International Trade

Finance
MGMT 3008

The Heart of Trade Finance

It is a very special finance in a Bank

Exclusively for Importer/Exporter relations
Manufacturing finance
Advanced purchase financing
Construction financing
Government tender financing
The heart of trade finance looks at 3 sets of
documents:
Commercial documentation
Financial documentation
Transportation documentation

Trade Financing and Banks

Banks are not concerned with the goods, type, or

quantities being traded
Banks play a role of a trustee
The international chamber of commerce (ICC) sets
up the standards for banking practices
The role of a bank is to examine the documents
They are not concerned with sales contracts
They exist to facilitate the importer/exporter

Trust Accounts Other payment

Open account:
methods
Is an agreement between the exporter and the importer, whereby the
(1)

exporter grants a facility to the importer to purchase goods on a

regular basis.
Therefore, there is an informal contract.
There is a limit (the amount) set on the importer to purchase goods.
Any interest that is to be paid is paid by the buyer interest accrues
after 30 days.
Only set up to purchase goods the duration of the account is one
year.
Before the year end, the importer must retire the outstanding balance
and negotiate a new contract with the exporter to increase or
decrease the account limit.
Biggest risk is on the exporter for non-payment.
Recent estimates suggest that over 80% of global trade is now
conducted on open account.
Large corporations trade on this basis in order to save cost and time.
Smaller corporations also move towards this direction once there is a
growth in confidence with their buyer/supplier relationships.

Trust accounts

(2)

(3)

(4)

(5)

Advance payment:
Is a percentage of the total payment (invoice) that is transferred from
importer to exporter.
The importer accrues interest on the goods if the goods are not
shipped (ex..30 days after the payment), because the exporter is
holding the importers money.
Pre-payment:
Sending the complete amount of value before the goods are shipped
by the importer.
Consignment:
Exporter ships the goods to the importer but does not transfer title to
the importer title is held with the exporter.
Exporter is at risk.
ExDDP INCOTERM.
Partial payments and Instalment payments:
For partial payments, no shipping dates are attached (goods are not
attached).
For instalment payments, shipments are attached (goods).

Documentary Collections

Involves the collection of commercial documents,

financial documents, and transportation documents
by a bank usually by the importers bank
The role of the bank is to collect the documents from
the exporter, transfer title from the exporter to the
importer
The bank does not guarantee payment to the
exporter and there may be a slight risk of default by
the importer
Financial documents used Bill of Exchange

Documentary Collections
(URC 522)

In collections, the drawers bank is known as the Remitting Bank. (to

remit the documents)
The drawees bank is known as the Presenting Bank or Collecting Bank.
(presenting the documents to the importer)
URC 522 ICC Uniform Rules for Collections NO. 522
Documentary Collections is the collection of commercial, financial, and
transportation documents by a bank usually the presenting bank or
collecting bank in order to transfer title from the drawer to the drawee.
Documents are drawn by the drawer
Drawn on the drawee
Drawee is the party paying for the documents
The drawee in Documentary Collections can be an importer or
commercial bank
Every DC has a collections order attached to it.
Collection order is a letter of instruction in a format by the drawer to the
presenting bank as to what has to happen with the collection.
Banks cannot change instructions and they cannot make up their own
instructions; they are examiners of documents.

Documentary Credits (LCs)

Letters of Credit

In letters of credit, the exporter is called the beneficiary

The importer is called the applicant
The importers bank is called the Issuing Bank or Opening Bank
The exporters bank is called the Advising Bank or Confirming
Bank
LCs are a guarantee by a bank to pay the beneficiary if and only
if (iff) the beneficiary complies and conforms to the terms and
conditions to the letter of credit
Terms and conditions are set by the importer
The type of letter of credit is determined by the exporter
There are 4 Important dates on an LC:
Issue date
Expiry date
Last day to ship the goods
Last day to present the documents

Other payment methods

Variance payments
Type of LCs
Special types of LCs to arrange for loans or
advance payments
Variance LC/s
Non Traditional Payment Methods
Standyby LCs
EDC Financing

Role of Documents in Trade

Finance

Banks are highly responsible (extraordinarily responsible) to

examine documents.
They are examined for compliance and conformity purposes.
Banks want to make certain that the documents are drawn correctly
by the drawer.
If the documents are drawn correctly, then the bank will have no
hesitation to transfer title to the drawee.
Therefore, the commercial banks are solely responsible for the
accuracy of the documents and the accuracy of the contents in the
documents if contents do not conform with accuracy, it is called a
discrepancy.
To fix a discrepancy, one must file an amendment (to correct). If the
exporter is at fault for the discrepancies then he/she must pay for
amendment charges which could range from 40$ to 60$ per
discrepancy.

