Free Online Course in International BusinessLoansThere are many similarities between the ways banks and companies manage credit. Both have similar processes. Credit management at a bank starts with credit analysis. Before a bank creates any exposure, someone needs to prepare a credit analysis describing the prospective borrowers financial condition. Based on the credit analysis and the bank’s risk management policies, a borrower is assigned a risk rating. Banks tend to be more formal about this process because extending credit is a core line of business for banks. Risk ratings usually range from very good to unacceptable. Several levels, 1 through 4, will be considered acceptable, though with different acceptability structures for each level; one or two levels will be considered marginal or ʺwatch list,ʺ while remaining levels will be deemed unacceptable. Risks may not lie entirely in a borrowers financial condition! In trade finance, as in export credit management, risk ratings must also factor in cross border risks that may cause non repayment of a loan, such as political events, the economic situation, or even acts of God and nature (earthquakes, monsoons) in the country of the borrower. When a risk rating is assigned, the next step is to designate a credit limit and indicate permitted structures that may include sub limits. Some structures may require collateral. The limits and sub limits will be based on the desire of a borrower or a lender to diversify the risks not to lend too much money to any one borrower, or to too many borrowers in any one country or industry. Country limits are particularly important in trade finance. A political or economic event may disrupt payments from all borrowers in a country. An international credit management system must be able to aggregate all exposures in a country, check that they are within the country limit, and block creation of new exposures that would cause that limit to be exceeded. Limiting factors include different limits for different types of risk: trading risk, risk related to loan, risk related to guarantees and tenor which includes short, medium and long term trade finance. A lender may also have overall country limits, then limits for each sector (financial, industrial, government), and then limits for each borrower (by tenor and type of risk). With increased regulations and capital adequacy, this whole area of risk management has become very complicated.Letter of CreditThe letter of credit process begins after a buyer and seller conclude a sales contract providing for payment by a letter of credit. The buyer then instructs his bank the issuing bank to issue a letter of credit in favor of the seller. The sales contract may call for either a• sight letter of credit pursuant to which the issuing bank agrees to make payment upon presentation of a sight draft and the required documents, or • time letter of credit pursuant to which the issuing bank agrees to accept a time draft and pay at maturity upon its presentation with confirming documents. The issuing bank then delivers or transmits the credit to a bank in the seller’s country the advising bank that may also be the asked to confirm the credit. The advising/confirming bank notifies the seller that the credit has been issued. Once the seller has been advised that a letter of credit has been issued in his/her favor and is certain that he/she can satisfy the stated terms and conditions, the goods are shipped and required shipping documents assembled. Documentary Draft CollectionThis type of document is archaic if you haven’t seen it before, it may not make much sense. A documentary draft or bill of exchange is very similar to a letter of credit in that it is an agreement between a buyer and seller. (A simple check is the most familiar type of draft to most people.) Documentary drafts are still widely used, however, in many countries whose commercial law is based upon the Napoleonic Code. They were primarily used in domestic commerce as a way of facilitating transactions between individuals and companies who had faith in one another. The use of documentary drafts in global commerce began as a result of trade between companies in countries whose commercial law was based upon the Napoleonic Code, and they were also used in the United States. Using a draft is a multi step process:1. A seller writes out a draft in his/her own favor (to his/her own account). 2. When the buyer accepts the draft (signed it to accept payment), the draft then becomes a trade acceptance. A trade acceptance is a form of commercial paper that is both endorsable and liquid. 3. In many countries, failure to satisfy a trade acceptance can lead to an immediate seizure of the personal assets of the acceptor. 4. In order for the documentary draft to work, a third party acts as a guarantor of the draft. The third party will guarantee payment of the draft upon presentation of the proper documents. While some companies would act as guarantors as a favor to special customers or clients, banks became involved as the third party. In certain letter of credit transactions, documentary drafts are also used as a backup to create additional assurance that a buyer will pay his/her obligations to a seller via a third party, in most instances a bank. Accounts Receivable Financing –Transference or MitigationAccounts receivable financing is a particular form of collateralized lending. In addition to banks, finance companies offer accounts receivable financing to both sellers and buyers. The collateral taken is receivables; and financing is with recourse to the seller or buyer, depending on the agreement. For example, a transaction could look like this: the product that the buyer is acquiring is used as collateral. If the buyer defaults, the seller gets his money, but the lender has the right to attach or "go after" the buyer and try to recoup the loss. Normally a finance company will offer this type of financing for up to 70 percent of the eligible accounts receivable. Each buyer and location must be acceptable credit risks. With this method, a buyer is able to borrow money against its short term open account receivables. Generally, this is a very expensive financing option. If a bank loans without recourse, then it is left holding the debt and cannot go after the originator of the loan or contract.Governments- TransferenceMany governments are involved in supporting international trade and investment. International trade and investment are considered the two key engines that drive economic growth. Governments set the tone for economic development through policies and actions. Most want to foster exports as opposed to imports; exports create internal jobs, while imports create jobs in other countries. As a result, most major economies have created specialized governmental institutions that are known as "ECA’s," or Export Credit Agencies. An ECA provides insurance or loan guarantees through that country’s financial institutions and shares any losses with the bank in the event of a non payment, depending on the agreement between the ECA and the country’s banks. By providing this type of guarantee, the ECA supports an exporter’s or seller’s ability to extend credit. ECA financing is very difficult to arrange. It is usually supported by government credit agencies. Normally, the payment for the project is for five years and longer. A credit manager or project finance banker can determine what kind of project or government supported financing best fits the situation. An example of an "ECA" is the US Export Import Bank. The Ex Im Bank works within a set of policies that focus on creating US jobs and adhering to US positions and regulations. As a result, it has certain restrictions on utilizing its programs that may prevent some buyer companies from getting financial support. In order to insure that their programs are creating jobs in the US, participating companies must ship all products overseas from the US, and support may be limited to the US content of the products. In addition, the final manufacturing stage must be in the US, and some programs require shipment on US vessels. Finally, with few exceptions, no product can be shipped to a military buyer. Within these restrictions, the Ex Im Bank can support a variety of trade transactions under numerous programs. The Ex Im Banks programs cover a variety of needs. In some cases, a company that needs financing, that is, a buyer requires pre export financing assistance, which is offered through pre shipment insurance and a working capital loan guarantee program. Post shipment assistance is provided through short, medium, and long term programs. All the Ex Im Banks short term export programs are insurance programs. These include programs to protect sales to an individual buyer called single buyer insurance or many buyers at the same time, multi buyer insurance, including programs designed specifically for small businesses the small business program and the environmental program. All goods covered under these programs must have at least 50% US content. The Ex Im Banks medium term programs include insurance, guarantees and direct loans. It is a requirement of any such program that the buyer make a 15% down payment based on the transaction value. A maximum of 85% of the FOB value, plus up to 15% in local costs in the destination country, are covered under these programs. Under its long term facility, the Ex Im Bank offers both guarantees and project finance programs.
|
About Us | Terms of Use | Contact Us | Partner with Us | Press Release | Sitemap | Disclaimer | Privacy Policy
©1999-2011 OpenLearningWorld . com - All Rights Reserved