International

Trade Finance Akash Nagori

Management
Astha Surbhi
Chetansi Nanavati
Joy Parekh
Moumita Biswas
Raj Dharod
Shreya Ghosh

MBA A I International Business I Group 3

 Whether you are running a small or big
business, you always look for ways to expand
your business’s export and want buyers to
import your product first.

Introduction Here, when trade finance comes into the

scenario making it easy to run an international
business smoothly around the different
corners of the world.

But what is trade finance and how does it help

importers & exporters? Let’s find out.
 What is Trade Finance?
It is the financial help provided by banks or financial
institutions in the field of international trade through various
types of financial instruments like bank guarantee, letter of
credit etc.

These varieties of financial instruments and products helps

importer & exporters to execute business transactions without
facing any financial inconveniences.

It bridges the gap between importers & exporters by adding a

third party and covers activities like issuance of letter of
credit, lending or forfaiting, etc.
 Providers Users
Importer Trader

Financial Traditional
Institutions Commercial
Banks Manufacturer

Financial Exporter Producer

Intermediaries
 The process of trade finance includes various
trading intermediaries such as banks, and
other financial institutions to facilitate
different financial transactions between
importer and exporter.

They act as third parties and remove the

How does it payment & supply risks between buyer and

seller.

work? The exporter gets the receivables or payment

as per the agreement while the importer can
extend credit to complete the trade order.

Trade finance covers a vast range of different

types of activities including Letters of Credit,
lending, forfaiting, export credit, and
factoring.
How does it help the business?
Trade finance can help There is no doubt that an The appropriate solution to
reduce the risks involved in exporter needs an importer this problem is to provide a
international trade by to pay in advance for an proof of funds to the
bridging the gap between export shipment to avoid the exporter’s bank presenting
buyers and sellers and risks of nonpayment or the documents of the
securing funds required to refuse to pay for the goods. shipment. It guarantees the
purchase the goods etc full payment to the seller in
case the buyer fails to do so.
Other Benefits Of International Trade
Finance
It helps different companies to obtain funds to facilitate their
international transactions smoothly. The companies can
receive cash payments based on the accounts receivables in
case of factoring or they can also consider letters of credit.
Companies can improve or grow their global business and
generate revenue through trade.
It helps companies reduce the risks of financial nonpayment.
It also strengthens the relationship between buyers and sellers.
Buyers can request a higher volume of stock or place larger
orders with the suppliers.
 Types of International Payment
Methods
Cash in Advance
Letters of Credit
Documentary
Collections
Open Account
Consignment
 Cash in Pros Cons

Advance Risk of not receiving

shipment or receiving
Buyer Minimal damaged shipment
1) The buyer completes the payment
and pays the seller in full before the Unfavorable cash flow
merchandise is delivered and shipped
off to the buyer.

2) Credit card payment and wire Secure full

Risk of losing business to
transfers (electronic payment via payment before
competitors if offering
banks) are the more commonly used Seller shipment
this as the only accepted
payment modes. international payment
No risk of
method
non-payment
 Documentary Pros Cons

Collection More
Reliance on seller to
Buyer economical
1) Documentary collections is a ship goods as specified
than Letters
process in which both the buyer’s and
of Credit
seller’s banks act as facilitators of the
trade.

2) The seller submits documents No verification involved

needed by the buyer, which is No guarantee of
necessary for the transfer of title to payment from bank
the goods, to its bank. Seller Minimal
No protection against
3) The seller’s bank will then send cancellations
these documents to the buyer’s bank
along with payment instructions.
 Open Account Pros Cons

1) Under Open Accounts (also known Receives goods

as Accounts Payable), merchandise is before payment is
Buyer
shipped and delivered prior to due Minimal
payment, proving to be an extremely
Positive cash flow
attractive option for buyers especially
in terms of cash flow.

