Chapter 5

INTERNATIONAL TRADE
FINANCING
Introduction

 Banks provide financing to buyers and sellers

 Importers may take some time to dispose goods,
thus need to finance their purchase with banks
 Sellers may require financing to purchase raw
materials to manufacture the goods, and they need
to finance the production process.
 Financing facilities are available for both exporters
and importers to finance their sales and purchases
respectively.
Financing Facilities
1. Shipping guarantee
2. Banker acceptance
3. Export credit financing
4. Trust receipt
5. Bill discounting
6. Export Factoring
7. Term loan
8. Overdraft
9. Bank Guarantee
10. Forfeiting
11. International Leasing
 1. Shipping Guarantee
 It is a document that enables the customer to take delivery of
the goods before the receipt of the bill of lading.
 Normally used when the goods had arrived before the arrival
document of title (bill of lading).
 It is a form of guarantee that the bank executes jointly with its
customers for shipping company.
 Advantages
a) customer can take the goods without surrending the bill of
lading
b) Goods can be claimed as soon as possible
c) Improving the cash flows
d) Avoiding any possible losses due to deterioration of the goods
e) Avoiding demurrage charges
 2. Bankers Acceptance (BA)
 BA is a short-term debt instrument issued by a firm that is guaranteed by a 
commercial bank
 The banker's acceptance specifies the amount of money, the date, and the
person to which the payment is due
 These instruments are similar to T-Bills and are frequently used in 
money market funds.
 Features :
 Minimum financing: RM 30 000, with multiple of RM 1 000
 Minimum financing period: 30 days
 Maximum financing period: 200 days
 The holder may wait until it matures, and allow the
borrower to make the promised payment, or
 May sell it at a discount from the face value today to
any party that is willing to wait for the face value
payment of the deposit on the maturity date.
 The rates, at which they trade, calculated from the
discount prices relative to their face values, are
called banker's acceptance rates.
 If an accepted draft has a face value of RM100,000,
the holder would be able to sell the draft for a lesser
amount, say RM97,500, in the secondary market.
 The discount amount fluctuates with current
interest rates. The interest rate for bankers'
acceptances is usually at a small spread over the
current rates for Malaysian Treasury Bills.
BA for import
BA for export
 3. Export Credit Refinancing

 ECR is a short-term financing scheme provided to

direct/indirect exporters by EXIM Bank through designated
commercial banks.
 The Exim Bank fixes the interest rate in the ECR scheme from
time to time.
 ECR is divided into two types, namely Pre-shipment and Post-
shipment financing
1. Pre-shipment financing
 A loan advanced by EXIM Bank to facilitate the production of
eligible goods for export prior to shipment and to promote
backward linkages to benefit the indirect exporters
 Available to direct and indirect exporters to fund their
purchases of domestic inputs and overhead expenses
incurred in relation to the production of eligible goods.
2. Post-shipment financing
 Post-shipment Export Credit Refinancing (ECR) facility
is defined as loan advanced by EXIM Bank to finance
exports of eligible goods on usance terms at a certain
prescribed interest rate.
 Minimum period of financing is 7 days and the
maximum period must not exceed the approved
financing tenure subject to a maximum period of 6
months.
 The eligible goods are agricultural products, selected
primary commodities and manufactured products that
have significant value-added and utilization of local
indigenous resources.
 4. Trust Receipt
 It is a type of short-term import advance to provide the buyer
with financing to settle goods imported under Letter of Credit
where title of goods is held by a bank.
 The bank remains the owner of the merchandise, but the buyer
is allowed to hold the merchandise in trust for the bank, for
manufacturing or sales purposes.
 The importers may need this facility when they are unable to pay
a sight bill
 The risk of trust receipt:
a)The ownership of the goods remains with the bank; therefore
the bank has the right to take possession of the goods if the
customer default his payment.
b)The bank faces the risk because once the goods handed over to
the customer, the bank will lose control over the goods.
c)For small goods makes it harder to identify, especially when the
customer mixed the goods with other goods from different
dealings.
 5. Bill discounting
 The seller can have their working capital through
discounting Bills of Exchange with Banks
 In case the seller is in need of money and has credit limits
with his bank, he can get the bill discounted with his bank
and take money.
 The seller/borrower should pay interest on the amount
availed against the bill in the name of Bill discounting
Charges.
 The bank will extend bill discounting credit for a period not
exceeding the due date of the bill.
 When the customer/buyer pays the money, the same will be
adjusted the credit extended to the seller
6. Term loan
 Also known as fixed loan.
 It is commonly used to finance the purchase of, or
constructing building, house, land and other fixed
assets
 Traders used it, to buy expensive capital goods such
as machinery and equipment, which form the fixed
asset of the company.
 The asset purchased is used as collateral.
 The loan is repaid by periodic installment payments,
such as monthly, quarterly, or yearly.
7. Overdraft

