Ways of remitting money when trading on open account terms
disadvantages
1) a)
b) '
| a) b) a) a) |
2)
| 3) 4) |
The foreign buyer can pay Ihe exporter by
HI
Test.Fill in the missing words:
As the cheque is most likely lo be payable in Ihe buyer's
country, the exporter will need to... il Ihrough Ihe bank
ing system thus risking furlher ....... and possible default.
Sometimes the exporler may be able lo arrange for the
cheque lo be..... by his bank. Exchange Conlrol..... in Ihe
buyer's country may delay the..... of the cheque.
In mosl instances the buyer can arrange for a bank in his
country lo issue their..... on a bank in the UK in favour of
Ihe...... As Ihe draft is ...... in the UK there should be little
delay in..... paymenl. The foreign bank...... the draft will
have ensured that any..... control regulations obtaining in
the buyer's country will have been ......
When payment for exporls is lo be made by mail Iransfer,
the buyer's bank ..... a corresponded bank in the UK by
..... to pay funds lo the exporter or to the bank for
credit to his .......
173
| Unit Five Short-term Export Finance Parti |
| TEXT Read Иге text below concentrating on its contents and terminology: However skilled a company is at selling goods overseas and whatever its size, exporting can, because of delays in receiving payment, seriously deplete cash flow and to that extent reduce profitability, unless the exporter arranges special finance. An exporter often has to allow credit terms to an overseas buyer, to cover the time not only needed to transport the goods, but also the period of production, sometimes of years in the case of large-scale projects or heavy machinery exports. In addition, there can be delay between payment by an overseas buyer and the actual receipt of funds by an exporter. Types of finance. There are two types of export credit. Under supplier credit an exporter allows credit terms to an 175 |
Active Vocabulary:
deplete
allow credit with/without recourse
overdraft
overdrawing advance
face value of the bill clean bill
bill negotiation
cash against documents
charging interests collection fees
Accepting Houses Committee
bank bill . с
discount
174
-исчерпывать,
истощать
-предоставлять кредит
-с/без права обратного
требования
-овердрафт, превышение
кредитного лимита
-превышение
-1) аванс, авансирование 2) заем, ссуда
-номинал векселя
-недокументированный ве
ксель
-передача векселя
-платеж наличными
против документов
-взимание процентов
сбор за инкассирование
-Комитет акцептных домов
(Великобритания)
-банкнота, банковский
билет
-1) дисконт, учет векселей
2) процент скидки; ставка
учета
money market
sale proceeds acceptance commission
factoring
sales accounting collect debts
service charge standing of a company
— 1) денежный рынок
2) рынок краткосрочного капитала
— поступления от продажи
— акцептный комиссионный
сбор
— факторинг,
факторинговые операции
— торговая бухгалтерия
— получать деньги в
погашение долга;
инкассировать долг
— плата за услуги
— финансовое положение,
репутация компании
overseas buyer in the sales contract and then obtains finance to cover these terms from a UK bank. With buyer credit a UK bank provides finance direct to an overseas buy«r, or an approved borrower, so that an exporter can be paid immediately on shipment of the goods. If the finance is with recourse, it means that an exporter is liable for any balance of funds the buyer does not repay to the lender. If the finance is without recourse, an exporter is not responsible to a lender for any default by a buyer.
Short-term finance.The first obvious method of financing export sales is through an exporting company's existing overdraft facility with its bank. It is clearly very simple and convenient to finance all the elements of the export contract (purchasing, manufacturing, shipping and credit) by simply overdrawing within the facility and replenishing the account with payments received from an overseas buyer.
As business increases it is unlikely that an exporter can finance sales entirely from an overdraft, palricularly as borrowing in this way may be more expensive than other forms specifically designed for export credit.
Advance against bills.One form of short-term finance for the exporter is to obtain an advance of funds from a UK bank against the face value of a bill of exchange drawn by an exporter on an overseas buyer under the terms of the export t contract. The exporter sends the bill to the bank which ad- [ vances an agreed percentage of tfie value to the exporter immediately and undertakes to present it to the overseas buyer for collection. If the buyer does not pay the UK bank for the bill then the bank has recourse to the exporter for the loss.
An advance against a bill is made only when unaccompanied by arfy transport documents relating to the exported goods i.e. it is a clean bill collection. The bank charges interest for the credit period of the loan and fees for the collection operation.
176
Negotiation of bills.Obtaining an advance against bills is useful only when a limited amount of extra finance is required, the rest being covered by existing resources. If an exporter requires more finance in the short-term, an alternative method is to establish a facility for bill negotiation. The exporter's bank agrees to purchase bills (usually accompanied by the shipping documents) on presentation. The hank may even simply purchase the documents under a cash against documents collection. The bank then sends the bills for collection to the overseas buyer and reimburses itself when the buyer pays. If the buyer .defaults, the bank has recourse to the exporter, charging interest for the credit period any collection fees. A cheaper rate of interest is available to exporters holding ECGD1 insurance, and normally the exporter assigns the ECGD policy over to the bank as security.
Acceptance credits.There are various merchant banks, members of the Accepting Houses Committee, which accept a bill of exchange drawn by an exporter on any of its members. This bank bill, as it is called, can be discounted (i.e. sold for its face value less a discount charge) in the money market to one of the discount houses that specialise in this business.
The sale proceeds are credited to the exporter and when the bill matures, the bank pays it and debits the exporter's account for the amount plus an acceptance commission. Alternatively the exporter can draw another bill on the bank to be accepted and simply pay the difference between the face value of the maturing bill and the sale proceeds of the new one. A company can choose when to draw funds by gauging when there is the best discount rale in the money market, instead of being tied to overdraft rales of interest with a bank. Normally only the larger cxporler uses Ihis service.