2) With this payment option, the seller

ships the goods to the buyers with a
credit period attached. This is usually Can attract
in 30-, 60-, or 90-day periods, during Seller customers in High risk of default
which the buyer must carry out full competitive markets
payment
 Consignment Pros Cons

Payment is due May have large

1) The consignment process is similar only after final sale inventory to
Buyer
to that of an open account whereby of goods to end manage
payment is only completed after the consumer
receipt of merchandise by the buyer. Minimal
Quick receipt of
2) The difference lies in the point of goods
payment. With consignment, the
foreign buyer is only obliged to fulfil Lower storage fees Payment not
payment after having sold the guaranteed until
merchandise to the end consumer. Seller Less inventory end sale
management Lack of access to
and management of
More competitive merchandise
 What is LC? Why Use LC?
A promise issued by a bank to another party Parties do not know each other
states the bank will pay the seller a specified
amount when certain conditions are met A means to avoid the risk of default by the
other party
Can be continuous/revolving or for a single
transaction Shift risks to other parties.
Parties Involved in an LC Transaction
Freight Insurance
Buyer Seller
Forwarder Company

Issuing Receiving
Carrier
Bank Bank
Governing Law of Fundamental
LC Principles of LC
LC is by nature a matter of the contract; the The responsibility of banks to deal with
rules of letters of credit are embodied in the documents only
terms of the contracts themselves. The rule of independence: LC is considered
Parties may choose the governing law in the independent from the sales contract between
LC document/contract. the parties.
UCP 600: Standards developed by the ICC; if The rule of strict construction: terms and
incorporated into the LC, it is binding in case conditions of the LC are strictly adhered to.
of a dispute.
UCC Article 5: If the UCP 600 is not
incorporated into the LC, and there is no
another choice of law provision, the UCC
might be a gap-filler.
How Does Letter of Credit Work?
 Revocable

Transferable
Types Confirmed
Of LC

Irrevocable
Advance Payment Method
 What is SWIFT? How Does it work?
The Society for Worldwide Interbank Financial Swift payments are payments done through
Telecommunication (Swift) is a global network the network. Swift assigns each bank an eight-
connecting banks to communicate messages or 11-character long code, known as the bank
about activities like money transfer safely and identifier. It is similar to the IFSC code used
securely, using a code. About 11,000 for domestic interbank transfers, with Swift
members of SWIFT send nearly 33.6 million being used for international transfers
transactions every day.
 Who uses Banks

SWIFT? Securities Dealers

Clearing Houses
Exchanges
SWIFT network has expanded Corporate Business Houses
over the years, and presently
the following institutions use the Brokerage Institutes
system. Asset Management Companies
Depositories
Treasury Market Participants
Foreign Exchange & Money Brokers
Services Offered By SWIFT
SWIFT offers many services to businesses and individuals that facilitate accurate and seamless
business transactions. Some of the services provided by the SWIFT network are

