INTERNATIONAL

TRADE
FINANCE

For : Prof. V. Murlidharan

GROUP MEMBERS

Daljit Arora 03
Khushboo Damani 21
Ronak Desai 26
Rohit Dutt
Amisha Khanna
Jitendra Relan 79
 PRESENTATION FLOW

• Introduction to International Trade

•Methods of Payment
•Pre-Shipment Finance
•Post-Shipment Finance
•Letter of Credit
• Open Account
•Documentary Collections
•Factoring
INTERNATIONAL TRADE FINANCE

DEFINITION

International
InternationalTrade
Trade

Flow Flow
FlowofofProductive
FlowOf
OfCommodity
Commodity factors
Productive
factors
INTERNATIONAL TRADE
INTERNATIONAL TRADE FINANCE

Trade Finance is the science that describes

the management of money, banking,
credit, investments and assets for
international trade transactions.
FISCAL INCENTIVES TO
PROMOTE EXPORT

Duty Drawback

Tax Concession

Market development assistance

Export promotion of capital goods scheme

Cash compensatory support

Air Freight Subsidiary

METHODS FOR INTERNATIONAL TRADE
FINANCE

According to stage of financing

Pre-shipment finance

Post-shipment finance
METHODS FOR INTERNATIONAL TRADE
FINANCE

Instruments/methods of financing

Letter of credit

Open account

Factoring

Document collections
Pre-Shipment Finance
 PRE-SHIPMENT FINANCE
Definition:

• “Financial assistance extended to the exporter from the date

of receipt of the export order till the date of shipment is
known as pre-shipment credit”.

• Such finance is extended to an exporter for the purpose of

procuring raw materials, processing, packing, transporting,
warehousing of goods meant for exports.

• Maximum period of 180 days

• Exporter can obtain 90% of the FOB value of the order or

75% of the CIF value of the order.
IMPORTANCE OF PRE-SHIPMENT
FINANCE
o Purchase raw material, and other inputs
o Assemble the goods in the case of
merchant exporters.
o Store the goods in suitable warehouses
till the goods are shipped.
o Packing, marking and labeling of goods.
o Pre-shipment inspection charges.
o Purchase of heavy machinery and other
capital goods
o Consultancy services.
o Export documentation expenses.
POST SHIPMENT FINANCE
• Definition:
Post Shipment Finance is a kind of loan
provided by a financial institution to an
exporter or seller against a shipment
that has already been made.

• Export finance is granted from the date

of extending the credit after shipment of
the goods to the realization date of the
exporter proceeds. Exporters don’t wait
for the importer to deposit the funds.
FEATURES

• Purpose of Finance

• Basic of Finance

• Types of Finance

• Abundance of Finance

• Period of Finance
 LETTER OF CREDIT

• Definition:
A formal document issued by a bank on behalf of
customer, stating the conditions under which the
bank will honour the commitment of the customer

• The letter of credit is also known as banker’s

commercial credit or documentary letter of credit.

• L/C used in domestic trade are called inland

L/C’s.
PARTIES TO A LETTER OF CREDIT

• Importer or Applicant

• Issuing Bank

• Beneficiary

• Advising Bank

• Negotiating/ The Paying Bank.

 LETTER OF CREDIT – THE
PROCESS

Seller 1. Contract Buyer

(Beneficiary) Applicant

2. Documentary
4. Advice of credit Application
Documentay
credit

Advising Bank 3. Documentary credit ISSUING

BANK.
ADVANTAGES OF LETTER OF
CREDIT

• Immediate Payment

• Guaranteed Payment

• Performance

• Safe & Secure Method

• Political & Exchange Control risks

reduced.
 OPEN ACCOUNT
Open Account
• Definition:
Open Account is a form of trade whereby sales
are made to the buyer without entering into any
formal contract. The system works on complete
trust between buyer & seller.

• An open account transaction means that the

goods are shipped and delivered before payment
is due, usually in 30 to 90 days.
 OPEN ACCOUNT – PROS & CONS
Pros & Cons

• Pros:
Boost competitiveness in the global market.

Establish and maintain a successful trade

relationship.
• Cons:
Exposed significantly to the risk of nonpayment

Additional costs associated with risk mitigation

measures.
OPEN Open
ACCOUNT – PROCESS
Account - Process

TARGET VENDOR

BANK
OPEN Open
ACCOUNT – PROCESS
Account - Process

TARGET Purchase order VENDOR

Pu der
or
rc
ha
se

BANK
OPEN Open
ACCOUNT – PROCESS
Account - Process

TARGET Purchase order VENDOR

Pu der Goods
or
rc
ha

ts
se

en
um
c
Do
BANK
OPEN Open
ACCOUNT – PROCESS
Account - Process

TARGET Purchase order VENDOR

Pu der Goods
or
rc
Do

ha
cu

ts
se

en
m
en

um
t

c
s ta

Do
tus
.

BANK
OPEN Open
ACCOUNT – PROCESS
Account - Process

TARGET Purchase order VENDOR

Pu er Goods
or
rc
Do

d
ha

ts
cu

se

en
Pa

nt
m
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ym

e
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BANK
DOCUMENTARY COLLECTIONS

• Process Overview

Sends Documents +
Instructions for
Payment
Remitting Bank Collecting Bank

Payment
Draft indicating D/A
Entrusts Payment or D/P
Payment
collection of
payment

Importer Exporter
DOCUMENTARY COLLECTIONS
Documentary Collections

Importer can collect documents by following payment

terms:

A. Document against acceptance (D/A)

Importer pays the face amount on a specified date in the
future. Transfer of title of goods and documents is done
on receipt of payment.

B. Document against payment (D/P)

Importer pays the face amount on sight of goods.
Transfer of title of goods and documents is done
immediately.
DOCUMENTARY COLLECTIONS
Documentary Collections

Advantages:
• Documentary collections involve use of drafts which is
less expensive than letter of credit.

Disadvantages:
• Although banks act as facilitators, no verification
process is present.

• Limited recourse in the event of non-payment.

FACTORING

• Definition –
“Financial transaction whereby a business sells
its accounts receivable to a third party called a
factor (financial institution) at a discount in
exchange for immediate money with which to
finance continued business.”

• Financial option for the management of

receivables
FLOW CHART OF FACTORING

(1) Credit Sale

of Goods

Customer Client
(2) Invoice

(5) Pays the amount (6) Pays

(In recourse type the (3)
customer pays balance Submit
through client) (4) Invoice
Payment Copy
upto 80%
initially
Factor