Documentary acceptance credits.With a confirmed irrevocable letler of credit an exporter can receive finance im-
ECGD — Export Credit Guarantee Department.
177
mediately on presenting to the UK confirming bank a bill of exchange and the documents required under the terms of the credit. The bank can accept a term bill for extended periods which the exporter can then discount with any bank for cash. Any cost is charged to the exporter unless it has been arranged for the overseas buyer to bear costs.
Factoring.If export turnover is sufficiently large, an exporter may find it easier to shift the problems of collecting the payment for completed orders over to organisations that specialise in the task of debt collection and trade finance.
An exporter can sell trade debts to a factoring company, usually a subsidiary of a major clearing bank. In return the exporter receives up to 80 per cent of the face value of the debts. The factoring company handles the sales accounting and carries out the task of collecting the debts from overseas buyers. The factoring company regularly monitors sales ledgers for the exporter. When the factoring company receives payment it credits the exporter with the 20 percent balance, deducting an amount for service charges. If the overseas buyer defaults on a debt, there is no recourse to the exporter. The factoring company still pays the remaining 20 per cent, less charges, on the due date. Because of this a factoring company makes an agreement with an exporting company only after examining closely the standing of the company and the reliability of an overseas buyer, and indeed of the buyer's country.
| 178 |
A factoring company may be prepared to buy the goods destined for an overseas buyer for cash. The exporter then acts as the factor's agent, delivering the goods and collecting the proceeds. If the buyer does not know that the exporter has raised finance through a factoring house to export the goods, fit is called undisclosed factoring. The exporter still deals directly with the buyer for payment of debts.
Comprehension.Answer the following questions: 1 Why does the exporter have to arrange special finance for his exports?
2. List two types of export credit.
3. What is the difference between the supplier credit and
the buyer credit?
4. What does finance with recourse mean?
5. What is the simplest method of financing export sales?
6. What are the disadvantages of financing export sales by
an overdraft?
7. What must the exporter do to obtain an advance on funds
for his exports from his bank?
8. What does the bank do if the buyer does not pay a bill?
9. On what type/kind of bills is an advance granted?
10. What can the exporter do if he needs more finance than
just an advance against bills?
11. What does the bank do with the purchased bill?
12. Why is it a good thing for the British exporter to be a
holder of EGGD insurance? i , •
13. What does it mean to discount the bill?
14. In what case can the exporter receive finance on his ex
port sales from the bank?
15. Who bears the costs of discounting bills?
16. Which organization in the UK specializes in collecting
payment for completed orders?
17. What is the job of a factoring company?
18. Does the factoring company have recourse to the exporter
if the buyer defaults?
19. How does the factoring company secure its interests?
20. When does the exporter act as the factor's agent?
21. What is undisclosed factoring?
179
II
Comprehension. Complete the following on the basis of the text:
1. Supplier credit is a facility set up to enable.....
2. Until a bill is accepted by the buyer, the bank advance is
on ......
3. An overdraft facility is often used by.. to.......
4. To obtain advance of funds from the bank, the exporter
has to...... for........
5. Fees are...... by...... for.......
6. Interest is...... for..... of........
7. When the bank undertakes to negotiate the bill on behall
of the exporter, it ..... with recourse to the exporter in
case ......
8. If exports are covered by a ECGD guarantee.....
9. To avoid being out of funds while awaiting settlement al
maturity, the exporter can ..... to ......
| 12. If unfortunately the foreign buyer has become insolvent, the loss ..... |
| Arrange your knowledge of financial terminology by group ing the terms required under appropriate headings: 1. Advantages of the supplier's credit over the buyer's credit. 2. Names of contracts and agreements to be concluded (signed) under these forms of credit. |
| 3. Gerferal characteristics of these documents. 4. Two forms of a line of credit arrangement. 5. The main lines of the activities of the Midland Bank Group- |
| 180 |
10. Factoring is a service used by the exporter who passes
the task of..... to.......
11. Before the start of the factoring operation, the factor will
I
IV
You are given below a list of financial one-word-terms, list all terms-phrases you can associate with them: 1. Credit 2. Interest 3. Rate 4. Bond 5. Purchase 6. Leasing 8. Payment 9. Overdraft 10. Forfeit 11. Discount 12. Collection
Make sentences with these terms.
Test. Fill in the missing words: .
A conventional overdraft facility is often used by exporters
to....... transactions where credit terms extend over a.......
period and is commonly used during... and for the period
prior to...... of the goods.
It is sometimes possible for advances of an agreed percent
age to be made against the ..... value of a bill of exchange
..... by an exporter on an overseas buyer entrusted to the
bank for.......
In approved cases banks will negotiate foreign ....... on
behalf of their customers for amounts up to pre-agreed lim
its. The bank in effect.... the bill for the face amount with
recourse to the..... in the event of non-payment. When the
bill is paid the resultant proceeds are used to repay the....
made when the bill was purchased, the exporter paying..
fees and..... for the credit period.
Factoring is a service being used more and more by.....
who need, through the growing level of competition in...
trade, to extend open credit..... to foreign customers with
resulting problems such as: How much.. should be given ?
On what ...... ? What are the .... risks? How should the
exporter go about.... payment given the differences in lan
guages, law and ..... practice?
