International Business Chapter 18 How Documentary Credit Created And What Are Its Advantages Exporters And Importers

Chapter 18

Financing International Trade

QUESTIONS

1. What is the fundamental financing problem in international trade?

Answer: When goods are shipped internationally, it takes time to ship them, and someone

must own the goods, which requires financing, during their transit between countries. The

2. What is a bill of lading? Explain the difference between a straight bill of lading and an

order bill of lading.

Answer: A bill of lading is a contract issued to an exporter of goods by the shipping company

(also called a common carrier) that will transport the goods to their destination. The bill of

lading serves several purposes, but most importantly, it documents that the exporter’s goods

have been received by the carrier.

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3. What is the difference between a clean bill of lading and a foul bill of lading?

4. What are the purposes of a commercial invoice and a packing list?

5. What do the INCOTERM acronyms FOB, FAS, CFR, and CIF mean?

6. How can an exporter insure against the loss of value of goods while they are being

shipped internationally?

Answer: Merchandise that is shipped internationally is invariably insured. The insurance

documents must be signed by an authorized representative of the insurance company, its

7. Why might a country require an exporter to acquire a consular invoice in order to clear

the customs of an importing country?

8. Why would a certificate of analysis be important for shipping goods internationally?

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13. What is meant by a document discrepancy? How might one arise? How can it be

resolved?

14. How is a documentary credit created, and what are its advantages to exporters and

importers?

Answer: Documentary credits (D/Cs) are designed to solve the problems caused by the fact

that importers and exporters want to pay and be paid at different times. Documentary credits

also provide a way for exporters to finance the production of their goods. With a

documentary credit, at least one commercial bank stands between the importer and the

exporter. The exporter must assess the credit risk of this international bank, not the credit risk

of the importer. Because the involvement of commercial banks in the transaction is

extensive, using a documentary credit is the most expensive of the methods of payment.

The steps in the creation of a documentary credit are the following:

Documentary credits offer a number of advantages to exporters:

20. What is forfaiting? How does it work? Why did it arise?

Answer: In limited-recourse financing, the financial intermediary purchases the promissory

notes of the importer from the exporter at a discount. The term forfaiting is often used

interchangeably with the term note purchase to describe this financing technique. The

21. What is export factoring? What services does a factor perform for an exporter?

Answer: A technique for financing exports that is closely related to forfaiting is export

factoring. An export factor is a company that performs credit risk investigations and collects

22. What are the differences between receiving payment on a collection basis, on an

average collection basis, and on a maturity basis?

Answer: Factors pay exporters in a variety of ways. One is on a collection basis. Under this

arrangement, the exporter gets paid when the factor receives funds from the importer.

23. How does an export–import bank work? Who ultimately pays for the services of an

export–import bank?

Answer: Export-import banks, like the Export–Import Bank of the United States, are usually

independent government corporations involved in financing and facilitating of the exports of

the country. Export-import banks try not to compete with private-sector lenders. Rather, they

26. How would a clearing arrangement work between the Ukraine and Lithuania, whereby

the Ukraine exports grain and Lithuania exports shoes?

27. There are major natural resource deposits in the People’s Republic of China (PRC).

How might a buyback arrangement work in which the PRC purchases earthmoving

equipment from the Japanese firm Komatsu?

28. The Indonesian government is concerned that it may contribute to the country’s

balance-of-trade deficit if it follows through with plans to import a large order of trucks

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from Germany that will be used to develop Indonesian timber resources. How might the

Indonesian government use a counterpurchase to its advantage?

29. Web Question: Go to the Trade Finance magazine Web site at

www.tradefinancemagazine.com and report on the latest innovations in trade finance.

30. Web Question: Visit the following Web site: <URL> https://group.atradius.com/

</URL>. What is the business model for Atradius? How do they provide value to

their clients?