different sources of financing foreign trade

Modes of Payment

Payment in Advance:

¤     Payment is paid in advance by the importer

¤     I.e. prior to shipment of the goods

¤     In this case exporter does not need finance

¤     Not a very common mode

¤     Normally adopted in case of risky importers

Payment under Consignment Sale:

¤     Title of goods lie with exporter

¤     Even after shipment and receipt of goods by importer

¤     Importer remits money after the sale

¤     Exporter’s capital is tied up in inventory

¤     Normally found in related companies only

Open Account:

¤     Like normal ‘Credit Sales’

¤     Goods are shipped and received by importer

¤     Title is also transferred

¤     Payment is received on a predefined future date

¤     Normally, to only creditworthy importers

Draft (Bill of Exchange):

¤     An Instrument through which

¤     An exporter (maker or drawer) instructs the

¤     Importer (drawee) or its agent (its bank)

¤     To pay a specified amount

¤     At a specified time.

Draft (Bill of Exchange) - TYPES:

¤     Demand Draft or Time Draft

n      In case of DD - Payment is made immediately

n      In case of refusal it is termed as Dishonor

n      Time Draft – Payment is made after a specified time (tenor) written in draft

n      Holder has option to keep till maturity and get the specified amount

n      Or holder can sale it in Money Market at discounted rate.

¤     Clean Draft & Documentary Draft

n      Clean Draft – No other document is attached with

n      All other documents directly send to importer

n      Normally, used in case Intra-firm sales

n      Documentary Draft – Shipping documents are sent along with draft

n      Goods can be release only after submitting these documents

n      These documents have to be obtained from bank after due payment  or acceptance of draft

¤     Documentary Draft

n      When documents are obtained against full Payment of Goods, it is termed as Documents against Payment i.e. D/P

n      When documents are obtained against the acceptance of draft (i.e. promise to pay), it is termed as Documents against Acceptance i.e. D/A

Letter of Credit (L/C):

¤     An Instrument signed by the Importer’s Bank

¤     Wherein it (bank) promises the exporter

¤     To make payment of the goods

¤     If he abide by conditions mentioned in L/C

¤     Importer’s bank gets a fee from importer

¤     L/C has an amount and expiration period


¤     Exporter receives payment after a no. of days

¤     During this period export is treated as Account Receivable

¤     But at the same time export may in need of finance

¤     Therefore, exporter can sell his receivables to a bank or other agencies


¤     Almost similar to ‘Factoring’

¤     But usually done in large and long-term export

¤     Which is generally the case of capital goods

¤     In this case importer write a promissory note (bill of exchange) to exporter i.e. promise of paying a specified amount on a specified date

Counter Trade:

¤     Those type of transactions in which

¤     Exporter gets value of exports not in cash

¤     But in the form of specific commodities

¤     As per the agreement b/w parties

¤     In other words, here imports are financed through exports

Export-Import Bank of India:

¤     Apex body in the country estd. Jan.1982

¤     For direct finance and refinance facilities

¤     For encouraging foreign trade

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