English presentation report financing in foreign trade

FOREIGN TRADE UNIVERSITY HO CHI MINH CITY CAMPUS -*** ENGLISH PRESENTATION REPORT TOPIC: FINANCING IN FOREIGN TRADE GROUP 19 Member Nguyễn Văn Thành Trần Quyền Linh Nguyễn Trường Nguyên Trần Hoàng Sơn Phạm Hoàng Phúc Nguyễn Minh Thắng Nguyễn Thanh Phương Trần Ngọc Thuỳ Linh Student ID 1501015494 1501015273 1501015373 1501015470 1501015428 1501015488 1501015436 1501015271 1 TABLE OF CONTENTS 2 TOPIC: FINANCING FOREIGN TRADE Group 19 Payment Terms in Foreign Trade * Four Principle Means: - Cash - in - advance With cash-in-advance payment terms, an exporter can avoid credit risk because payment is received before the ownership of the goods is transferred - Letter of Credit (LC) Letters of credit (LCs) are one of the most secure instruments available to international traders An LC is a commitment by a bank on behalf of the buyer that payment will be made to the exporter, provided that the terms and conditions stated in the LC have been met, as verified through the presentation of all required documents - Drafts A draft may be written with virtually any term or condition agreeable to both parties A draft is a check that is drawn on a bank’s funds and guaranteed by the bank that issues it - Open account An open account transaction is a sale where the goods are shipped and delivered before payment is due, which in international sales is typically in 30, 60 or 90 days 3 1.1 Cash in advance The seller requires receipt of payment from the buyer before shipping goods Payment may be made by wire-fund transfer from the buyer’s bank to the seller’s bank, or by company check, credit card, or other agreed upon means Method CASH IN ADVANCE Usual Time Goods Risk of Payment Available to To Buyer Seller Before After None shipment payment Risk to Buyer Complete Comments - Seller's goods must relies on seller be special in one to ship exactly way or another, or the special expected, quoted ordered goods as and circumstances prevail over normal trade practices (example, goods manufactured buyer-only specification) 1.2 Letter of Credit (LC) LC’s definition: Briefing : A letter addressed to seller: - Written and signed by buyer’s bank Promising to honour seller’s drafts Bank substitutes it’s own commitment Seller must conform to terms A written commitment to pay, by a buyer's or importer's bank (called the issuing bank) to the seller's or exporter's bank (called the accepting bank, negotiating bank, or paying bank) 4 to A letter of credit guarantees payment of a specified sum in a specified currency, provided the seller meets precisely-defined conditions and submits the prescribed documents within a fixed timeframe These documents almost always include a clean bill of lading or air waybill, commercial invoice, and certificate of origin To establish a letter of credit in favor of the seller or exporter (called the beneficiary) the buyer (called the applicant or account party) either pays the specified sum (plus service charges) up front to the issuing bank, or negotiates credit We have clause in a contract of payment term: Type of LC Name of issuing bank Name of advising bank The currency of LC The value of LC The beneficiary The validity of LC Date and place of expiry Documents required Procedures of payment against documents: Exporters delivers the goods to the carier Exporters gets transport documents from carrier and prepares other required shiping documents Exporter presents shipping documents to advising bank Advising bank send shiping documents to issuing bank Issuing bank checks shipping documents and if appropriate, sends funds to advising bank Advising bank notifies exporter the availability of funds in exporter’s account Issuing bank releases shipping documents to importer Importer persents shipping documents to carrier and takes delivery of goods 1.3 Bill of Exchange Bill of exchange 1.3.1 - Definition An unconditional order in writing, signed by one party (drawer) such as a buyer to another (drawee) to pay a certain sum of money, either immediately or on a fixed date, for payment of goods or services received Common versions of bill of exchange are: - Sight drafts: are payable on demand when the drafts are presented 5 - Time drafts: (also called usance drafts) are payable at future fixed date or determinable (30, 60, 90 days) date There are three entities that may be involved with a bill of exchange transaction They are: - Drawee The party on whom the B/E is drawn Drawer The party who signs the B/E, requesting the payment Bearer: the last beneficiary who presents the B/E for getting payment Beneficiary: The party who is paid by the drawee A bill of exchange normally includes the following information: (1) (2) (3) (4) (5) (6) (7) (8) Title The term "bill of exchange" is noted on the face of the document Amount The amount to be paid, expressed both numerically and written in text Name of the drawee Time of payment Address of the drawee Beneficiary Place of drawing B/E, B/E date Name, address of the drawer and signature of the legal representative of the drawer Advantages: 6 Legal Relationship: Issuing bills of exchange provides a framework