At the end of the chapter, student should be able to: Describes types of short-term financing 01 schemes for exporters and importers.
Discuss the functions of Exporter Credit
02 Refinancing (ECR)
03 Explain types of long-term financing.
TYPES OF FINANCING SCHEMES FOR EXPORTER AND IMPORTER (LONG TERM)
FORFEITING COUNTER TRADE
LONG TERM LEASING FINANCING HIRE PURCHASE SCHEMES
FACTORING SHIPPING GUARANTEE
WHAT IS LONG TERM
FINANCING SCHEMES??? It consists of loans and financial obligations lasting over one year. Long-term debt for a company would include any financing or leasing obligations that are to come due in a greater than 12-month period. FORFEITING Forfeiting is a purchase of an exporter’s receivable. A bank advances cash to an exporter against invoices or promissory notes guaranteed by the importer's bank.
An exporter sells its claim to trade receivables to a financial
institution (forfeiter) and receives payment immediately. The time frame for forfeiting is usually longer and several months to if several years.
The amount advanced is always 'without recourse' to the
exporter. Major export destinations financed via the forfaiting technique are Eastern Europe, the Middle East, and Latin America. FLOW OF FORFEITING FACTORING Export factoring means purchase, funding, management and collection of short-term accounts receivable based on goods and services provided to foreign buyers.
The Client (Seller) sells goods to the buyer and prepares invoice with a notation that debt due on account of this invoice is assigned to and must be paid to the Factor (Financial Intermediary). The amount received less than the face value of the draft.
The factor then manages your accounts receivable ledger (or
‘debtors’) and collects your debts. FACTORING Factoring is, A Financial Intermediary that buys invoices of a manufacturer or a trader and takes responsibility for collection of payments. The parties involved in the factoring transaction are:- a. Supplier or Seller (Client) b. Buyer or Debtor (Customer) c. Financial Intermediary (Factor) FLOW OF FACTORING LEASING The lease is a contract whereby one party, the lessor, grants the right to use a particular goods for a period to the other party, the lessee (or tenant), which will pay for the transfer of the right to use a fixed amount regularly.
Leasing can be of two types – financial lease and operating lease.
a. Finance lease - The lease agreement is irrevocable. Practically all the risks incidental to the asset ownership and all the benefits arising there from are transferred to the lessee who bears the cost of maintenance, insurance and repairs. Only title deeds remain with the lessor. Financial lease is also known as ‘capital lease’. b. Operating lease - This lease agreement gives to the lessee only a limited right to use the asset. The lessor is responsible for the upkeep and maintenance of the asset. HIRE PURCHASE Hire Purchase is an option of financing an asset for use whereby the financing company lent the goods on hire to the buyer against small installment called hire charge and the buyer get the right to use the asset with an option to purchase the asset by paying all such installments spread over a period time.
This installment covers the principal amount and the interest
cost towards the purchase of an asset for the period the asset is utilized.
The hirer gets the possession of the asset as soon as the hire purchase agreement is signed, and they will become the owner of the equipment after the last payment is made. COUNTER TRADE Countertrade means exchanging goods or services which are paid for, in whole or part, with other goods or services, rather than with money. A monetary 05 valuation can however be used in counter trade for accounting purposes.
SWITCH COUNTER TRADING PURCHASE BARTER
OFFSETS BUYBACK BARTER Exchange of goods or services directly for other goods or services without the use of money as means of purchase or payment. It doesn’t involve payment using money; parties in the barter system benefit from receiving the products they require by exchanging what they have in surplus.
Barter is the direct exchange of goods between two parties in
a transaction. For example, countries enter barter deals to obtain military equipment by transferring locally produced commodities. SWITCH TRADING Switch Trading involves the role of third party in a countertrade transaction. If a seller in the countertrade does not want goods offered by the buyer as payment, it may bring in third party to dispose of the merchandise offered by the buyer. Practices in which one company sells to another company its obligation to make a purchase in each country.
For example, country A exports its product to country B. Country B will ship other products to another country C, known as switch trader. Country C, in turn, provides or exports the product needed by country A. COUNTER PURCHASE The counter purchase involves an importer obtaining goods and services from an exporter with an assurance that the exporter will purchase other specific goods or services from the importer.
Volkswagen promises to Sell of goods and services purchase specific East Germany product from country B in the future
Country A Country B
The products ‘purchased’ are not related to the original exporter’s product line. For example, Brazil exports vehicles, steel, and farm products to oil- producing countries from which it buys oil in return within a set time. BUYBACK Buyback occurs when one party provides the inputs like technology and equipment to another party and, in return, receives a certain amount of finished goods made using those facilities as a part of compensation.
It is also evident that the products shared by the parties to the
agreement are related as input and output. For example, one country provides the auto parts, machinery, and workforce to another country and receives a large consignment of auto vehicles. OFFSETS Offset agreement also known as industrial compensations or industrial cooperation. They are often observed in the deals involving aircraft and military equipment. The agreements usually portray an exporter manufacturer agreeing to the importer’s terms like marketing their products, final assembly of exported items in the importer’s country, and buying other goods and services from the importer’s country.
Offset activity can be divided into two main categories Direct and Indirect: a. Direct offset is related to the product or service involved in the trade, and the agreement involves coproduction or subcontracts. b. Indirect offset agreements are not related to the main product, but the exporter may be obliged to buy goods or services from the importing country. SHIPPING GUARANTEE
06
It is a document issued by the bank to the shipping company
that allows the importer to collect the goods from that shipping company in the absence of a Bill of Lading. Thank You SEE YOU IN NEXT CLASS
