1. Exporters delivers the goods to the carier
2. Exporters gets transport documents from carrier and prepares other required shiping
documents
3. Exporter presents shipping documents to advising bank
4. Advising bank send shiping documents to issuing bank
5. Issuing bank checks shipping documents and if appropriate, sends funds to advising
bank
6. Advising bank notifies exporter the availability of funds in exporter’s account
7. Issuing bank releases shipping documents to importer
8. Importer persents shipping documents to carrier and takes delivery of goods
1.3 .Bill of Exchange
Bill of exchange
1.3.1 Definition
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An unconditional order in writing, signed by one party (drawer) such as a buyer to
another (drawee) to pay a certain sum of money, either immediately or on a fixed date,
for payment of goods or services received.
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Common versions of bill of exchange are:
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Sight drafts: are payable on demand when the drafts are presented
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Time drafts: (also called usance drafts) are payable at future fixed date or determinable
(30, 60, 90 days) date.
There are three entities that may be involved with a bill of exchange transaction. They
are:
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Drawee. The party on whom the B/E is drawn
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Drawer. The party who signs the B/E, requesting the payment.
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Bearer: the last beneficiary who presents the B/E for getting payment
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Beneficiary: The party who is paid by the drawee
A bill of exchange normally includes the following information:
(1) Title. The term "bill of exchange" is noted on the face of the document.
(2) Amount. The amount to be paid, expressed both numerically and written in text.
(3) Name of the drawee
(4) Time of payment
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(5) Address of the drawee
(6) Beneficiary
(7) Place of drawing B/E, B/E date
(8) Name, address of the drawer and signature of the legal representative of the drawer.
Advantages:
Legal Relationship: Issuing bills of exchange provides a framework which converts and
establishes a legal relationship between seller and buyer, from creditor and debtor to drawer
and drawee. In the case of any dispute between the parties, this relationship provides a
conclusive proof in the court of law.
Terms and Conditions: Bill of exchange contains all terms and conditions of payments viz.,
amount of the bill, date of payment, place of payment, interest to be paid, if any. The maturity
date of the bill is also known to the parties of the bill so they can make necessary arrangement
for funds
Mode of Credit: Bill of exchange has been defined as a negotiable instrument under the
Negotiable Instruments Act, 1881. The buyer can buy the goods on credit and pay after the
period of credit with the help of bill of exchange. In case of urgency, the drawer can also get
the payment through discounting the bill from the bank and without waiting for the maturity
period.
Easy Transferability: Bill of exchange can be used for settling the debt of the creditors. Mere
delivery and endorsement of the bill give a valid title to the endorsee.
Wider Acceptance: In case of foreign bill, wider acceptance is given to the parties through
which payments can be received and made easily.
Mutual Accommodation: Sometimes, bill can be issued for mutually accommodating the
parties so that financial help can be given to each other.
Disadvantages:
The bills of exchange are for short term service this not good option for banking services.
If biils of exchange are not accepted then it is an additional burden on the person who
was drawn it..
The discount allowed is also like an additional cost
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The drawee is liable to pay the bill in time as the date of payment is fixed.
1.4
Open Account
When a buyer and a seller agree to deal an open account term, it means that the seller will
dispatch his goods to the buyer and will also send an invoice requesting payment. The seller
loses control of the goods as soon as he dispatches them. He trusts that the buyer will pay in
accordance with the invoice.
Advantages to the exporter:
Because this method of settlement tends to be used when there is a long standing relationship
between the seller and the buyer, the open account balance is settled on a monthly or
quarterly basis and transactions can be dealt within very much the same way as the domestic
trade;
subject to any contract with the buyer, there are less constraints on documentation, timing of
shipments and places of dispatch that make this method more feasible;
as only the settlement payments pass through the banking system, the exporter incurs no
charges.
Disadvantages to the exporter:
There is no guarantee of payment and control if the goods are lost;
The exporter is exposed to political, economic and country risks unless other steps are taken
to cover these risks;
because, often there is no specific constraint on the timing of the payments, it is very difficult
to control the cash flow;There is a possibility that delays in the banking system will delay the
transfer of funds;
When received, payment can be in the form of a foreign cheque that will have to be
negotiated or collected, causing further delay;
greater debtor control may be required in the form of the maintenance of a sealed ledger and
sending out statements and reminders of payment due.
One method by which the exporter can reduce the risk of non-payment is relevant here and
that is the use of advance payments, which involve the buyer being persuaded to provide part
or the entire payment before receiving the goods.
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Advantages to the importer:
The importer retains control over the timing of settlement and the method by which funds are
remitted;
Inspection of the goods is usually possible before payment is made.
Disadvantages to the importer:
The importer has little control over shipment details and the timing of the receipt of the
goods; there is no control over the quality of the goods. If special documents (certificates of
origin) are required, there is no guarantee that these will be received.
