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8.1 Characteristics of international transactions financing. 8.2 Techniques of short-term financing. 8.3. Techniques of medium to long-term financing. 8.

4 Project financing, consortium loan and co financing.

8.1 Characteristics of international transactions financing.


International trade financing represents all

mechanisms, techniques and tools through which are purchased necessary funds to realize social and economic activities, in particular, business activities. When in this process is implied the external element, we are talking about the international financing the use of two or more currencies

exchange rate
currency risk.

International trade financing


Sources of financing:

internal external; In terms of the length of financing, it can be distinguished one of the following types: short term (12-18 months), medium term (5-7 years) long term (over 7 years). Generally, in export and import operations are mostly used techniques for short to medium term financing, while for international investments and industrial cooperation activities are specific long term financing techniques.

Export financing is often a key factor in a successful sale.


Exporters and importers have different expectations

regarding payment Competition between sellers - appropriate payment methods. non-payment risk

8.2 Techniques of short-term financing (180 days or less ).


trade finance pre-shipment post-shipment finance
Pre-shipment finance (for e.g. financing required to

cover the installation of plant and equipment as well as the cost of production, packing, storage and transportation of goods to the port of shipment). Post-shipment finance is for the financing of the stages after the good has been shipped for international transport while awaiting payment.

Forms of international trade finance


Goods not produced yet Producer signs export contract Goods in up-country warehouses Goods being processed locally Goods in local transit
Goods in export warehouses All these phases can result in documents which can support a financing.

Pre-shipment finance
When goods are loaded for international shipment, the transport agent issues a railway bill, a bill of ladingor a similar document. This document acts as a title document: one normally needs it to receive the goods from the transport agent on discharge. A financier can thus use it for security to provide post-shipment financing.

Goods in transit through 3rd country Goods stored in transit port Goods at sea Goods in import warehouses Goods in overland transport to buyer Goods received by buyer Goods processed by buyer Goods already sold by buyer

Post-shipment finance

Pre-shipment finance
Pre-shipment finance is supposed to enable

the exporter to prepare the goods for export. Banks can provide: 1)Bank overdrafts; 2)Discount loans; 3)Credit lines; 4)Cash-in-Advance.

Bank overdrafts
A bank overdraft is a limit on borrowing on a bank current account. An overdraft occurs when money is withdrawn from a
bank account and the available balance goes below zero. In this situation the account is said to be "overdrawn". authorized overdraft limit, The interest is charged only on the daily overdraft (debit) balance. If the negative balance exceeds the agreed terms, additional fees may be charged and higher interest rates may be applied. a fixed period (usually one year) If the overdraft is secured by an asset or property, the lender has the right to foreclose on the collateral in case the account holder does not pay.

BANK LOANS
A bank loan is a fixed amount for a fixed term with regular

fixed repayments. The interest on a loan tends to be lower than an overdraft. Example of a loan: A business borrows 12,000 from a bank over 3 years at an interest rate of 5%. The approx. repayments on this loan would be 392 a month for 36 months (14,112). A fixed term means how many months or years before the loan has to be repaid in full.

Overdrafts vs loans
Overdrafts Advantages Flexibility can change the amount borrowed within limits Interest is only paid on amounts borrowed Loans Larger amounts can be borrowed Lower interest rates than overdrafts Regular repayments help plan cash flows Disadvantages Cannot be used for large borrowing Less flexible than an overdraft

Rates of interest higher than in the case of loans


Bank can change limit at any time or ask for money to be paid back sooner than expected

Have to pay back in stated time or risk further financial problems

Discount loans
A discount loan is a loan arrangement where the interest and

any other related charges are calculated at the time the loan is granted. The total of the interest and other charges are subtracted from the face amount of the discounted loan. Instead of receiving the face value of the loan, the borrower receives the reduced amount, but is still responsible for repaying the full face value of the loan. schedule of payments
dividing the face value by the number

of installment payments to be made. This approach makes it possible for the borrower to begin paying on the principle immediately, without any of the installment payments going to cover interest charges.

Discount loans.
For the lender, the discount loan is also beneficial, in

this type of loan does not usually allow for breaks on the interest charges applicable to the loan. Since the applicable interest and related charges are accounted for up front, there is no need for the lender to have to apply penalties for early payoff or to recalculate the rate of interest if the borrower pays off the loan ahead of schedule. For example: If you close a loan for the amount of 50,000MDL. If the interest and financing charges are 10,000MDL, you would receive 40,000MDL from the lender, but still have to pay back the whole 50,000MDL.

