International Trade Financing DFA2137(3)

Alternative Methods of Trade Financing

Apart from the traditional trade financing instruments, other methods of financing international trade exist and these are described below:

A.

Pre-Shipping Financing

Pre-shipment finance for exporters is the finance required to bring an export transaction to the point of shipment either to manufacture, process, or purchase merchandise and commodities for shipment overseas. In some instances, the exporters position may be sufficiently liquid for the funds to be provided from working capital, or local suppliers of the export goods may extend credit. In many other instances, the exporter will look to a bank to provide finance. Preshipment financing can take in the form of short-term loans, overdrafts and cash credits.

B.

Post-Shipping Financing

If the buyer pays for goods with the order, the exporter does not require finance after shipment of the goods. However, where a period elapses after the goods have been shipped and before payment is made by the buyer, or by an overseas bank under a DC (issued on application by the buyer), the exporter or some party must provide finance for that period. This finance is known as post-shipment finance and is usually provided by the exporters bank. A major consideration in post-shipment finance is the fact that interest charges arise.

The bank providing post-shipment finance, by negotiating a sight or term drawing under a documentary credit, or by purchasing or advancing against a documentary bill, or by way of trade finance, or discounting a bill, will charge interest. The exporter must pay or otherwise provide for this interest. Thus, it is usual for the exporter to charge interest to the buyer for the credit terms extended and generally this is provided for in the price of the goods exported.

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International Trade Financing DFA2137(3)

Apart from interest charges, the bank may also charge commission rendering post-shipment finance quite expensive.

C.

Buyers Credit

On arrangements usually initiated by the supplier, and subject to a full investigation, a financial institution in the suppliers country makes a loan for the period required and in the currency agreed on, direct to the buyer for the balance of the amount owing to the supplier after initial payments at or before shipment as agreed has been made. The loan is used to pay the supplier, and from then he has no further interest in the transaction; he has received payment in full without recourse. The importers liability is to the financial institution providing the loan, and repayments are made in accordance with the loan agreement signed by the two parties. The rate of interest on the loan is set out in the loan agreement.

D.

Suppliers Credit

The term supplier credit is applied in circumstances where the supplier provides the finance for the period required either from his own resources, or by borrowing in his own name. Arrangements for payment by buyers under medium and long-term contracts vary considerably. Generally they provide for a deposit to be paid when the order is placed and a further part payment on shipment. The remaining payments are spread at regular intervals over the term for which credit is granted. Bills of exchange at varying usances (time allowed for settlement) may be drawn on the buyer by the exporter for installments, promissory notes may be issued by the buyer, or the buyer may make clean payments as installments fall due.

E.

Confirming Houses

Confirming houses are financial institutions providing an additional avenue of finance for the small to medium business sector or supplementing facilities provided by prime lenders such as
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International Trade Financing DFA2137(3)

banks and merchant banks. This finance is usually in the form of cash or, for imports, letter of credit establishment facilities.

Confirming houses are principally engaged in financing the movement of goods (be it export/import related) and provide up to 180 days finance on a transaction by transaction basis within a pre-arranged facility.

Confirming houses are basically secondary providers of trade finance. They charge a fee in addition to interest costs and out of pocket expenses. In all, these costs will usually make usage of a confirmers line of credit more expensive than that of a bank.

It is not uncommon for confirming/trade finance to be confused with factoring. The main difference is:

Confirming provides a customer with front-end financing either by way of letters of credit or cash.

Factoring provides a customer with rear-end financing by purchasing its debtors.

F.

Accounts Receivable Financing

Accounts receivable financing involves lending against the security of a companys receivables. Funds are generally advanced up to a maximum of 70% of the outstanding eligible receivables. Receivables are considered ineligible by the lender if they have been outstanding beyond a given number of days (usually 90 days), or if any doubts exists as to their value. The company retains responsibility for managing and collecting its receivables and continues to bear the cost of any bad debts.

Accounts receivable financing is commonly used to meet short term funding requirements, but in some cases it is provided as an ongoing working capital facility.
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International Trade Financing DFA2137(3)

G.

Invoice Discounting

Invoice Discounting offers an invoice purchasing facility providing working capital by virtue of the financier purchasing and discounting the trade debtors of incorporated businesses. In essence Invoice Discounting offers a stable long-term source of short-term finance linked to a companys receivables rather than to the value of its fixed assets or the strength of its balance sheet. Invoice Discounting effectively accelerates a companys cash flow cycle by providing almost immediate funding against receivables which are then collected under normal trade terms, e.g. 30 to 90 days.

Invoice Discounting is an alternative to overdraft or other working capital funding. The main difference between Invoice Discounting and a standard overdraft facility is that the level of funding available under Invoice Discounting is controlled by the amount of trade debtors purchased, within a facility limit. With Invoice Discounting therefore, the availability of funds is dependent on sales achieved and is thus responsive to any seasonality and/or growth in the customers business.

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