181
I
Unit Six
Short-term Export Finance
Part II
| Active Vocabulary: confirming house place an order export finance house credit assessment export house reimburse promissory note premium recourse counter claim warranty sight bill |
конфирмационный дом
(Великобритания)
размещать заказ
фирма экспортного
финансирования
оценка кредита
экспортная фирма
погашать
простой вексель, долговое
обязательство
1) премия, надбавка
2) премия по срочным сделкам
регресс, право регресса,
право оборота
встречный иск гарантия, поручительство предъявительский вексель
TEXT
Read the text below concentrating on its contents and ter-minology:
Confirming house.A confirming house is effectively an agent for an overseas buyer. The confirming house, acting for a buyer, places an order with an exporter and deals di-
rectly with the exporter to complete the contract. In this vvay there is no overseas credit risk or financial burden for the exporter, because the confirming house gives short-term credit to the overseas buyer who pays a commission for the services provided. A specialised form of confirming house is a buying house which makes purchases in the UK for overseas department stores.
Export finance house.If an exporting company sells only occasional large value capital or semi-capital goods abroad it may be better for it to use an export finance house to handle an overseas contract. An export finance house is particularly useful in coordinating finance when an overseas buyer is supplied by several companies, none of which wishes to take the major responsibility for arranging the finance for the contract. The export finance house provides cash to the exporter on shipment and credit to a buyer. It handles the credit assessment of a buyer, takes out*any necessary insurance, and if a buyer defaults there is no recourse to the exporter. The export finance house is able to take the risk of providing and managing export credit in foreign currencies, relieving its UK customer of these burdens.
Export houses.Export orders are not directly financed by export houses. They buy products from an exporter, acting either as an export merchant, i.e. buying and selling goods overseas, or as an export agent where an exporter receives payment for goods upon shipment and the export agent provides credit to the overseas buyer, promotes the goods abroad, holds stocks in the UK, and even acts as an export sales department.
Short-term ECGD-backed finance.In addition to those sources of short-term finance already mentioned, the UK government's Export Credits Guarantee Department (ECGD) guarantees finance for exports for periods normally UP to two years.
ECGD does not itself credit to the exporter because it is an insurance agency. But it provides a guarantee to the
183
exporter's bank to reimburse it if any overseas buyer defaults on payment. With this guarantee the bank can finance the exporter's business at preferential rates of interest.
There are two ECGD bank guarantees for short-term export finance: one covering business where the method of payments is bills of exchange or promissory notes (the Bills or Notes Scheme); and the other for business transacted on open account terms (the Open Account Scheme). The exporter decides how much finance is likely to be required at any one time and applies to ECGD for a guarantee to be given to a bank for this amount. When ECGD has indicated its willingness to issue a guarantee for this amount, the bank issues to the exporter a facility letter which outlines the terms and conditions under which finance is available. The facility is on a "revolving credit" basis and is renewable annually. ECGD charges the exporter a premium for the bank guarantee.
Before agreeing to provide a bank guarantee, ECGD requires an exporter to sign a recourse agreement which ensures that ECGD can turn to the exporter for payment if it has to pay sums to the exporter's bank under the guarantee The exporter then makes a counter claim on ECGD under the comprehensive short-term insurance already obtained
Bills or notes scheme.The bills or notes guarantee covers finance for contracts with credit terms of less than two years. Normally an exporter must have held an ECGD comprehensive insurance policy for an acceptable period, which could be as much as 12 months.
The exporter presents a bill of exchange to the bank together with documentary evidence that the goods have been exported from the UK and a warranty which confirms that the exporter has complied with the basic ECGD insurance cover. The bank then makes an advance of 100 per cent of the farfe value of the bill or note, excluding any interest element.
Until the bill is accepted by the overseas buyer, the bank has recourse to the exporter. After it is accepted the bank
has recourse to ECGD and not to the exporter. Sight hills are always with recourse while promissory notes are not. The bank deducts a small fee per item at the time of the advance, takes its normal commission for collecting the bills or notes, and charges interest at a margin above its base rate on a day basis. On receiving the proceeds of the collection the bank reimburses itself for the advance made to the exporter. Open account scheme.The bank advances funds to the exporter up to the total value of the invoice against a promissory note issued in favour of the bank, assuming the note docs not go over a credit limit agreed when the facility was established. If the overseas buyer defaults and the exporter cannot honour the promissory note, the bank claims from ECGD, which in turn has recourse to the exporter. Funds can be advanced for up to six months from date of shipment to the overseas buyer.
I Comprehension.Answer the following questions:
1. What part does a confirming house play in export/import
trade?
2. In what sort of transactions arc the services of an export
finance house particularly useful?
3. List the services provided by an export finance house in
handling an overseas contract.
4. What two functions do export houses perform?
5. How docs an export merchant differ from an export agent?
6. What does ECGD provide to British exporters?
7. Why doesn't ECGD provide credit to the exporter?
8. What two types of bank guarantees does ECGD issue?
9. Why docs ECGD require an exporter to sign a recourse
agreement?
10. When can an exporter apply for the bills and notes guar
antee?
 |
| 185 |
184
11. What procedure should the exporter follow in this case?
12. What interest does the bank charge for making an ad
vance?
13. In what case does the bank advance funds to the exporter
up to the total value of the invoice?
14. Who pays for goods if the overseas buyer defaults?
II
Comprehension.Complete the following on the basis of the information given in the text:
1. By using the services of a confirming house the exporter
avoids overseas credit risk or financial burden because it
is..... which gives...... to.......
2. The export finance house is able to relieve its UK cus
tomer of the risk of.....
3. The job of an export agent is firstly to ..... , secondly to
.... , thirdly to...... and to........