which converts and establishes a legal relationship between seller and buyer, from creditor and debtor to drawer and drawee In the case of any dispute between the parties, this relationship provides a conclusive proof in the court of law Terms and Conditions: Bill of exchange contains all terms and conditions of payments viz., amount of the bill, date of payment, place of payment, interest to be paid, if any The maturity date of the bill is also known to the parties of the bill so they can make necessary arrangement for funds Mode of Credit: Bill of exchange has been defined as a negotiable instrument under the Negotiable Instruments Act, 1881 The buyer can buy the goods on credit and pay after the period of credit with the help of bill of exchange In case of urgency, the drawer can also get the payment through discounting the bill from the bank and without waiting for the maturity period Easy Transferability: Bill of exchange can be used for settling the debt of the creditors Mere delivery and endorsement of the bill give a valid title to the endorsee Wider Acceptance: In case of foreign bill, wider acceptance is given to the parties through which payments can be received and made easily Mutual Accommodation: Sometimes, bill can be issued for mutually accommodating the parties so that financial help can be given to each other Disadvantages: The bills of exchange are for short term service this not good option for banking services If biils of exchange are not accepted then it is an additional burden on the person who was drawn it The discount allowed is also like an additional cost The drawee is liable to pay the bill in time as the date of payment is fixed 1.4 Open Account When a buyer and a seller agree to deal an open account term, it means that the seller will dispatch his goods to the buyer and will also send an invoice requesting payment The seller loses control of the goods as soon as he dispatches them He trusts that the buyer will pay in accordance with the invoice Advantages to the exporter: 7 Because this method of settlement tends to be used when there is a long standing relationship between the seller and the buyer, the open account balance is settled on a monthly or quarterly basis and transactions can be dealt within very much the same way as the domestic trade; subject to any contract with the buyer, there are less constraints on documentation, timing of shipments and places of dispatch that make this method more feasible; as only the settlement payments pass through the banking system, the exporter incurs no charges Disadvantages to the exporter: There is no guarantee of payment and control if the goods are lost; The exporter is exposed to political, economic and country risks unless other steps are taken to cover these risks; because, often there is no specific constraint on the timing of the payments, it is very difficult to control the cash flow;There is a possibility that delays in the banking system will delay the transfer of funds; When received, payment can be in the form of a foreign cheque that will have to be negotiated or collected, causing further delay; greater debtor control may be required in the form of the maintenance of a sealed ledger and sending out statements and reminders of payment due One method by which the exporter can reduce the risk of non-payment is relevant here and that is the use of advance payments, which involve the buyer being persuaded to provide part or the entire payment before receiving the goods Advantages to the importer: The importer retains control over the timing of settlement and the method by which funds are remitted; Inspection of the goods is usually possible before payment is made Disadvantages to the importer: The importer has little control over shipment details and the timing of the receipt of the goods; there is no control over the quality of the goods If special documents (certificates of origin) are required, there is no guarantee that these will be received Documents used in Foreign Trade 8 2.1 Bill of lading is one important shipping document necessary and useful in export-import trade transactions It is a document issued by the shipping company after the shipment of goods In simple, Bill of lading is a contract between the exporter or the shipper and the shipping company for the carriage of goods from the port of loading to the port of destination Bill of lading is a document to title of goods and is transferable by endorsement and delivery Hence, it is a semi-negotiable instrument The bill of lading is prepared on the basis of mate's receipt The importer has to produce this receipt for securing the deliver of goods The bill of lading contains following information :1 Name and address of the exporter and the shipper Name and address of shipping company Name and address of importer or agent Quantity, weight and value of goods sent Place of loading and port of destination Date of loading of goods on the ship Mark description and number of packages Port at which the goods are to be discharged Freight paid or to be paid 10 Signature of the issuing authority with date 11 Any other relevant details 2.2 Commercial