Chapter5_Trade Finance Methods.pdf

Chapter 5
TRADE FINANCE

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Trade Finance Methods

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 Accounts Receivable Financing

 An exporter that needs funds immediately
may obtain a bank loan that is secured by an
assignment of the account receivable.
 Factoring (Cross-Border Factoring)
 The accounts receivable are sold to a third
party (the factor), that then assumes all the
responsibilities and exposure associated with
collecting from the buyer.


Trade Finance Methods……contd.

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 Letters of Credit (L/C)

 These are issued by a bank on behalf of the
importer promising to pay the exporter upon
presentation of the shipping documents.

 The importer pays the issuing bank the
amount of the L/C plus associated fees.
 Commercial or import/export L/Cs are usually
irrevocable.


Trade Finance Methods……contd.

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 Letters of Credit (L/C)

The required documents typically include a
draft (sight or time), a commercial invoice,
and a bill of lading (receipt for shipment).
 Sometimes, the exporter may request that
a local bank confirm (guarantee) the L/C.

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Trade Finance Methods……contd.

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 Letters of Credit (L/C)
 Variations include
• standby L/Cs : funded only if the buyer does
not pay the seller as agreed upon
• transferable L/Cs : the first beneficiary can

transfer all or part of the original L/C to a third
party
• assignments of proceeds under an L/C : the
original beneficiary assigns the proceeds to the
end supplier


Trade Finance Methods……contd.

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 Banker’s Acceptance (BA)

 This is a time draft that is drawn on and
accepted by a bank (the importer’s bank). The
accepting bank is obliged to pay the holder of
the draft at maturity.
 If the exporter does not want to wait for
payment, it can request that the BA be sold in
the money market. Trade financing is
provided by the holder of the BA.


Trade Finance Methods……contd.

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 Banker’s Acceptance (BA)

The bank accepting the drafts charges an

all-in-rate (interest rate) that consists of the
discount rate plus the acceptance
commission.
 In general, all-in-rates are lower than bank
loan rates. They usually fall between the
rates of short-term Treasury bills and
commercial papers.

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Trade Finance Methods……contd.

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 Working Capital Financing

 Banks may provide short-term loans that
finance the working capital cycle, from the
purchase of inventory until the eventual
conversion to cash.


Trade Finance Methods……contd.
 Medium-Term

Capital

Goods

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Financing

(Forfeiting)
 The importer issues a promissory note to the
exporter to pay for its imported capital goods
over a period that generally ranges from three
to seven years.
 The exporter then sells the note, without
recourse, to a bank (the forfaiting bank).


Trade Finance Methods……contd.

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 Countertrade

 These are foreign trade transactions in which the sale
of goods to one country is linked to the purchase or
exchange of goods from that same country.
 Common countertrade types include barter,
compensation
(product
buy-back),
and
counterpurchase.
 The primary participants are governments and
multinationals.

BANK GUARANTEE
REFERENCES
 ICC Uniform Rules for Demand Guarantees
(URDG 758)

Circular stipulating the bank guarantee
(No. 07/2015/tt-NHNN)
 Website of commercial banks

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BANK GUARANTEE

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1. Concept
Bank guarantee refers to a type of credit whereby
the guarantor undertakes to act on behalf of the
obligor to fulfill their financial obligations to the
obligee in the event the obligor fails to fulfill or
insufficiently fulfill their agreed-upon obligations to
the obligee; the obligor must take on their debt
obligations and repay the guarantor.
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BANK GUARANTEE

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ISSUING BANK
(Guarantor)

APPLICANT/
PRINCIPAL

BENEFICIARY
Underlying
Transaction

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BANK GUARANTEE

Guarantee commitment: is a guarantee
document of the bank. Including:

Contract of
Guarantee

Letter of
Guarantee

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BANK GUARANTEE

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Letter of guarantee refers to the written
commitment between the guarantor and the
obligee to the guarantor's fulfilling the financial
obligation on behalf of the obligor in the event the
obligor fails to fulfill or insufficiently fulfill agreedupon obligations to the obligee.
Under the counter guarantee or the guarantee
confirmation, the letter of guarantee shall include
the written commitment of the counter-guarantee
issuing party to the guarantee, or of the
guarantee-confirmation issuing party to the obligee
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BANK GUARANTEE
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Guarantee contract refers to the written
commitment between the guarantor and the obligee
and other related parties (if applicable) to the
guarantee’s fulfilling the financial obligation on behalf

of the obligor in the event the obligor fails to fulfill or
insufficiently fulfill agreed-upon obligations to the
obligee.
Under the counter guarantee or guarantee
confirmation, the guarantee contract shall be composed
of the written committee between the counter-guarantee
issuing party and other related parties (if applicable), or
between the guarantee-confirmation issuing party and
the obligee as well as other related parties (if applicable).
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BANK GUARANTEE PROCESS

ISSUING BANK

(7)

(2)

(4)

(3)

APPLICANT/
PRINCIPAL

(1)

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(5)

BENEFICIARY

(6)


TYPES OF BANK GUARANTEE
Direct Guarantee

The guarantee issuing
bank is responsible
directly to the guaranteed
party and the guaranteed is
responsible for directly
reimbursing the guarantee
issuing bank.

Based on the method of guarantee
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Indirect Guarantee

The guarantee bank has issued a
guarantee under the direction of an

intermediary bank for the
guaranteed party based on another
guarantee called counter guarantee.
The guaranteed party does not have
to reimburse directly to the
guarantee issuing bank but the
intermediary bank is responsible for
reimbursement


TYPES OF BANK GUARANTEE

Based
on the
method
of
guarantee

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 Credit Guarantee (Credit Line/Facility Guarantee)
 Payment Guarantee ( Financial Guarantee)
 Advance Payment Guarantee (Down Payment
Guarantee)

 Bid Guarantee (Bid Bond, Tender Bond, Tender
Guarantee)

 Performance Bond (Performance Guarantee,
Delivery Guarantee)

 Warranty Guarantee (Warranty bond)
 Retention Money Bond ( Retention Money
Guarantee)

 Shipping Guarantee (Indemnity for lost B/L)
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TYPES OF GUARANTEE

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Counter guarantee: a type of bank guarantee
under which the counter-guarantee issuing
party agrees to fulfill the financial obligation to
the guarantor in the event that the guarantor is
called upon to fulfill the financial obligation on
behalf of the obligor being the customer of the
counter-guarantee issuing party; the obligor
must take on their debt obligations and repay
the counter-guarantee issuing party.

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TYPES OF GUARANTEE
COUNTER GUARANTEE

BANK A
(Counter-guarantee
issuing party)

(2)

(3)
(7)
(8)

(4) (5) (6)

(9)

APPLICANT/
PRINCIPAL

BANK B
(Guarantor)

(1)
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BENEFICIARY


TYPES OF GUARANTEE

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Guarantee confirmation: a type of bank
guarantee under which the party issuing the bank
guarantee confirmation makes a contractual
agreement with the obligee to ensure that the
guarantor would perform their obligations to the
obligee. The party issuing the bank guarantee
confirmation shall act on behalf of the guarantor to
fulfill their financial obligations in case of the
guarantor's nonperformance or insufficient
performance; the guarantor must take on their debt
obligations and repay the party issuing the bank
guarantee confirmation. Meanwhile, the obligor must
take on their debt obligations and make repayment to
the guarantor.
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TYPES OF GUARANTEE

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GUARANTEE
CONFIRMATION
BANK A
(Guarantor)

(2)

APPLICANT/
PRINCIPAL

(4)

BANK B
(Guarantee
confirming party)

(3)

(5)

(1)
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BENEFICIARY


TYPES OF GUARANTEE

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Co-guarantee: more than one bank participates in
guarantee.
Co-guarantee parties shall assume joint responsibility to
fulfill guarantee obligations unless otherwise agreed.
Where central credit institutions or foreign bank branches
are required to fulfill guarantee obligations, involved
parties shall be responsible for paying these credit
institutions or foreign bank branches a sum equivalent to
the agreed-upon co-guarantee contribution ratio.

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BANK GUARANTEE

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Question:


Differentiate types of bank guarantees?



Compare letter of credit and guarantee
commitment?
(Suggest comparative criteria: Purpose, meaning,
obligations of issuer, field of application,
Independence, Documents, amount, risk level
arising ...)

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