Unlocking sources of funding options for foreign trades

By Francisca Emeka- Amaugo

There is no doubt that international trades help to grow nations’ economy and above all, cement ties between countries. This type of trade is therefore, naturally inevitable as people from different countries are differently blessed with a wide range of endowments.

However, one major challenge that is associated with international trades is the issue of funding. Such funding, in most cases involves foreign exchange for it to work out effectively. Even at that, and in a desire to satisfy human wants and needs, players in the International arena strive to get across to adequate funding because finance is an essential ingredient to prosecute international trade.

The purpose of this piece is therefore, a deliberate attempt to guide practitioners in international trade on how to source for funding legally to execute their various businesses without much ado.

Globally, there exist a wide range of avenues and sources of finance for foreign trade which both importers and exporters should tap from. Some of these finance options are explained as follows:

Bills of Exchange

Bill of exchange is one of the tools used in foreign trade. It is a negotiable instrument drafted by the exporter (the drawer), accepted by the importer (the drawee) who thereby agrees to pay for the goods/services either immediately or more commonly after a specified period of credit.

If the importer accepts the bill it is known as a “trade bill”, whereas if the importer arranges for its bank to accept the bill, it becomes a less risky “bank bill”.

Where payment will be made after the specified period of credit, the exporter can sell the bill at a discount to its face value and receive the cash immediately.

If the bill is dishonored the exporter can seek legal remedies in the country of the importer.

Promissory Notes

Promissory notes are somewhat similar to Bill of exchange but the difference is that the former cannot usually be discounted prior to maturity.

Documentary Letters of Credit

In this aspect of funding source, the importer obtains a Letter of Credit from its bank, which guarantees payment to the exporter via a trade bill. Though slow to arrange, this method is virtually risk free provided the exporter presents specified error free documents (eg shipping documents, certificates of origin and a fully detailed invoice) within a specified time period.

The high bank fees for this procedure are normally borne by the importer, and the Documentary Letter of Credit (DLC) is normally reserved for expensive goods only.

Factoring

The factoring company (often the subsidiary of a bank) assumes the responsibility for collecting the trade debts of another – in this case an exporter.

The factor may provide a range of services (eg providing advances, administering the sales ledger, credit insurance etc) for an additional fee. Widely regarded as a useful means of obtaining trade finance and collecting of debts for small or medium sized exporters.

However the exporter must always bear in mind the eventual consequences of dispensing with the services of the factor and undertaking the running of the sales ledger and cash collection activities itself.

Forfaiting

Forfaiting is a medium term source of finance whereby a domestic bank will discount a series of medium term bills of exchange, which have normally been guaranteed by the importers bank. The forfaiting bank normally forgoes the right of recourse to the exporter if the bill is dishonoured.

The exporter obtains the benefit of immediate funds, but the bank charges are expensive. Forfaiting is normally used for the export of capital goods, where the importer pays in a series of instalments over a period of years.

Leasing and Hire Purchase

This type of sourcing for fund is mostly practiced in Africa, particularly in Nigeria and other parts of West Africa. In this case, the exporter sells capital goods to a lessor, which in turn enters into a leasing agreement with the exporter’s overseas customer.

Alternatively the equipment can be sold to a hire purchase company which resells to the importer under a HP agreement.

Acceptance credits

Under this aspect, a large reputable exporter can arrange for its bank to accept bills of exchange (which are related to its export activities) on a continuing basis.

These bills can then be discounted at an effective cost, which is lower than the bank overdraft interest rate.

Loans

Loans are common all over the business area. In fact, it is one veritable source of funding for any kind of business. It involves a situation where an importer acquires commodities for the purpose of immediate resale; it can raise a loan from its bank, which are usually commercial banks. The bank takes custody of the goods until the importer is able to sell them.

Thereafter the principal sum, interest and storage costs are repaid to the bank out of the proceeds of the sale.

It is worthy of note that before taking any loan from banks, the borrower should be able to read and understand the terms and conditions of the loan, so that there would be no regret while trying to pay back the borrowed fund. One of such critical areas borrowers should watch are: interest rates, period of the loan, and penalties attached to any default.