4. As ECGD is an insurance company, it doesn't.... but it
5. A facility letter is issued by... after ECGD has agreed to
6. A facility letter states all the......
7. The exporter pays ECGD .... for issuing.......
8. In case of bills or notes guarantees the bank can turn to the
exporter for payment until ......
9. After the bill is accepted by the overseas buyer the bank
can turn payment only to..... which........
10. When the bank makes an advance it charges ..... and
then it ..... and ......
•11. If the overseas buyer defaults, the bank. which.......
Ill
The two texts on short term export finance provided you with a set of specialized terms. It is time now to arrange them in groups describing definite financial operations. You '.
186
wiU see that terms of more general character often have their synonym (e.g. profit, gain, proceeds) while the very specific ones (e.g. types of bills or export finance houses) have, as a rule, only one name. This results in a great precision of information passed, and you can never be too precise where money is concerned.
By filling in the table below arrange the. knowledge on the terminology of finance you have already acquired:
| Terms related |
| The main term |
Its synonyms (if any)
1. Accept
(noun and verb)
2. Advance
(noun and verb)
3. Bill
4. Cash
5. Collection
6. Discount
(noun and verb)
7. House
8. Overdraft
9. Premium
10. Proceeds
Having filled in the, table above, use the terms you have just listed in sentences of your own.
IV
Complete the following:
1. The exporter applies to..... for.......
2. When the exporter has filled in..... he........
4. The UK bank sends......
5. Simultaneously ECGD ... and informs ......
187
6. When the UK bank has received ... it........
7. When the exporter receives the ECGD offer he.....
8. The exporter signs a ......
9. ECGD extends a .....
10. When the goods .... the exporter.......
11. On receipt of shipping documents, the bank....
12. The bank forwards......
13. When the bills are presented to the foreign buyer, he
Unit Seven
Medium Term Export Finance
Parti
Test. Fill in the missing words:
There are many companies who wish to export and are
asked to...... credit terms to the prospective buyer who do
not wish to be concerned with the...... and administrative
burdens involved and this function can be readily under
taken by the export ...... house. The simple effect of such
"handing over" of the administration can overcome. flow
problems as the export finance ..... is able to arrange for
cash...... to be made upon .......
An..... finance house is well suited to undertake business
involving more than one UK supplier, particularly when one
..... does not wish to be responsible for committing its own
..... for the benefit of sub-contractors or partners in a joint
...... The export finance house in these circumstances can
...... finance in the UK in relation to the customer's require
ments.
Active Vocabulary:
leasing hire purchase instalment merchant bank down payment
equity
fixed-rate —
bond —
floating-rate note —
interest rate —
trustee —
forfeiting service —
aval —
commitment fee —
eligible —
лизинг
покупка с оплатой в рассрочку взнос при уплате частями торговый банк
первоначальный взнос; первый взнос при покупке
1) маржа
2) доля акционера
3) обыкновенная акция
с фиксированной процентной
ставкой
1) облигация
2)закладная
3) долговая расписка
4) ручательство, гарантия
краткосрочное долговое
обязательство с плавающей
процентной ставкой
процентная ставка
доверитель, опекун
финансирование торговли путем
учета векселей без права регресса
авал (поручительская надпись на
векселе)
комиссионные за неиспользованную часть кредита приемлемый
189
TEXT
Read the text below concentrating on its contents and terminology:
Medium-terra finance.An exporting company may find with some contracts that it needs credit for periods longer than two years, which is normally the limit for financing exports by methods so far described. Where credit is required for more than two years, there are other options, the most important of which are described below.
Leasing.Where there is a large item of capital equipment involved, an exporter may find it more beneficial to sell the product to a leasing company which then provides it to the overseas buyer on a lease agreement. The exporter receives immediate payment from the leasing company without further recourse.
Instalment finance.An exporting company can also finance its export order by arranging hire purchase for an overseas buyer, either through a finance house in the buyer's country or through a UK finance company purchasing the goods from the exporter outright and receiving instalments from the buyer through an overseas finance company.
Merchant banks.Merchant banks have traditionally specialised in arranging medium and long-term export finance. In additon by using their associates and other close banking connections abroad, they are able to advise on and arrange finance for the exports of other industrialised countries under their own national schemes.
Merchant banks can also arrange Eurocurrency loans of all types. Eurocurrency loans are often required to cover the front-enfl finance, i.e. normally the financing of down payments by buyers for large projects abroad. For certain projects it is sometimes possible to arrange other types of finance e.g. equity participations, co-financing loans from
international development agencies or aid funds. In suitable cases arrangements can be made for medium-term, fixed-rate finance in the Eurobond markets by way of private placements or public offerings of bonds to finance major overseas projects. Alternatively it is sometimes possible to issue floating-rate notes which provide medium-term finance at floating interest rates but subject to a minimum fixed rate.
All or some of these elements can be combined to give a complete package which can provide up to 100 per cent of the financing of acceptable projects.
Security for the finance normally involves government, bank or other first class guarantees. However, in appropriate cases it is possible to secure the loan and to service the debt from future project income. A merchant bank can acl as agent or trustee for all the lenders in a particular package. In this way it becomes the sole point of contact between borrowers and lenders throughout the life of the credit facilities provided.
Forfeiting.Some UK banks oiler a forfeiting service to companies exporting capital goods and requiring credit for periods up to seven years. With forfeiting, the bank purchases from an exporter bills of exchange or promissory notes signed by an overseas buyer at a certain discount.
