Free Online Course in International BusinessFactoring -TransferenceFactoring can be described as the outsourcing of credit and collections. In other words, a seller pays another company, a factor, to collect payments from a buyer. The factor buys the accounts receivable product or services that the buyer wants and pays the seller directly. The factor owns the receivables and goes after the buyer if the buyer does not pay the factor. Its use in international trade goes back centuries. Cross border factoring differs from domestic factoring in that the factor does not purchase the receivables unless and until they become past due. When a factor guarantees payment and a seller needs the payment before it is due, the seller can borrow from the factor at some cost to the seller. The factor makes all credit decisions for the seller and collects all receivables from approved buyers. Unless the reason for non payment is a dispute between the seller and buyer, the factor pays 100% of past due receivables. Factors allow sellers to pick the customers they want to include, though not individual invoices. A rule of thumb is that factoring costs about twice as much as credit insurance. A limitation on factoring is that it only exists in countries with laws that support the buying and selling of receivables common in developed countries, but not emerging markets. If cost and range of risk coverage are issues, it is usually more satisfactory to use a letter of credit or export credit insurance. Most factors are niche players, usually concentrating in select regions of the world. There are certain industries, such as textiles and clothing, where factoring is considered a part of doing business. The problems factoring presents to most companies are that most factors don t cover the riskiest countries and the service may be cost prohibitive for companies with tight profit margins.Forfaiting-TransferenceThe name forfaiting is derived from the French term for the technique a forfait. It refers to the concept that a seller forfeits the right to a future payment on a receivable in return for immediate cash. This may sound similar to factoring. The objective of a forfaiter is to purchase such financial instruments at a low price and sell them at a high price, garnering a trading profit in the process. Frequently, forfaiters require that these instruments be avalized (guaranteed) by a buyer s bank, thereby enhancing marketability. Because there is little potential profit in small transactions and because buyers balk at signing promissory notes and obtaining bank avals on short term transactions, forfaiters tend to find a niche in medium term transactions, such as capital goods.Countertrade- AcceptanceIn the 1970s, there was a severe recession with some less fortunate nations having problems with huge balances of trade deficits, resulting in a lack of foreign exchange, inability to service foreign debt, and liquidity problems. Those countries were driven to exchange some of their national goods for imported, badly needed essential goods. Until the first half of the 1980s, use of countertrade grew in many countries in Central and Eastern Europe, Africa and the Middle East, Asia and Latin America. When the IMF ultimately intervened in order to help those countries, one of the rules imposed was that government to government countertrade be abolished in order that the flow of goods could generate a flow of money which, in turn, could be monitored and managed by the country itself. The aim of the IMF was to encourage countries involved in countertrade to evolve into more advanced economies, with normal money exchanges with other nations and transparent treasury and financial operations. There are still countries with countertrade operations, but many fewer now than in the 1980s. The mechanics of countertrade vary according to local regulations and requirements, the nature of the goods to be exported, and the current priorities of the parties involved. The meanings attributed to the terms used to describe the main modes of trading are not all at standard, and terms like barter, countertrade and offset are often used interchangeably. Reasons for the increasing use of countertrade include the following:• The world debt crisis has made ordinary trade financing very risky. • Many countries cannot obtain the trade credit or financial assistance to pay for desired imports. • Countries are increasingly returning to the notion of bilateralism as a way to reduce trade imbalances. • Countertrade is often viewed as an excellent mechanism to gain entry into new markets. A party receiving the goods may become a new distributor, opening up new international marketing channels and ultimately expanding the market. • Providing countertrade services helps sellers differentiate products from those of competitors. Banker's Acceptances -TransferenceA banker's acceptance is a method of financing that banks can use to provide customers with short term (six months or shorter) financing for trade transactions. Acceptances may be less expensive than more traditional trade financing methods. A banker's acceptance is a time