INTERNATIONAL TRADE FINANCE

1. INTERNATIONAL TRADE FINANCE • Topics to be Discussed in Chapter • Letter of Credit • Uniform Customary and Practices for Documentary Credits • Standby Letters of Credit • Alternative Methods of Guaranteeing Performance • Alternative Methods of Financing • Seller • Buyer • Government Programs

2. LETTERS OF CREDIT • Letters of Credit a commercial bank guarantee of either payment by the buyer or performance by the seller. • Purposes • Guarantees payment by the buyer (letter of credit) or to guarantee performance by seller (standby letter of credit. • Once letter of credit is issued, the seller can use instrument to finance production of goods.

3. LETTERS OF CREDIT • Functions of Letters of Credit • Payment Instrument • In absence of letter of credit, sight or time drafts used. No Guarantee of Payment. • Letters of Credit Involves Bank in Transaction. • Performance Guarantee • In Documentary Transaction no guarantee of performance. • Payment by bank would not be released until goods and document conforms to specifications on letter of credit. • Finance Instrument • Seller can use letter of credit as collateral to finance production and exportation of good.

4. LETTERS OF CREDIT • Types of Letters of Credit • Irrevocable Letter of Credit-bank cannot revoke letter of credit. To change letter of credit, must get written agreement. • Most Popular in International Commercial Transaction • Revocable Letter of Credit-bank can revoke letter of credit. • Very Seldom Used.

5. LETTERS OF CREDIT • Letter of Credit Transaction • After formation of contract, buyer arranges for bank to open letter of credit. • Buyer’s bank prepares irrevocable letter of credit. • Buyer’s bank sends irrevocable letter of credit to a US bank for confirmation. • US bank prepares a letter of confirmation to exporter along with irrevocable letter of credit • Exporter arranges for freight forwarded to deliver goods. Freight Forwarder prepares documents. • Exporter presents document to Bank indicating full compliance. Bank bound by “rule of strict compliance” • Bank reviews documents and authorizes payment

6. UNIFORM CUSTOMS AND PRACTICES FOR DOCUMENTARY CREDITS • Uniform Customs and Practices for Documentary Credits are rules and procedure published by International Chamber of Commerce • Provisions • Care should be taken in specifying expiration dates • The applicant must specify if the letter of credit is transferable. • The applicant must specify that the letter be confirmed • The currency of the letter of credit should be designated using ISO currency code. • The applicant should designate the nominating bank

7. UNIFORM CUSTOMS AND PRACTICES FOR DOCUMENTARY CREDITS • Uniform Customs and Practices for Documentary Credits-provisions continued. • Applicant must specify clearly whether the letter of credit will be available for partial shipment. • The letter of credit should provide transport details • Under “rule of strict compliance”, banks are authorized to reject documents if there are any discrepancies. • Facial Compliance Rule-bank only required to review documents. • Banks are not required to investigate trade customs or usage

8. UNIFORM CUSTOMS AND PRACTICES FOR DOCUMENTARY CREDITS • Uniform Customs and Practices for Documentary Credits-provisions continued • Description of the Goods should be clear and brief as possible. • In the listing of documents, should list the contents of each document. • Transportation Documents must be clear. • Insurance Documents must be clear. • Time periods for presentation of documents must be specified. • Title of Letter of Credit should specify irrevocable.

9. STANBY LETTER OF CREDIT • Standby Letter of Credit is a letter of credit that represents an obligation to the beneficiary on the part of the issuer • International Standby Practices • Standby Letters of Credit secures contractual obligations in construction contracts, service contracts, warranties, counter-trade trade obligations, secures international loans and supplies.

10. ALTERNATIVE METHODS OF GUARANTEEING PERFORMANCE • Alternative Methods of Guaranteeing Performance • Types • Performance Bond-a guarantee from an insurance company to pay insured in case of default. • Bid Bond-insure against the risk that a bidder may not honor its bid. • Credit Surety-guarantees the repayment to a bank or lender who finances an export transaction or development project. Exim Bank of World Bank

11. ALTERNATIVE METHODS OF GUARANTEEING PERFORMANCE • Types-Continued • Retention Fund-in large or government projects, a percentage is deducted from each payment due to the supplier or contractor and is retained in a fund pending completion of project. • Demand Guarantee secures performance of a non-monetary obligation.

12. SOURCES OF TRADE FINANCE • Commercial Banks • Export Financing • Borrowing against trade documents • Factoring-exporter transfers title to its account receivable to a factoring company at a discount. • Forfaithing-selling at a discount, of longer term receivables or promissory notes to a foreign buyer. • Transferable Credit-suppliers accept part of the letter of credit that seller receives from buyer in export transaction. • Back to Back Letter of Credit-buyer makes arrangements with third bank to make loan.

13. SOURCES OF TRADE FINANCE • Government Assistance Programs • Eximbank in United States- • Arranges loans, guarantees, working capital and insurance • Foreign Corporation Insurance Agency • Protects against default on exports sold under open accounts • Overseas Private Insurance Corporation • Offers performance bonds • Small Business Administration • Revolving line of credit