Applications :
Compliance Services
Business Intelligence
Messaging and
Connectivity
Blockchain Technology Blockchain is a specific type of
database.
Block chains store data in blocks
that are then chained together.
The data is chained together in
chronological order.
The most common use of block
chain so far has been as a ledger for
transactions.
In Bitcoin’s case, block chain is
used in a decentralized way so that
no single person or group has
control—rather, all users
collectively retain control.
Decentralized blockchains are
immutable, which means that the
data entered is irreversible.
 Wire A wire transfer facilitates money transfers
electronically across a network of banks or
transfer agencies around the world.
The term wire transfer refers to an electronic
transfer of funds via a network that is Senders pay for the transaction at the
administered by banks and transfers service remitting bank and provide the recipient's
agencies around the world. name, bank account number, and the
amount transferred.
Most wire transfers can take as long as two
business days to process.
International wire payments are monitored
by the Office of Foreign Assets Control to
ensure the money isn't being wired to
terrorist groups or for money laundering
purposes.
All transfers go through a domestic
Automatic Clearing House before they are
settled.
 A common method of financing international
trade
Selling the accounts receivables at a discount
to a third-party financial institution to receive
payment instantly instead of waiting months
Factoring for the customer to pay
Bundles together credit protection, export
Method working capital financing, foreign accounts
receivables bookkeeping, and collection
services
Can only be done by banks or NBFCs that
have a factoring license
Process Characteristics
Suited for continuous short-term
export sales of consumer goods on
open account terms
Offers 100 percent protection
against the foreign buyer’s inability
to pay
Generally, a more expensive option
that may erode a significant amount
of an exporter’s margin
The advance rate is generally limited
to 80 percent of invoices that are
factored
 Types of Factoring
Discounting Factoring Collection Factoring
The factor pays the exporter in advance In this, the factor pays the exporter after
against the receivables and then the funds are deducting the commission during the maturity
collected from the importer. time of receivables from importer.
 Advantages Disadvantages
Immediate cash injection Exists only in countries that have supporting
Business growth laws
Reduced risk Generally, does not work with foreign account
Lack of collection management receivables that have more than 180-day
Improved cash flow and working capital terms
Competitive advantage May be cost prohibitive for exporters with
tight profit margins
 Global Scenario
75

50

International Factoring
Volume (in billion Euros)

25

0
China U.K. India U.S.A. Germany Singapore
 Reason for Slow Growth of Export
Factoring in India

Cash credit and overdraft facilities are more

acceptable to borrowers.
Debtors remain hesitant to accept assignments and
pay factors.
NBFC factors are financed by banks, who charge
hefty interests on them. NBFCs, in turn, charge
additional interests on it.
There is a lack of significant players in the market,
especially ones on a big scale.
MBA A II International Business II Group 3
 Factoring Act, 2011
A factor, client or a customer may be located outside the territory of India and such a
transaction shall be governed by the provisions of the Factoring Act and Foreign Exchange
Management Act (FEMA).
As per section 31(d) the provisions of the Act shall not apply to foreign exchange transactions
except receivables in foreign currency.
The Factoring Act provides that ‘banks’, as defined in the Banking Regulation Act, 1949 are not
required to be registered as factors for the purposes of carrying out the factoring business.
However, Non-Banking Financial Companies (NBFCs) engaged in the factoring business are
required to be registered in accordance with the provisions of the Factoring Act. The factor
commencing the factoring business shall obtain a certificate of registration from RBI.
 Factoring Act, 2011

Overseas factoring companies providing factoring services to the Indian exporters are not
covered under the Factoring Act.
Upon realisation of the assigned receivables or settlement of the claim against the debtors, the
Factor would be required to file for satisfaction of the assignment of receivables in its favour, in
such manner and subject to payment of such fees as may be prescribed in this behalf.
Illustration

Under an advance factoring arrangement Bharat Factors

Limited (BFL) has agreed to advance a sum of Rs.14 lakh
against the receivables purchased from ABC Limited. The
factoring agreement provides for an advance payment of
80 percent of the value of factored receivables and for
guaranteed payment after three months from the date of
purchasing the receivables. The advance carries a rate of
interest of 16% p.a. compounded quarterly and the
factoring commission is 1.5 percent of the value of
factored receivables. Both the interest and commission
are collected upfront. Compute the amount actually
made available to ABC Limited.
 Solution

(Rs. in lakh)
Value of factored receivable (= 14/0.8) 17.50
Maximum permissible advance 14.00
Less: Commission @ 1.5 percent (= 17.5 x 0.015) 0.26
13.74
Less: Discount charge (14 x 0.16 x 90/360) 0.56
Funds made available to ABC Limited 13.18
 Forfaiting is a means of financing that enables
exporters to receive immediate cash by selling
their medium and long-term receivables—the
amount an importer owes the exporter—at a
discount through an intermediary.

Forfaiting Forfaiting also protects against credit risk,

Method transfer risk, and the risks posed by foreign

exchange rate or interest rate changes.