 It is a facility granted by a bank under a current account

where the customer is allowed to overdraw his account up to
an amount agreed upon
 Features
a) granted on a clean basis (no collateral),
b) no guaranteed by third parties
c) depends on the relationship, integrity, and financial standing
of the client.
 An importer may utilize this facility to finance his imports
when the required documents are against payment.
 This facility is also available to exporters to finance their
short-term requirements such the purchase of raw materials,
manufacturing and other overhead expenses.
 8. Bank guarantee
 An undertaking given by the bank to a third party
at a request of a customer.
 A bank guarantee represents an irrevocable
obligation of the bank to pay a specified amount of
money if the party for which the bank is giving the
guarantee does not fulfill its contractual
obligations
 The main reason for a bank guarantee is to ensure
that the party contracting to perform a certain
undertaking is in a position to undertake it.
 A bank guarantee is ideal for those in industries
such as property development, building,
contracting or retailing
 5 types of bank guarantee
a) A payment guarantee - is used to guarantee the seller that the buyer
will fulfill its payment obligations as stated in the contract.
b) A tender guarantee (bid bond) - is used for participation in international
tenders, such a guarantee covers the organizers’ expenses in case when
a participant revokes its bid or does not accept the offer.
c) A performance guarantee - is used to strengthen the contractual
relationship between a buyer and a seller. It guarantees compensation of
the agreed-upon amount in case the delivery terms or other contractual
obligations of the seller are not fulfilled as agreed upon in the contract.
d) An advance payment guarantee - is used when the contract provides for
advance payment to be made to the seller, and it guarantees that the
advance payment will be returned to the buyer if the seller does not
fulfill its obligations on delivery of goods or services.
e) Guarantee for warranty - is used to secure any claims by the buyer on
the seller due to possible defects appearing after delivery.
9. EXPORT FACTORING

 Factoring is a method used by a firm to obtain cash when

the available cash balance held by the firm is insufficient
to meet current obligations
 The three parties directly involved are: the one who sells
the receivable, the debtor, and the factor.
 Sale of the receivables transfers the ownership of the
receivables to the factor, indicating the factor obtains all
of the rights and risks associated with the receivables.
 Factor obtains the right to receive the payments made by
the debtor for the invoice amount
 Factor must bear the loss if the debtor does not pay the
invoice amount.
 The factoring diagram
1. The seller sells their
products by credit sales
worth of RM 100,00

Holder of 3. The seller

Debtor
account informs the
receivable buyer about
2. The holder the factor,
could not wait for who now
the collection become the
4. The factor will new holder of
process, thus
give 80% advance to the account
sells their
the seller. receivable
account
receivable .
6. After receiving 5. The factor will
full payment with maintain the collection
profit, the 20% from the debtor for an
Factor agreed period.
balance will be
sent to the seller
of account
receivable
 9. Forfeiting
 Method of export trade financing, especially when dealing in
capital goods (which have long payment periods) with high
risk countries.
 In forfeiting, a bank advances cash to an exporter against
invoices or promissory notes guaranteed by the importer's
bank.
 The amount advanced is always 'without recourse' to the
exporter, and is less than the invoice as it is discounted by
the bank.
 The discount rates depends on the terms of the invoice/note
and the level of the associated risk.
11. International leasing

 Leasing is a process by which a firm can obtain the

use of a certain fixed assets
 The firm must pay a series of contractual, periodic,
tax deductible payments.
 Leasing is a contract between the two parties
a) The lessee is the receiver of the services or the
assets under the lease contract
b) The lessor is the owner of the assets
 The relationship between the tenant and the
landlord is called a tenancy, and can be for a fixed
or an indefinite period of time
 Two Types of Lease

a) Operating Lease
 A lease agreement where the lessor provides the assets as
well as the supporting services and maintenance.
 Lessee has the right to revoke the lease and in return the
assets before expiry date of the agreement.
 
b) Financial Lease
 It is a non-cancellable agreement; where the lessee has to
make periodic payment of rental over a specified period to
lessor,
 The lessee has to maintain the asset leased in good
condition and to take out adequate insurance coverage.