A line of credit is an agreement between a financial institution and a


borrower allowing the latter to access credit up to an agreed amount;
Interest is paid only on money actually withdrawn. Lines of credit can be secured by collateral or can be unsecured. Lines of credit are often extended for creditworthy customers in order to

Credit lines

address liquidity problems;


The term is also used to mean the credit limit of a customer, that is, the

maximum amount of credit a customer is allowed.

This credit arrangement allows to finance within this balance several contracts subsequently entered into by the client. Lines of credit may set up for purchasing miscellaneous goods (general purpose lines of credit) or for contracts associated with one project (project lines of credit).

EXAMPLES:

1. the international bank extended in 1995 a US$10 million line of credit directly to South Africa Sugar Association at a price of LIBOR + 0.875% (excluding commitment fees).
2. the Zambian subsidiary of an international bank granted in 1996 a US$1.5 mln cotton input facility to a local cotton producer at LIBOR +1.5% (excluding arrangement fees).

Cash-in-Advance
cash in advance may be considered a payment mechanism

that provide credit to the exporter since the exporter will receive part of payment prior to shipment, which will enable him to produce. Applicability Recommended for use in high-risk trade relationships or export markets, and ideal for Internet-based businesses. Risk Exporter is exposed to virtually no risk as the burden of risk is placed nearly completely on the importer. Pros Payment before shipment Eliminates risk of non-payment Cons May lose customers to competitors over payment terms No additional earnings through financing operations

The importer is a new customer and/or has a less

When to Use Cash-in-Advance Terms


established operating history. The importers creditworthiness is doubtful, unsatisfactory, or unverifiable. The political and commercial risks of the importers home country are very high. The exporters product is unique, not available elsewhere, or in heavy demand. Such loans are granted to high-value products with long manufacturing cycle. Pre-financing loans (cash in advance) role is to cover cash needs of the producer when the advance received from the buyer signing the contract is not covering the production. The exporter operates an Internet-based business where the use of convenient payment methods is a must to remain competitive.

Post-shipment finance
Post-shipment finance is generally provided against shipping

documents, as proof that the shipment has indeed been made. As the buyer normally takes possession of the goods before he reimburses the credit, the shipping documents only provide security to the bank for a limited period, basically while the goods are in international transit. Post-shipment finance can be given to the buyer or the exporter: It can be given to the buyer who then can promptly pay the seller. It therefore allows the buyer not to commit his own funds to pay for the goods until some time after they have been shipped preferably, until after he has already sold the goods. Exporter operate in a very competitive buyer's market and in order to conclude an export sale, it is critical to offer attractive credit terms to the overseas buyer. Thus, Post-shipment finance can be given to the seller so that he can sell on deferred payment terms to the buyer.

Post-shipment finance
Discounting is one of the most used techniques in short-

term financing of exports. Usually, selling on credit is accompanied by issuing a trade document (promissory notes, drafts, bills) according to which the importer is obliged to pay, when due, the value of goods. The mechanism of discounting The loan that is granted by the bank therefore has a real value calculated from the amount of the bill (nominal value) minus the discount fee, also is charged a fee to cover the bank's risk in such operations. Vr=Vn-S, where:
Vr real value of the loan; Vn nominal value of the bill; Nz number of days from discounting day till maturity; S the discount; Ts discounting rate;

Acceptance credit
similar in principle to the technique of discounting. This credit may be granted in favor of the exporter or importer.

Acceptance credit in favor of the exporter. If the contract partner, for various reasons, do not accept the use of debt securities (efecte de comert), the exporter is able to draw a bill on his bank (also called the blue bill, the color that distinguishes them from other bills). Depending on the laws of different countries, acceptance credit can be obtained in two ways: - Whether the bank itself accepts the rediscounting of the debt security to the central bank or other exports financing institution, and on this basis, the exporter receives the credit; - Whether the exporter, with the acceptance received from its bank, discounts the bill to another bank. In this case, the bank of the exporter, although it does not finance the operations, it facilitates, through its signature on the bill of the exporter, to obtain financing from another bank.

In SUMMARY, Pre- and Post- shipment Finance Compared

Pre-shipment Finance

Post-shipment Finance

Finance is disbursed prior to shipment to enable collection of materials for export. Involves both performance and payment risk of the exporter . Source of repayment is the proceed of the contract. Relatively a higher risk with higher costs.

Finance is disbursed after shipment. Involves mainly payment risk of the buyer Repayment comes from proceeds of exports Risk is lower, especially if buyer is well known, hence financing cost is lower.

Topics for reports


Specifics of the export financing in the context of the

economic and financial crisis Peculiarities of trade financing in Republic of Moldova: opportunities and constraints