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



Factoring:

¤     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



Forfaiting:

¤     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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