If a buyer has arranged an aval, i.e. unconditional guarantee for each bill or note from an internationally recognised major bank, then the exporter can receive finance from the UK bank at finer rates, without having to obtain ECGD-backed sources of finance.
Medium-term ECGD-backed finance.ECGD provides a specific bank guarantee to a bank to finance export credit terms of two years or more. The finance is covered by bills of exchange drawn on the overseas buyer or by promissory notes in favour of the exporter. To obtain a bank guarantee, an exporter must have ECGD insurance, usually the supplemental extended terms or specific cover.
190
191
Once bills have been accepted on behalf of an overseas buyer and confirmed as valid by a bank abroad there is no recourse to the exporter. Evidence of shipment and an ECGD warranty are required in the same way as for short-term guarantees.
Contracts with a minimum value of Jl million can be financed in foreign currency, usually US dollars or Deutsche-marks. Interest is payable at a preferential rate, depending on the length of credit and the particular country of the overseas buyer. The UK bank charges a commitment fee. Contracts with buyers in EEC countries are not eligible.
An exporter must, at the earliest possible moment in contract negotiations, check that ECGD is willing to provide insurance cover and a specific bank guarantee, and at the same time check with the UK bank for its agreement in principle to provide the finance, given ECGD backing.
Preshipment finance is also available on contracts of over Jl million, subject to certain limitations imposed by ECGD.
Comprehension .Answer the following questions:
1. List finance facilities when export credit is required for
more than two years.
2. When is it advisable to sell a product to a leasing company
rather than to an overseas buyer? Why?
3. How is payment made when the goods are exported on a
hire purchase basis?
4. What are the advantages of selling goods on hire purchase
through a finance house:
a) for .the exporter?
b) for the overseas buyer?
5. What part do merchant banks play traditionally in ex
port/import trade?
6. In what cases are Eurocurrency loans usually required?
7. List different types of credit facilities available for certain
projects.
8. To what companies and in what contracts do some UK
banks offer a forfaiting service?
9. How does a forfaiting service operate?
10. What is an aval?
11. What are the advantages of an aval arrangement for the
exporter?
12. What does ECGD provide for British exporters?
13. Do Russian exporters enjoy similar facilities? If yes, what
bank are they provided by?
14. What is the export finance provided by ECGD covered
by?
15. How does a bank guarantee protect the exporter?
16. What export contracts can be financed in foreign cur
rency?
17. What does a preferential rate in interest payment de
pend on?
18. What must the British exporter do when negotiating an
export order?
Comprehension. Complete the, following on the basis of the information given in the lext:
1. Selling to a leasing company is best suited when....
2. When the goods are sold on hire purchase through a fi
nance house, the exporter ...... and the overseas buyer
3. Medium and long-term export finance may be arranged
through .......
4. By private placements or public offerings of bonds in the
Eurobond markets, money..... to.......
192
193
5. Medium and long-term export credits are usually secured
by......
6. Sometimes future project income can be taken as...
7. Under an aval arrangement, the exporter.......
8. Under an aval arrangement, the exporter doesn't need to
have ......
9. Bills of exchange or promissory notes cover. provided
by...... to.......
10. When the bills have been accepted by an overseas buyer
and confirmed by his bank....
11. It is risky for the British exporter to enter export nego-
tiations without ......
3. They help to avoid difficulties with domestic leasing.
4. Paying in partial payments.
5. Financing of down-payments by buyers for large projects
abroad .
6. Opposite of "fixed rate".
7. A firm or individual to whom something is entrusted.
8. Penalty or fine for neglect or causing losses.
9. An unconditional guarantee for a bill.
10. Bills recognized by the bank as good.
1 1 . Finance cannot come back to the exporter. 12. Money paid for bank operations.
 |
Ill
The text you have just read introduces several terms which are either already known to you (e.g. hire-purchase, instalment, interest rate etc.) and listed in the Active-Vocabulary section to remind you, or terms meaning the same in Russian (e.g. leasing). Hence, there should be no difficulties in understanding its contents.
On the other hand, however, there are some points to be discussed: first the meaning of financewhich may be both a noun or a verb. Then the term optionmeaning here choice or possibility. Equityparticipation means here shareholdingNotice also combination with "Euro"(e.g. Eurobond, Eurocurrencies, Euromarket). Remember also that similarly to a cheque drawn ona firm or an individual, you can also draw a bill of exchangeon the buyer.
Give the proper financial term for their following descriptive definitions listed below:
r
1. Payment which is not settled immediately.
2. Leases made by a company to an overseas buyer.
194
Complete the following:
1 . At the earliest possible moment in export contract negotiations the exporter applies to ..... and ..... to make sure that the bank ......
2. When ECGD agrees to ..... and the contract ..... the ex-
porter ......
3. When the exporter's application has ..... ECGD ......
4. On receipt and acceptance of the bank guarantee, the ex
porter ..... and .......
5. After signing a recourse agreement with ..... the ECGD
..... which in turn ......
6. When the goods have ..... and the shipping documents
with ECGD insurance warranty ..... to ..... the UK bank
7. Once the documents and bills sent by the UK bank have
.... by finance ......
195
Test. Fill in the missing words:
Leasing
This form of...... has grown considerably in the last de
cade and offers the use of...... without the investment of
capital or other liquid......
The advantages of leasing locally in the country of......
are:
1. The lessee is not exposed to currency.....
2. The lessee obtains..... for 100 per cent of the delivered
costs.
3. The lessee may negotiate rental ... over a period which
matches the useful life of the.....
