International Trade Finance

Abstract

◆ Learn how international trade alters both the supply chain and general value chain of the domestic firm, thereby beginning the globalization process in the trade phase. ◆ Consider what the key elements of an import or export transaction are in business. ◆ Discover how the three key documents in import/export, the letter of credit, the draft, and the bill of lading, combine to both finance the transaction and to manage its risks. ◆ Identify what the documentation sequence is for a typical international trade transaction. ◆ Learn how the various stages and their costs impact the ability of an exporter to enter a foreign market and potentially compete in both credit terms and pricing. ◆ See what organizations and resources are available for exporters to aid in managing trade risk and financing. ◆ Examine the various trade financing alternatives. W-50 The purpose of this chapter is to explain how international trade, exports and imports, is financed. The contents are of direct practical relevance to both domestic firms that just import and export and to multinational firms that trade with related and unrelated entities. The chapter begins by explaining the types of trade relationships that exist. Next, we explain the trade dilemma: exporters want to be paid before they export and importers do not want to pay until they receive the goods. The next section explains the benefits of the current international trade protocols. This is followed by a section describing the elements of a trade transaction and the various documents that are used to facilitate the trade's comple-tion and financing. The next section identifies international trade risks, namely, currency risk and noncompletion risk. The following sections describe the key trade documents, including letter of credit, draft, and bill of lading. The next section summarizes the documentation of a typical trade transaction. This is followed by a description of government programs to help finance exports, including export credit insurance and specialized banks such as the U.S. Export-Import Bank. Next, we compare the various types of short-term receivables financing and then the use of forfaiting for longer term receivables. The Mini-Case at the end of the chapter, Crosswell International and Brazil, illustrates how an export requires the integra-tion of management, marketing, and finance. Financial statements are like fine perfume: to be sniffed but not swallowed. —Abraham Brilloff. As we saw in Chapter 1, the first significant global activity by a domestic firm is the importing and exporting of goods and services. The purpose of this chapter is to analyze the international trade phase for a domestic firm that begins to import goods and services from foreign suppliers and to export to foreign buyers. In the case of Trident, this trade phase began with suppliers from Mexico and buyers from Canada. Trade financing shares a number of common characteristics with the traditional value chain activities conducted by all firms. All companies must search out suppliers for the many goods and services required as inputs to their own goods production or service provision processes. Trident's Purchasing and Procurement Department must determine whether each potential supplier is capable of producing the product to required quality specifications, pro-ducing and delivering in a timely and reliable manner, and continuing to work with Trident in the ongoing process of product and process improvement for continued competitiveness. All must be at an acceptable price and payment terms. As illustrated in Exhibit 19.1, this same series of issues applies to potential customers, as their continued business is equally as critical to Trident's operations and success. The nature of the relationship between the exporter and the importer is critical to under-standing the methods for import-export financing utilized in industry. Exhibit 19.2 provides an overview of the three categories of relationships: unaffiliated unknown, unaffiliated known, and affiliated. ◆ A foreign importer with which Trident has not previously conducted business would be considered unaffiliated unknown. In this case, the two parties would need to enter into a detailed sales contract, outlining the specific responsibilities and expectations of the busi-ness agreement. Trident would also need to seek out protection against the possibility that the importer would not make payment in full in a timely fashion. ◆ A foreign importer with which Trident has previously conducted business successfully would be considered unaffiliated known. In this case, the two parties may still enter into a detailed sales contract, but specific terms and shipments or provisions of services may be significantly looser in definition. Depending on the depth of the relationship, Trident may