While these debt instruments can have a

range of maturities, most maturity dates are
between one and three years from the time of
sale.
 How does it work?

1. Communicate with prospective

importer
2. Contact a forfaiter
3. Present transaction details to
forfaiter
4. Sign commitment letter with
forfaiter by the forfaiter.
 Advantages Disadvantages
Forfaiting simplifies the transaction by More expensive than commercial lender
transforming a credit-based sale into a financing leading to higher export costs.
cash transaction. There exists no international credit agency
Provides immediate cash flow for the seller that can provide guarantees for forfaiting
and eliminates collection costs. companies.
Forfaiting is flexible because a forfeiter Discrimination exists where developing
can tailor its offering to suit an exporter's countries are concerned compared to
needs and adapt it to a variety of developed countries.
international transactions.
 The Black Sea Trade & Development Bank (BSTDB)
lists forfaiting in its list of special products along with
underwriting, hedging instruments, financial leasing,
and discounting.

BSTDB was established as a source of financing for

development projects by 11 founding countries—

Example Albania, Armenia, Azerbaijan, Bulgaria, Georgia,

Greece, Moldova, Romania, Russia, Turkey, and
Ukraine.

The bank explains that "the importer’s obligations

are evidenced by accepted bills of exchange or
promissory notes which a bank avals, or
guarantees."
Export Finance
Process of pre-shipment finance
Export Finance Purposes for which pre-shipment finance is
provided:
In order to avail raw materials, components,
machinery, equipment, and technology which
Types of Exporters :
Merchant exporters are required for export production.
Manufacturer exporters Turning raw material into a finished product,
Export and Trading houses its packaging, and transport to the shipping
Manufacturers who supply goods port.
to export houses (EH) trading It takes measure that the quality of the goods
houses (TH) or merchant will increase and confirm the international
exporters. standards.
They also wish to adapt products to the
requirements of foreign markets, improve
existing products, product addition and
product extension.
 Amount of pre-shipment finance
The only guideline principle which is important is the concept of Need Based Finance. Banks find
out the percentage of margin, depending on factors like:
The nature of the following order.
The nature of the following commodity.
The capability of exporter to bring up the required contribution.
However, the exporters have a limit of $50 million overall credit limit in a year.
After background checks, banks generally lend out only 50% of the capital required.
The other half is to be arranged by the exporter on his own.
All banks charge 9% interest for the money lent.
 Illustration

Exporter
Procurement of raw material : $ 15000
Turning into Fixed Product : $ 25000
Packing : $ 5000
Transport to shipping yard : $ 5000
Insurance : $ 2000
Total Excluding Insurance $ 50000

Bank will provide only 50% of the amount as loan

Therefore, Pre shipment loan = 50000 X 50% = $25000
 Pre-Shipment Packing Credit
Pre-Shipment Packing Credit

Indian Foreign
Rupees Currency

EPC (Export Packing Credit) PCFC (Packing Credit in

Foreign Currency)
 Running Account Facility
When the exporter has multiple exports and
different payments are received on different
dates, the exporter can make use of running
account facility.

For eg. Multiple exports are made : Exp1 ,

Exp2 and Exp3. Trade finance is availed on
Exp1. In this case, if the payments for Exp2 or
Exp3 are received before the date of payment
of Exp1, then these payments can be adjusted
against the loan of the first export.
 Running Account Facility
(a) The facility may be extended provided the need for ‘Running Account’ facility has been
established by the exporters to the satisfaction of the bank.

(b) Banks may extend the facility only to those exporters whose track record has been good.

(c) In all cases, where Pre-shipment Credit ‘Running Account’ facility has been extended, the L/Cs or
firm orders should be produced within a reasonable period of time.

(d)The PCFC will be marked-off on the ‘First-in-First-out’ basis.

(e) PCFC can also be marked-off with proceeds of export documents against which no PCFC has
been drawn by the exporter.
Thank you!