2. Documents used in Foreign Trade
2.1
Bill of lading is one important shipping document necessary and useful in export-import
trade transactions. It is a document issued by the shipping company after the shipment of goods.
In simple, Bill of lading is a contract between the exporter or the shipper and the shipping
company for the carriage of goods from the port of loading to the port of destination.
Bill of lading is a document to title of goods and is transferable by endorsement and delivery.
Hence, it is a semi-negotiable instrument. The bill of lading is prepared on the basis of mate's
receipt. The importer has to produce this receipt for securing the deliver of goods.
The bill of lading contains following information :1. Name and address of the exporter and the shipper.
2. Name and address of shipping company.
3. Name and address of importer or agent.
4. Quantity, weight and value of goods sent.
5. Place of loading and port of destination.
6. Date of loading of goods on the ship.
7. Mark description and number of packages.
8. Port at which the goods are to be discharged.
9. Freight paid or to be paid.
10. Signature of the issuing authority with date.
11. Any other relevant details.
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2.2
Commercial invoice is a basic export document. It contains all the information, which
is required for preparation of all other documents. It is the exporter's bill for goods which the
importer has to pay.
Commercial invoice contains the following information :1. Name and address of exporter and importer.
2. Description of goods (weight, quality, quantity, rate, etc.)
3. Value of goods after discount, if any.
4. Net amount payable by the importer.
5. Terms and Conditions of sale
2.3
A certificate of insurance (COI) is a non-negotiable document issued by an insurance
company or broker verifying the existence of an insurance policy and summarizing key aspects
and conditions of the policy.
For example, a standard certificate of insurance lists the policyholder's name, policy effective
date, the type of coverage, policy limits, as well as other important details of the policy.
And other documents used in foreign trade
Letter of Credit
Consular Invoice
Certificate of Origin
Bill of Entry
3.
Financing Techniques
3.1
Banker's acceptance
A banker's acceptance (BA) is a short-term debt instrument issued by a company that is
guaranteed by a commercial bank. Banker's acceptances are issued as part of a commercial
transaction.
A banker's acceptance arises when a bank guarantees (or accepts) corporate debt, usually when
it issues a loan to a corporate customer and then sells the debt to investors. Because of the bank
guarantee, a banker's acceptance is viewed as an obligation of the bank. If the bank has a good
reputation, the acceptance can be re-sold in an open market, at a discount to its face value. A
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banker's acceptance is considered to be a very safe asset, and is used extensively in international
trade.
3.2
Discounting
When using Letter of Credit, the client can choose various ways of payment, including the
delayed payment option. In this case the client receives the payment with a slight delay that can
create difficulties in financial flow, therefore we offer an option to discount the Letter of Credit.
+ Discounting of Letter of Credit is a short-term crediting of the seller by the bank. The bank
can finance the client in case of Letter of Credit for export (if the client is seller in the
transaction) by negotiating or by purchasing the documents or by making the early
disbursement of the postponed payment. This means that the bank pays to the client the amount
indicated in the agreement before receiving the payment from Letter of Credit issuing bank.
+ Letter of Credit issuing bank's commitment to pay the amount mentioned in the Letter of
Credit at a certain date serves as a credit guarantee to the bank. SEB bank will carefully evaluate
the bank that has issued the Letter of Credit and its risk limit.
+ For discounting the Letter of Credit the bank applies corresponding discounting fee.
3.3
Factoring
1. Definition of Factoring
Factoring is defined as a method of managing book debt, in which a business receives advances
against the accounts receivables, from a bank or financial institution (called as a factor). There
are three parties to factoring i.e. debtor (buyer of goods), the client (seller of goods) and the
factor (financier). Factoring can be recourse or non-recourse, disclosed or undisclosed.
2. Process of Factoring
In a factoring arrangement, first of all, the borrower sells trade receivables to the factor and
receives an advance against it. The advance provided to the borrower is the remaining amount,
i.e. a certain percentage of the receivable is deducted as the margin or reserve, the factor’s
commission is retained by him and interest on the advance. After that, the borrower forwards
collections from the debtor to the factor to settle down the advances received.
3.4
Forfaiting
1. Definition of Forfaiting
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Forfaiting is a mechanism, in which an exporter surrenders his rights to receive payment against
the goods delivered or services rendered to the importer, in exchange for the instant cash
payment from a forfaiter. In this way, an exporter can easily turn a credit sale into cash sale,
without recourse to him or his forfaiter.
2. Process of Forfaiting
The forfaiter is a financial intermediary that provides assistance in international trade. It is
evidenced by negotiable instruments i.e. bills of exchange and promissory notes. It is a financial
transaction, helps to finance contracts of medium to long term for the sale of receivables on
capital goods. However, at present forfaiting involves receivables of short maturities and large
amounts.
- Key Differences Between Factoring and Forfaiting
The major differences between factoring and forfaiting are described below:
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