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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.
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.
regarding payment Competition between sellers - appropriate payment methods. non-payment risk
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.
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 An overdraft occurs when money is withdrawn from a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
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.
Credit lines
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
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.
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.
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