Financing Export and Import
C H A P T E R
19
International Trade Finance
Financial statements are like fine perfume: to be sniffed but not swallowed. —Abraham Brilloff.
LEARNING OBJECTIVES
◆ Learn how international trade alters both the supply chain and general value chain of the domestic firm, thereby beginning the globalization process in the trade phase. ◆ Consider what the key elements of an import or export transaction are in business. ◆ Discover how the three key documents in import/export, the letter of credit, the draft, and the bill of lading, combine to both finance the transaction and to manage its risks. ◆ Identify what the documentation sequence is for a typical international trade transaction. ◆ Learn how the various stages and their costs impact the ability of an exporter to enter a foreign market and potentially compete in both credit terms and pricing. ◆ See what organizations and resources are available for exporters to aid in managing trade risk and financing. ◆ Examine the various trade financing alternatives.
The purpose of this chapter is to explain how international trade, exports and imports, is financed. The contents are of direct practical relevance to both domestic firms that just import and export and to multinational firms that trade with related and unrelated entities. The chapter begins by explaining the types of trade relationships that exist. Next, we explain the trade dilemma: exporters want to be paid before they export and importers do not want to pay until they receive the goods. The next section explains the benefits of the current international trade protocols. This is followed by a section describing the elements of a trade transaction and the various documents that are used to facilitate the trade’s completion and financing. The next section identifies international trade risks, namely, currency risk and noncompletion risk. The following sections describe the key trade documents, including letter of credit, draft, and bill of lading.
19
International Trade Finance
Financial statements are like fine perfume: to be sniffed but not swallowed. —Abraham Brilloff.
LEARNING OBJECTIVES
◆ Learn how international trade alters both the supply chain and general value chain of the domestic firm, thereby beginning the globalization process in the trade phase. ◆ Consider what the key elements of an import or export transaction are in business. ◆ Discover how the three key documents in import/export, the letter of credit, the draft, and the bill of lading, combine to both finance the transaction and to manage its risks. ◆ Identify what the documentation sequence is for a typical international trade transaction. ◆ Learn how the various stages and their costs impact the ability of an exporter to enter a foreign market and potentially compete in both credit terms and pricing. ◆ See what organizations and resources are available for exporters to aid in managing trade risk and financing. ◆ Examine the various trade financing alternatives.
The purpose of this chapter is to explain how international trade, exports and imports, is financed. The contents are of direct practical relevance to both domestic firms that just import and export and to multinational firms that trade with related and unrelated entities. The chapter begins by explaining the types of trade relationships that exist. Next, we explain the trade dilemma: exporters want to be paid before they export and importers do not want to pay until they receive the goods. The next section explains the benefits of the current international trade protocols. This is followed by a section describing the elements of a trade transaction and the various documents that are used to facilitate the trade’s completion and financing. The next section identifies international trade risks, namely, currency risk and noncompletion risk. The following sections describe the key trade documents, including letter of credit, draft, and bill of lading.