draft drawn on, and accepted by, a bank. By accepting the draft, a bank indicates its commitment to pay the stated amount of the draft on a specified future date. The draft may then be sold to an investor for a money market rate of return base on the credit risk of the bank. Acceptance financing has been used for decades as a form of bank loan. The ability to fix rates for periods of up to 180 days protects the borrower from adverse movements in interest rates up to six months. Banks offer banker's acceptances in a wide range of maturities to match their customer's sales cycles and payment terms. A banker's acceptance begins with a financial instrument issued in negotiable form, commonly called a "time draft" or "usance draft." This is a draft drawn on a bank usually by an importer or exporter for a certain sum of money payable in the future. The drawee's bank thereupon signifies acceptance of the obligation by stamping the work "accepted" across the face of the draft. Traditionally, importers used bankers acceptances to finance imports into the United States. Today acceptance financing is used to finance a wide range of activity such as imports, exports, domestic shipments, domestic purchases, and commodity warehousing of readily marketable products.Credit Insurance - MitigationYou carry insurance on your car such that, in the event of an accident, you can get your car repaired or replaced without having to pay for all the expense of the repair or replacement. Export credit insurance is similar. It is an insurance protecting the exporter in case a credit related non payment should arise unexpectedly. It is not a means of payment. Sellers consider credit insurance when selling into a part of the world where there may be political or commercial turmoil. For other sellers, credit insurance may be considered when selling for a first time in a part of the world where concerns for profit may outweigh the buyer's concern for nonpayment. By insuring commercial transactions, a company safeguards against the potentially devastating effects of a loss caused by the insolvency or protracted default of one or more of its customers. For international trade, external factors such as import and trade restrictions can also interfere with the successful completion of the contract of sale. A seller may be faced with a buyer's insolvency, bad debts or even bankruptcy. Credit insurance protects a seller against a wide range of commercial and political risks and can provide a competitive edge by enabling a seller to• expand sales • protect a seller's balance sheet against bad debts • boost borrowing power, since lenders will have a "comfort level" with this protection • stabilize cash flow • enable new markets to be developed. Credit insurers require a seller to be part of the credit decision. A seller has to satisfy the credit insurer that he/she has adequate credit controls in place in order to be paid in the event of a default. Insurance coverage is available for legally enforceable indebtedness and usually commences when goods are shipped or delivered. However, for many companies, business is complex and requires flexibility from the insurer, so one common variation for insurance is pre delivery cover (or work in progress). If goods are tailor made, the policyholder may not be able to resell them if the original buyer has become insolvent or the contract is frustrated before delivery. The policyholder is therefore exposed to the risk from date of contract. The extent of cover provided varies between insurers but will normally begin on the effective date of the contract, with claims calculated in relation to costs incurred in the manufacture of the product before the date of loss. Business credit insurance covers a company s accounts receivable, which can, typically, represent more than 40% of its assets. This protection insures against unexpected bad debt losses outside of the insured s control as a result of commercial and/or political risks, such as insolvencies, protracted default, repudiation, acts of war and government regulations or restrictions. Credit insurance covers trade credit, insuring accounts receivable which are generally defined as short term (360 days or less) and not secured by other guarantees. With a credit insurance policy in place, the company can be certain that valid ( non disputed) accounts receivable will be paid by either the debtor or the insurer. With most comprehensive export credit insurance policies, exporters are protected against both credit and political risks. Insurance companies will normally insure between 80 and 90% of the commercial (credit) risk and 85 to 100% of the political risk in a transaction. ResourcesFCIB www.fcibglobal.comMSU Globaledge Modules - http://globaledge.msu.edu Export Financing - Sources of Export Insurance US Dept of Commerce - International Company Profile - www.export.gov US Export Import Bank www.exim.gov US Small Business Administration www.sba.gov
|
About Us | Terms of Use | Contact Us | Partner with Us | Press Release | Sitemap | Disclaimer | Privacy Policy
©1999-2011 OpenLearningWorld . com - All Rights Reserved