Financing International Trade Transactions Dr Katalin Csekő

Financing International Trade & Transactions Dr. Katalin Csekő

Trade Finance Trade finance is needed both by the exporter and importer v Exporter: gap between time of delivery time and of the payment actually made; v Importer: gap between the time he has paid for the goods and the time the goods are sold for a profit. v v v Why is financing needed? to bridge the time gaps and lapses; to ensure the smooth operation; to avoid cash flow problems; Self-financing if banks are reluctant to do so;

Forms of trade financing Most common trade financing instruments are: (deferred payments) v Documentary collection; v Discounting of bills of exchange; v Documentary credit; v Factoring; v Forfeiting; v Lombard crediting;

How to finance the exporter 1. Possibilities for the exporter: ► Credited by the bank, ► If the export deal incorporates the use of: § Bill of Exchange; § Documentary collection; § Documentary credit; (L/C) Exporter may obtain cash: by negotiation of the documents or discounting the bill.

How to finance the exporter 2 ► Payment can be done: § With recourse: the bank will have a recovery /reimbursement from the exporter if the bill of exchange remains unpaid; § Without recourse if the bank will not have the amount of the bill of exchange as to its tenor, it has no right for recovery;

How to finance the importers v Deferred payment; Money transfer without security tool at a defined time; Currentdebt/liability=accounts payable; v Documents against payment type of documentary collection; v Documentary credit with acceptance, and with deferred payment; v Bank-credit or loan;

Documentary collection 1. ► Debiting vs. Documentary collection; ► Usage set up by ICC→ URC 522; ► Actors: ► Principal= Exporter → has to bear all costs of the process; Remitting bank= seller’s bank; Presenting & Collecting bank= Buyer’s bank; ► Documents: commercial vs. Financial (B/E, cheque)

Documentary collection 2. ► At sight = D/P type; ► Deferred payment= D/A type; ► Forms: ► Open account trade: goods to be delivered to the address and to the order of the buyer; ► Indirect: to the address of the buyer/or forwarder and to the order or the bank; ► Direct: to the address and to the order of the bank;

BILL OF EXCHANGE 1 NEGOTIABLE (Transferable) Payment INSTRUMENT; Different national regulations are based on: ► UK Bills of Exchange Act 1882; ► Uniform Law on Bills of Exchange, Geneva Convention 1932; (mainly Europe( ► UCC; ► UNCTAD Uniform Convention;

B/E Parties involved Bill of Exchange 2 The Drawee: to whom the bill is addressed, the buyer, a bank which will pay on the buyer’s behalf; ► The Drawer: the seller, the person who draws the bill; ► The Payee endorses the Bill of Exchange in favor of the next beneficiary (endorsee) full or in blank; The seller is commonly the payee; ► The Payee: the beneficiary, who gets the money; ► ► The Acceptor: the drawee, as soon as he has signed his name across the Bill of Exchange/ willingness to pay the Bill of Exchange at maturity. ► The Endorser: the Payee or any other person who signs his name on the back of the Bill of Exchange.

The core elements Bill of Exchange 3 v UNCONDITIONAL PROMISE OR ORDER TO PAY; v SUM CERTAIN IN MONEY; v REQUIRING THE PERSON TO WHOM IT IS ADDRESSED TO PAY, ON DEMAND, OR AT A FIXED OR DETERMINABLE FUTURE TIME, v TO OR TO THE ORDER OF A SPECIFIC PERSON= HOLDER IN DUE COURSE=FREE OF ANY CLAIM AND DEFENSES OF ANY THIRD PARTIES; v TO BEARER, HOLDER; v THE RULES OF B/E IS TO BE APPLIED TO B/L AND OTHER DOCUMENTS OF TITLE (CERTIFICATE OF INSURANCE, WAREHOUSE WARRENT)

Geneva Convention Bill of Exchange 4 The followings must be stipulated in a valid B/E: ► 1. The tenor of Bill of Exchange is to be drawn up in the language the instrument; ► 2. Unconditional order to pay a sum certain in money =quasi money; ► 3. The name of the person who is called upon to pay = drawee; ► 4. The due date of payment: at sight /deferred time; ► 5. The place where payment is due; ► 6. The name of the person to whom or to whose order payment is to be made= payee; ► 7. The date and place where the Bill of Exchange has been issued; ► 8. The signature of the person who issues the Bill of Exchange= drawer;

Negotiation of the Bill of Exchange 5 v by endorsement if there is an order clause (to the order of) or it is missing vfull or vblank endorsement v. Includes the physical delivery; v by cession before the notary public, if the paper not to order”.

Discount calculations Bill of Exchange 6 discount on a Bill of Exchange of USD 1. 000, - for 91 days at 8, 5% would be: discount= principal 1. 000 x __8, 5 % x 91 days 360 x 100 payee gets: USD 1. 000, - 21. 486= 978. 514, -USD Payee gets: principal less discount.

Promissory Note Date and Place of Issuance: Budapest, 10 th September 2011. I Interker Kft. (Address, Registry. No. ) pay against this promissory note to the order of Helm Hamburg Co. (Address, Registry. No. ) EUR 50. 000, - Fifty Thousand EUR on November 11, 2011 in Budapest at Citibank Budapest Acc. No 1345679034 Peter. J Foldes Interker Kft Budapest

The Bill of Exchange Date and place of issue: Budapest 16 th October 2011 Pay against this Bill of Exchange to the order of Smith and Co Ltd New York USD 20. 000, -, Twenty Thousand USD on 16 th December 2011 in New York, Credit Bank New York Account No. 34519987 Drawn to: Black and White Ltd New York drawee Issued by: Trader Co Budapest drawer