Role of documents

Banks do not correct discrepancies for documentary collections or

letters of credit; only responsible for the presentation of documents by
drawer or beneficiary.
Commercial banks are not responsible for goods, the type of goods, or
damages to the goods, etc.. As long as the documents are presented
properly the drawer/beneficiary will get paid.
From customs point of view:
Insurance Certificate: to check if importer is undervaluing shipment to
avoid taxes.
Commercial Invoice: to calculate duties and taxed based on ad-valorem
rates.
Certificate of origin: to establish origin of a product based on tariff
treatment.
Packing List: requirements of certain countries on how the goods should
be packed.
Weight Certificate: To prove the real weight of the shipment if the
shipment is based on Kg/Lbs/MT.

Role of documents
(Documentary collections)

Documents are issued after the goods leave the country.

Commercial documents
Transportation documents
Financial documents

Commercial documents:
Commercial invoice (3)
Certificate of origin (B232E-NAFTA coo.) (2)
Insurance certificate (2)
Packing list (2)
Weight certificate (2)
Cargo control document or A8A (2)
B13A Export declaration (3)
B3 Import declaration (2)

Transportation documents:
BOL Original Bill of Lading (3)
AWB Air Way Bill (3)
TWB Trucker Way Bill (3)
Financial documents:
B/E Bill of Exchange; Traders B/E & Bankers B/E (1)
Draft or Letters of credit (1)

Sight or Term

ICC Uniform Rules for Collections No. 522 (URC 522,

documentary collections).
Uniform Customs and Practices 600 (UCP 600,
governs letters of credit).

Commercial Documents

All of these documents are issued after the goods leave the
country
Commercial Invoice Official document issued by the drawer
upon the drawee, acknowledging that the goods have been
shipped by payment is outstanding
Commercial invoice is drawn in 3 original sets unless the drawee
demands for more original sets
Each commercial invoice must be signed and sealed by the
drawer Endorsing the document
The commercial invoice indicates the quantity of the goods
The amount of goods in designated currency
It also indicates the origin of the product, drawers name,
drawees name

Commercial Invoice

Uses terms such as seller/buyer

It indicates the port or place of shipment and
destination
Usually drawn two to three days after shipment
Must also mention terms of sale
Any of the documents in general are notarized,
legalized or councellorized
Used to calculate duties and taxes based on advalorem rates (on value as opposed to a specific
unit of measurement of particular products)

Commercial Documents

Certificate of origin is a bilateral document. This

means that there are two parties involved in its
endorsement.
It is a joint document by which the board of trade counter
endorses the document ( chamber of commerce)
The exporter is referred to as the principal to the
document (not the buyer/seller)
It is used to establish the origin of the product based on
tariff treatment.
NAFTA Certificate of Origin B232E Canada Customs
version.

Commercial Documents

Insurance certificates to certify the shipment up to a particular

point (depending on the INCOTERM)
It is drawn in two original sets
According to trade finance rules, a minimum of 110% of
insurance coverage must be purchased
The exporter is referred to as the principal
The exporter signs first with the insurance company counter
endorsing the certificate
Two types of insurance are specific insurance and general
insurance

Commercial Documents

Packing list is a unilateral document issued by the drawer

Its purpose is to provide evidence of how the goods are packed for
insurance purposes
There are requirements of certain countries at to how the goods should
be packed.
Weight Certificate provides a specific unit of measurement (not AdValorem)
This is used to determine the shipments legal weight
Both the Packing list and the Weight Certificate are considered to be
documents of evidence.

Financial Documentation

Bill of Exchange is an unconditional demand for payment by the drawer upon

the drawee. In lieu of payment
Drawee in documentary collections can be either the importer or a bank.
Therefore, there are two types of Bills of Exchange:
Traders B/E whereby the importer is responsible for payment to the drawer
Bankers B/E whereby payment is guaranteed by a bank; the bank avalizes the
B/E can discount in markets.
If the B/E has a clause or marked while mistakes are made, then the drawer
must re-draw the document.
In documentary collections, 3 things can happen:
Documents can be accepted by the drawee
Documents can be rejected by the drawee
Documents can be accepted by the drawee and not paid on the due date
In collections, banks cannot force payment, therefore:
The drawer (exporter) may Protest is the activity in which the drawer officially
objects through the bank for non-payment of the documentation by the drawee.