invoice is a basic export document It contains all the information, which is required for preparation of all other documents It is the exporter's bill for goods which the importer has to pay Commercial invoice contains the following information :1 Name and address of exporter and importer Description of goods (weight, quality, quantity, rate, etc.) Value of goods after discount, if any Net amount payable by the importer Terms and Conditions of sale 9 2.3 A certificate of insurance (COI) is a non-negotiable document issued by an insurance company or broker verifying the existence of an insurance policy and summarizing key aspects and conditions of the policy For example, a standard certificate of insurance lists the policyholder's name, policy effective date, the type of coverage, policy limits, as well as other important details of the policy And other documents used in foreign trade Letter of Credit Consular Invoice Certificate of Origin Bill of Entry Financing Techniques 3.1 Banker's acceptance A banker's acceptance (BA) is a short-term debt instrument issued by a company that is guaranteed by a commercial bank Banker's acceptances are issued as part of a commercial transaction A banker's acceptance arises when a bank guarantees (or accepts) corporate debt, usually when it issues a loan to a corporate customer and then sells the debt to investors Because of the bank guarantee, a banker's acceptance is viewed as an obligation of the bank If the bank has a good reputation, the acceptance can be re-sold in an open market, at a discount to its face value A banker's acceptance is considered to be a very safe asset, and is used extensively in international trade 3.2 Discounting When using Letter of Credit, the client can choose various ways of payment, including the delayed payment option In this case the client receives the payment with a slight delay that can create difficulties in financial flow, therefore we offer an option to discount the Letter of Credit + Discounting of Letter of Credit is a short-term crediting of the seller by the bank The bank can finance the client in case of Letter of Credit for export (if the client is seller in the transaction) by negotiating or by purchasing the documents or by making the early 10 10 disbursement of the postponed payment This means that the bank pays to the client the amount indicated in the agreement before receiving the payment from Letter of Credit issuing bank + Letter of Credit issuing bank's commitment to pay the amount mentioned in the Letter of Credit at a certain date serves as a credit guarantee to the bank SEB bank will carefully evaluate the bank that has issued the Letter of Credit and its risk limit + For discounting the Letter of Credit the bank applies corresponding discounting fee 3.3 Factoring Definition of Factoring Factoring is defined as a method of managing book debt, in which a business receives advances against the accounts receivables, from a bank or financial institution (called as a factor) There are three parties to factoring i.e debtor (buyer of goods), the client (seller of goods) and the factor (financier) Factoring can be recourse or non-recourse, disclosed or undisclosed Process of Factoring In a factoring arrangement, first of all, the borrower sells trade receivables to the factor and receives an advance against it The advance provided to the borrower is the remaining amount, i.e a certain percentage of the receivable is deducted as the margin or reserve, the factor’s commission is retained by him and interest on the advance After that, the borrower forwards collections from the debtor to the factor to settle down the advances received 3.4 Forfaiting Definition of Forfaiting Forfaiting is a mechanism, in which an exporter surrenders his rights to receive payment against the goods delivered or services rendered to the importer, in exchange for the instant cash payment from a forfaiter In this way, an exporter can easily turn a credit sale into cash sale, without recourse to him or his forfaiter Process of Forfaiting The forfaiter is a financial intermediary that provides assistance in international trade It is evidenced by negotiable instruments i.e bills of exchange and promissory notes It is a financial transaction, helps to finance contracts of medium to long term for the sale of 11 11 receivables on capital goods However, at present forfaiting involves receivables of short maturities and large amounts - Key Differences Between Factoring and Forfaiting The major differences between factoring and forfaiting are described below: 12 12 ...TABLE OF CONTENTS 2 TOPIC: FINANCING FOREIGN TRADE Group 19 Payment Terms in Foreign Trade * Four Principle Means: - Cash - in - advance With cash -in- advance payment terms, an exporter... applies corresponding discounting fee 3.3 Factoring Definition of Factoring Factoring is defined as a method of managing book debt, in which a business receives advances against the accounts... is used extensively in international trade 3.2 Discounting When using Letter of Credit, the client can choose various ways of payment, including the delayed payment option In this case the client