International Trade Finsaancing – Key Concepts and Instruments

These flashcards cover definitions, processes, types, objectives and benefits of key international trade financing instruments: Letters of Credit, Export Credit Refinancing, Shipping Guarantees, Trust Receipts, and Bankers’ Acceptances.

What is the primary objective of international trade financing?

To reduce risks in cross-border transactions such as payment default, currency fluctuations, and political instability.

Name five common forms of international trade financing mentioned in the lecture.

Letter of Credit, Export Credit Refinancing, Shipping Guarantee, Trust Receipts, Bankers’ Acceptance.

What is a Letter of Credit (LC)?

A bank’s written guarantee that a seller will receive payment if the terms specified in the LC are met.

Who is the ‘issuing bank’ in an LC transaction?

The buyer’s bank that issues the LC on the buyer’s behalf.

Which bank verifies the authenticity of an LC for the exporter?

The advising (or confirming) bank—typically the seller’s bank.

At what point are funds released to the seller under an LC?

After the seller presents compliant documents proving shipment/performance that meet LC conditions.

Give three benefits of using a Letter of Credit.

Reduced risk of non-payment, secure payment mechanism, enhanced trust/credibility between trading partners.

Why are Letters of Credit considered internationally recognized?

They follow globally accepted rules (e.g., UCP 600) and are trusted worldwide by banks and traders.

What is the main difference between a revocable and an irrevocable LC?

A revocable LC can be changed or cancelled without the seller’s consent; an irrevocable LC cannot be altered without agreement of all parties.

When is a confirmed LC generally used?

When the issuing bank is in a country with political/economic instability or questionable creditworthiness.

Which LC type can be reused multiple times within a set amount and period?

Revolving Letter of Credit.

What does a standby Letter of Credit back up?

Another payment obligation—often serves as a guarantee if the buyer fails to perform under a contract or loan.

Explain a transferable LC.

An LC that allows the original beneficiary to transfer part or all of the credit to other beneficiaries (e.g., suppliers).

What is a back-to-back LC arrangement?

An intermediary uses a ‘master’ LC as collateral to obtain a secondary LC to pay the supplier.

Define Export Credit Refinancing (ECR).

A facility where a financing institution provides short-term loans to exporters by refinancing their export receivables.

Which Malaysian institution currently manages the ECR scheme?

Export-Import Bank of Malaysia (EXIM Bank).

What is the maximum typical tenure of an ECR loan?

Up to 180 days.

State one objective of pre-shipment ECR.

To finance direct and indirect exporters for production of goods destined for export.

State one objective of post-shipment ECR.

To provide immediate funds to exporters after shipment on credit/usance terms of at least 30 days.

List the basic steps in obtaining ECR (simple sequence).

Application → Assessment → Approval → Disbursement → Repayment (and possible Refinancing).

Give two benefits of ECR for exporters.

Improved cash flow at lower cost, increased competitiveness through cheaper financing.

How does ECR help mitigate exporter risk?

The facility is secured against export receivables, reducing credit and foreign-exchange risk.

What is a shipping guarantee?

A bank’s commitment to pay shipping costs if the responsible party (importer/exporter) fails to do so.

Why are shipping guarantees used in international trade?

To assure the shipping company of payment, building trust when creditworthiness is uncertain.

Name two advantages of using a shipping guarantee.

Reduced non-payment risk for shippers, quicker release of goods facilitating trade.

Outline the key steps in a shipping guarantee transaction.

Application → Bank assessment → Issuance to shipping company → Possible payment claim → Borrower repayment to bank.

What is a Trust Receipt (TR)?

An arrangement where a bank releases imported goods to a buyer who holds them in trust until the loan is repaid.

When are trust receipts typically used?

When importers lack funds to pay upfront and need temporary financing to sell or process goods.

Who retains ownership of goods under a trust receipt until repayment?

The bank (financier).

List two benefits of a trust receipt for the importer.

Access to financing without upfront cash; flexible repayment schedule tied to sale of goods.

List two benefits of a trust receipt for the bank.

Security via title to goods and reduced credit risk due to collateral control.

What is a Bankers’ Acceptance (BA)?

A time draft guaranteed by a bank promising payment on a future date, used to finance trade.

How can the seller obtain immediate funds after receiving a BA?

By selling (discounting) the BA on the secondary market.

Describe the typical flow of a Bankers’ Acceptance transaction.

Exporter ships goods → Buyer requests BA from bank → Bank accepts draft → Exporter receives BA → BA may be discounted → Bank pays exporter at maturity.

Give three advantages of Bankers’ Acceptances.

Low-risk investment backed by bank credit, liquidity through secondary market trading, discounted financing option for sellers.

How does a BA help mitigate non-payment risk in international trade?

The bank’s guarantee ensures payment on the maturity date regardless of buyer default.

Which trade situations often favour the use of Bankers’ Acceptances?

Transactions where parties want deferred payment with bank assurance or when creditworthiness concerns exist.

Why might a shipping guarantee be considered lower cost than an LC?

It focuses only on shipping cost security and usually involves fewer documents and fees.

What dual role does EXIM Bank play in Malaysia’s ECR scheme?

Sets ECR interest rates and endorses exporters’ documents for post-shipment refinancing.