Midland Montagu Leasing Limited, a..... of the Midland
Bank Group, can assist exporters of.... goods in introduc
ing them and their .._ to major leasing in most parts
of the world. In certain countries where the Group has es
tablished a....... operations, first hand assistance can be
given to the...... in his negotiations with the overseas buyer
in the provision of..... facilities.
Unit Eight
Medium Term Export Finance
Part II
The text to follow is not preceded by a list of new words, as all its terminology should be already known to you. By reviewing the vocabulary of previous units check your understanding of the basic financial terminology.
TEXT
Read the text below concentrating on its contents and terminology:
Buyer credit.For the larger or more complex contracts it is often the best course for the finance to be provided in the form of a loan direct to an approved borrower who is not necessarily the buyer in the country concerned, rather than
to an exporter.
Single project finance.Buyer credit financing facilities are provided with the support of a guarantee from ECGD which enables I lie bank to advance a large proportion of the finance at fixed and preferential rates of interest. It is available on contracts for capital goods and related services with a value greater than £1 million, provided that the buyer is not an EEC country. As a general rule, the facility covers 80 per cent of the UK content but a proportion of local costs also can sometimes be included. The balance of the financing is expected to be provided by the buyer and this can be very often arranged by a bank as a separate loan on commercial terms.
197
The interest rate for financing guaranteed by ECGD is usually not only lower than the ruling commercial rate but is also fixed for the entire period of the loan which is particularly important for larger projects.
As well as the supply contract between an exporter and an overseas buyer, a buyer credit involves three separate agreements: a loan agreement between the lending bank and the overseas buyer or borrower; a guarantee agreement between ECGD and the lending bank; and a premium agreement between ECGD and the exporter.
A loan agreement is concluded between the bank and an ECGD-approved overseas borrower. This provides for funds to be paid to an exporter on presentation of documentation specified in the loan agreement (which confirms that the sum claimed is due for payment).
If the supply contract allows, it is possible under the loan agreement for funds to be paid to an exporter before delivery or at different stages of a project's progress and execution.
The loan agreement also slates the conditions to be met before finance is made available and sets out arrangements for payment of interest and repayment of principal. It also includes provisions for default under the agreement; any arbitration and termination of the supply contract; and, where appropriate, insurance. All bank commissions and fees arising from the agreement are payble by the overseas tor-rower.
It is essential that an exporter approaches ECGD and a bank at an early stage of negotiations with an overseas buyer so that they can indicate the conditions for any support, including the credit terms and the interest rale.
How buyer credit works is illustraled on Ihe next pages.
Lines of credit.Buyer credit facilities arc usually provided in support of a single export supply contracl, bul il is also
possible to extend credit to an overseas buyer by providing a single loan facility to cover a number of separate supply contracts. This is the line of credil arrangemenl. A line of credil can take two dislincl forms.
A general purpose line of credit — covering a number of differenl requirements of capital goods not related to a specific project — is usually negotiated by a UK bank with a bank or other financial inslilution in the overseas country concerned. The need for a line of credil is determined after prior discussion between interested parties in both countries. The banks concerned Ihen publicise Ihe line of credil lo polenlial exporters.
A project line of credit — by definilion confirmed lo a specific projecl — is often established by the main exporter or conlraclor or by an overseas buyer.
The finance available under lines of credil is normally 80 lo 85 per cent of the contracl value. 10 per cent (sometimes less) of each contracl price is usually paid direclly by an overseas buyer wilhin 30 days of signalure of Ihe conlracl and further direcl paymenls made on a pro rala basis according lo Ihe value of each shipment lo Ihe buyer.
The lenglh of credil will vary according lo Ihe conlracl value allhough general purpose lines of credil usually range between two and five years. ECGD slipulales a minimum contract value which can be as low as J10,000.
Midland Bank Group.Midland Bank, as a leading international bank, offers a full financing service lo UK and overseas exporters. Overdraft facililies for exporting, advances againsl and negolialions of bills and documenlary credil operations are readily available. Initial conlacl should be made wilh Midland's local bank branch or one of Ihe International Division regional branches.
Midland Bank Group International Trade Services provides trade finance to UK and overseas exporters, including
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the negotiation of credit insurance where necessary. Its UK export finance pouse subsidiary is Midland International Trade Services I(UK) Ltd.
Griffin Factors, part of Midland's Forward Trust Group, is a major UK export factoring company. Griffin is a member of Factors Chain International which links factoring companies in major trading nations, providing information and services for Griffin clients in several overseas markets.
Samuel Montagu and Co., Midland's international merchant bank, provides medium and long-term finance for exports, including Eurocurrency loans and bond issues, and equity and joint venture participations. Samuel Montagu is a member of the Accepting Houses Commit lee and conducts regular acceplancc credits business.
Forward Trust Group can assist UK exporters of capital goods by arranging leasing operations through major leasing companies in many parts of the world. Through its membership of two internalional leasing associalions, Ebiclease and Leaseclub, Forward Trust is in contacl wilh major leasing companies to enable exporters to obtain prompt service and accurate information on the conditions of leasing for their overseas buyers.
Forward Trust has a growing instalment finance business with various major trading nations. Through its connections with EXFINTER (Export Finance International) it provides instalment finance of various kinds in several European countries. Forward Troust Group also coordinates all the factoring, leasing and instalment finance aclivilies of Midland Bank Group.
Whatever the financial requirements of UK exporters, the various associated companies of Midland Bank Group can meet them, whether for a short or longer credit period, whether an exporter or a buyer receives it; and in whatever form it is needed.
I Comprehension.Answer the following questions:
1. What is often the best way of financing large and complex
export contracts?
2. What contracls are buyer credit financing facilities usu
ally available for?
