International Trade Finsaancing – Key Concepts and Instruments

International Trade Financing: Purpose & Instruments

• Facilitates cross-border trade by lowering payment, currency, political and performance risks.

• Main tools covered: Letter of Credit, Export Credit Refinancing, Shipping Guarantee, Trust Receipt, Bankers’ Acceptance.

Letter of Credit (LC)

• Bank-issued payment guarantee; seller paid when documentary conditions met.

• Parties: buyer (applicant), issuing bank, advising/confirming bank, seller (beneficiary).

• Core flow: contract agreed → buyer requests LC → issuing bank sends LC → advising bank authenticates → seller ships & submits documents → banks examine → payment made → buyer reimburses bank.

• Benefits: risk reduction, secure & internationally accepted payment, trust-building, flexible structuring, possible financing.

• Key variants:
  • Revocable vs. Irrevocable (cannot change without all consents).
  • Confirmed vs. Unconfirmed (added second-bank guarantee).
  • Standby, Revolving, Transferable, Back-to-Back (two linked LCs using a master/secondary structure).

Export Credit Refinancing (ECR)

• Short-term liquidity facility whereby exporter assigns receivables to a financing institution in exchange for discounted cash.

• Malaysian scheme started nineteen-seventy-seven (Bank Negara) and now run by EXIM Bank; covers pre- and post-shipment.

• Pre-shipment aims: fund direct & indirect exporters, support small industries, encourage high value-added local resources.

• Post-shipment aims: immediate funds against usance exports of at least thirty days.

• Simplified flow: exporter applies → institution assesses & approves → funds disbursed → repayment from receivables; can be re-refinanced.

• Benefits: stronger cash flow, lower credit cost, competitiveness, risk mitigation (FX & buyer default), promotion of export sector.

Shipping Guarantee

• Bank commitment to pay freight or other shipping charges if customer defaults; presented to carrier so goods are released.

• Used when trust or creditworthiness is uncertain.

• Typical steps: customer applies → bank evaluates → guarantee issued to shipping line → goods released → if customer fails, bank pays; customer later reimburses bank.

• Advantages: lowers non-payment risk for carriers, builds trust, speeds up cargo release, can be cheaper and quicker than an LC.

Trust Receipt (TR)

• Bank releases imported goods to buyer but retains title until loan repaid; goods held "in trust" for bank.

• Process: importer requests TR → bank issues & hands over goods → importer sells/uses goods → sale proceeds repay loan → title passes to importer.

• Importer benefits: financing access, flexible repayment, reduced upfront cash need, credit history building.

• Bank benefits: collateral control, enhanced security, lower lending risk.

Bankers’ Acceptance (BA)

• Time draft drawn by borrower, accepted (guaranteed) by bank; promises payment on future date and can be traded.

• Flow: exporter ships & invoices → buyer asks bank to accept draft → bank issues BA to exporter → exporter may discount or sell BA → at maturity bank pays holder and debits buyer.

• Merits: low-risk investment backed by bank credit, trade financing tool, secondary-market liquidity, discounting option for early cash, mitigates non-payment risk in volatile markets.

Quick Comparison Highlights

• LC: documentary payment guarantee; rigorously defined conditions.

• ECR: refinancing of receivables; improves exporter working capital.

• Shipping Guarantee: secures freight charges; targets carriers’ risk.

• Trust Receipt: inventory-based import finance; bank retains title.

• BA: marketable time draft; combines payment assurance and financing.

Exam Tip

Focus on purpose, key parties, typical process flow, and primary benefit(s) of each instrument—these are common test prompts.