3. What percentage of the contract value does the facility
usually cover?
4. Who is expected to balance the financing and how can Ihis
be arranged?
5. Whal preferential treatment-is provided for large single
projects which financing is guaranteed by ECGD?
6. List three separate agreements and their participants in
volved in a buyer credit.
7. Who pays all bank commissions and fees arising from the
agreement?
8. Whal Iwo kinds of credit facililies are available for an over-
seas buyer? Whal does the choice depend on?
9. Who is Ihe need for a general purpose line of credil deter
mined by?
10. How does a general purpose line of credil differ from a
project line of credil?
11. Whal percenlagc of Ihe conlract value docs the finance
available under lines of credil usually cover? And how is the resl of Ihe conlracl value normally balanced?
12. Lisl financing facilities offered to UK and overseas ex
porters by leading international banks.
13. List Ihe Midland Bank Internalional Divisions and Ihe
financing services offered by each of Ihem.
200
201
II
Comprehension. Complete the following on the basis of the information given in the text:
1. Under the supply contract between an exporter and an
overseas buyer, a loan agreement is .... between ......
2. When the exporter presents documentation specified in
the loan agreement, he ......
3. The conditions to be met by the exporter before finance is
made available for..... him are........
4. The loan agreement also includes provisions for firstly
..... secondly .... thirdly
5. Ал overseas buyer can be provided with. in support of
.... or with ...... to cover.......
6. A number of different requirements of capital goods not
related to a specific project can be financed by....
7. The general purpose lines of credit usually provides fi
nance for the period of.. with a minimum contract value
of......
8. To negotiate credit insurance UK and overseas exporters
can turn to....... which also provides......
9. If export turnover is sufficiently large, an exporter can
shift the problems of collecting the payment for completed
orders to an ..... for example: ......
10. If Eurocurrency loans for the financing of down payments
by buyers for large projects abroad are required, appli
cations should be.... to one of...... for example: ......
11. An exporter of a large item of capital equipment can find
the services of a ..... beneficial in obtaining ..... and
.... on the conditions of........ In this case he can be
assfssted by .....
12. Midland Bank Forward Trust Group is a member of two
III
Test. Fill in the missing words:
Lines of credit are covered by ECGD Buyer Credit Guar
antees. They allow UK banks to make... available at pref
erential ..... to overseas borrowers to..... the purchase of
a wide range of....... goods and services from various UK
..... with contract values sometimes as low as ....... being
covered. A general purpose line of credit can be used for a
..... of types of contract with various..... in the country of
import. A project line of credit is established for a..... project
but perhaps involving many different .....
Under the line of...... arrangement the exporter receives
payment...... delivery of goods or...... of services and has
in effect a cash......
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202
| Unit Nine Foreign Currency for Exports |
| TEXT Read the text below concentrating on its contents and terminology: It is becoming more popular for exporters to accept payment for their orders in the currency used by their overseas buyers. There are several reasons for this. Some goods are traded internationally in one particular currency, e.g. oil sales in dollars. A buyer may traditionally prefer to price a contract in a particular currency, e.g. Latin American importers usually wish to be invoiced in dollars. Buyers are aware oflhe fluctuating nature of rates of exchange for major trading currencies and may prescribe contracts priced in a currency that they expect to depreciate before final payment. By quoting in this currency, an exporter may 1ю able to gain |
Active Vocabulary:
convertible
foreign exchange market
forward exchange market
forward rate
spot rate at a premium
at a discount commission fee
— конвертируемый
— внешний валютный рынок
— форвардный валютный
рынок
— курс по срочной сделке,
форвардный курс
— курс но кассовым сделкам
— с премией; выше номинала;
выше паритета
— со скидкой, ниже номинала
— комиссионный сбор
an advantage over competitors unwilling to do likewise. If an exporter uses credit finance, the cost of borrowing may be cheaper in a foreign currency than in sterling.
However, an exporter must consider carefully the consequences of any invoicing contract in a buyer's currency. Payment of a foreign currency leaves an exporter open to an exchange risk, e.g. an exporter may not receive full domestic currency value for an order if a buyer's currency has depreciated during the contract period. Moreover, it is unwise to accept payment in a currency that is not freely convertible on the foreign exchange market. The exporter may end up with blocked accounts or with funds saleable only at a considerable discount.
Forward exchange market. An exporter can protect against any loss caused by fluctuating currencies during the sales contract period by taking out a forward exchange contract with a UK bank.
The exporter, invoicing a buyer in a foreign currency for payment at an agreed future date, sells those expected receipts to a bank in advance (i.e. forward) of the due dale of payment. The bank agrees to buy at a predetermined forward rale of exchange which varies according to the time of future delivery, e.g. one, three or six months, or even longer. No money is exchanged at the time the forward contract is made, bul under its terms the exporter is guaranteed a certain amount of domestic currency in place of Ihe foreign currency sales proceeds, whatever fluctuations in the exchange-rale may take place between invoicing and payment by the buyer.
The forward rale varies from the spot rale, i.e. Ihe rate the bank is prepared to pay for foreign currency at any moment of lime. The forward rale for selling Ihe foreign currency may be al a premium, i.e. il exchanges for more domestic currency lhan Ihe spol rale, or il may be al a discount if it exchanges for less. The difference between spol and forward rales is determined by market forces — the most impor-
204
205
tant of which is the difference in the prevailing interest rates being paid by banks f</r fixed deposits of the two currencies concerned.
A fixed forward contract binds an exporter to delivering the required foreign currency to the bank on the date of maturity of the exchange contract. If the buyer defaults on payment or government controls are imposed on the currency payment, the exporter must still deliver the required foreign currency amount. The exporter must purchase the required amount of currency at the spot rate to close the forward contract. This could be expensive, since the rate of exchange used will be that applicable at the lime of the spot purchase. However, if the delivery of the currency is delayed beyond the maturity date then the forward exchange contract can be extended — but possibly at some extra cost, depending on the forward rate for this additional period.
An exporter may still use forward exchange even when the date of payment by a buyer is in doubt, by entering into an option contract. Under this contract the exporter delivers the required amount of currency at a fixed rate at any chosen time between two agreed dates.
Foreign currency borrowing.It is increasingly common for many exporters to raise finance in foreign currency. An exporter can eliminate exchange risk by taking a loan in the same currency as that to be paid by an overseas buyer, so that fluctuations in the exchange rate cannot affect the exporter's expected receipts from the buyer. Moreover, borrowing in a foreign currency may be cheaper than borrowing in sterling, depending on the relative interest rates prevailing.
Bills drawn in a foreign currency can usually be negotiated by a UK bank in a similar way to sterling bills. Foreign currency loans can help the exporter develop international business, whether for capital expenditure at home, overseas acquisition or for export credit, including front-end finance.
206
Various types of Eurocurrency loans are available to finance export business. They include fixed-rale loans where borrowing costs are predetermined, or floating-rate loans where Ihe rale varies periodically according lo market rates. As menlioned previously ECGD can provide guarantees for foreign currency export contracls and large projects.
Currency accounts.If an exporter has a continual flow of international business it may be preferable to open accounts in the currencies of the sales proceeds, instead of converling all of them into domestic currency.
The various balances can then be used lo meel any expenses incurred in those currencies, while reducing commission fees incurred from dealings in the foreign exchange market.
I Comprehension.Answer Ihe following questions:
1. Why is it becoming more popular for exporters to accept
payment for their orders in the currency used by their
foreign buyers? List all Ihe five reasons.
2. What risk does any invoicing contract in a buyer's cur
rency involve?
3. Whal protects an exporter againsl any loss caused by fluc-
tuating currencies?
4. What is the exporter guaranteed under a forward ex
change contract?
5. What is the spot rale?
6. What is the difference between spot and forward rates
delermined by?
7. Whal is an exporter obliged lo do under a fixed forward
contract?
8. In what cases would entering into an oplion conlracl be
justified?
207
 |
9. Why is raising finance in foreign currency becoming popu-
lar for many exporters?
10. What types of Eurocurrency loans are available to fi
nance export trade?
11. When is it advisable for the exporter to open a foreign
currency account? Why?
II
Comprehension.Complete the following on the basis of the information given in the text:
1. Some goods traded internationally are traditionally.....
2. The fluctuating nature of the rates of exchange of major
trading currencies involves some .... both for ..... and
3. If the contract currency depreciates before final payment,
the buyer .......
4. If the contract currency is upvalued before final payment,
the buyer is bound to.......
5. Another reason for concluding export contracts in other
currencies than in sterling is that ......
6. To price a contract in a currency that is not freely convert-
ible on the foreign exchange markets is ._ because the
accounts may.... and the funds.......
7. The forward rate for selling the foreign currency is at a
premium if the bank......
8. The forward rate for selling the foreign currency is at a
discount if the bank......
9. Under a fixed forward contract the exporter must deliver
the required foreign currency to the bank on maturity of
the exchange contract even if the buyer should.....
10. There is no difference in negotiating by banks bills..
and those .....
11. Underlloating-rate loans borrowing costs.... according
to ......
Ill
Study the examples of forward exchange, contracts and comment on the exporters gain and loss.
EXAMPLE OF FORWARD EXCHANGE CONTRACTS WHERE THE EXPORTER IS EARNING DUTCH CURRENCY EXPECTED IN THREE MONTHS TIME
a) Dutch guilders
Guilders 10,000 to be received
| 5.00 |
Spot rale of exchange (bank's buying rale)
Premium for 3 months forward (fixed) 2c
| 0.02 |
deduct from rate
| 4.98 £2,000.00 £2,008.03 8.03 |
Forward rate to be used
Guilders 10,000 a 5.00
Guilders 10,000 a 4.98
Exporter's gain
(equal to 1.6 per cent per annum)
b) Dutch guilders
Guilders 10,000 to be received
| 5.00 0.01 |
Spot rate of exchange (bank's buying rale)
Discount for 3 months forward Ic - add to rale
| 5.01 £2,000.00 £1,996.01 £3.99 |
Forward rate to be used Guilders 10,000 a 5.00 Guilders 10,000 a 5.01 Exporter's loss (equal to 0.80 per cent per annum)
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209
EXAMPLES OF FORWARD EXCHANGE CONTRACT WHERE A US EXPORTER IS EARNING GERMAN CURRENCY EXPECTED IN 3 MONTHS TIME
A. Deutschemarks al a premium
10,000 Deutschemarks to be received.........................
Spot rateof exchange (i.e. bank's buying rate) to$= 2.50
Premium for 3 months forward (fixed)
bu I deduct 5pf from rale........................................... = 0.05
Forward rate to be used............................................................... 2.45
Ueutschemarksl(),00()a2.50....................................... = $4000.00
DculschemarkslO,OOOa2.45...................................... = $4081.63
Exporter's gain (equal to 8.16 per cent per annum) = $81.63
B. Deutschemarks al a discount
Deutschemarks 10,000 to be received....................
Spot rate of exchange (i.e. bank's buying rate)
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