Chapter 9
Financing
Financing international trade in consumer goods is generally classified as
short-term, the average credit being 180 days with exceptions running to 18
months. To understand the opportunities for banks to engage profitably in
this type of finance it is necessary to examine the chain of contracts
supporting most transactions. An importer seeking finance to purchase
goods from overseas must satisfy his bank that he can liquidate any
borrowing from the proceeds of the resale of those goods. The resale
immediately becomes the most important aspect of the deal, so far as the
bank is concerned, and can enable the bank to strengthen its security and
increase its earnings; later in this chapter examples demonstrate this.
On the other side of the main contract, the supplier may require some
degree of finance before he can forward his goods for shipment. That
finance is generally to cover packing and transport, although he often buys
in his goods from manufacturers before modifying and preparing them for
specific buyers who may require their own trademarks to be added.
Exporters and importers are rarely able to finance contracts simply by the
use of a single method of payment such as an irrevocable credit.
Figures 9.1 and 9.2 illustrate the contractual relationships established
between a foreign government, a Paris trader and a US supplier. The foreign
government issues an invitation to tender for the supply of tallow which is
advertised and transmitted to suppliers around the world. To ensure that
interested suppliers are submitting genuine bids which they intend to
honour, they are required to support their bid with a bid bond which they
Financing
are told will automatically be converted into a performance bond if the bid
is successful. Bid bonds are usually for 5% of the value of the contract and
performance bonds are 10% and above. Immediately the Paris trader
approaches his bank to obtain a bid bond, the bank realises the possible
extent to which they may be required to provide finance if the trader’s bid
is successful. The minimum risk is the bid bond at 5% rising to 10% for a
successful bid. Therefore, before issuing the bid bond, the bank requires
certain assurances from their customer:
1 If your bid is successful, how will you be paid?
2 We are asked to guarantee that you will execute your contract with the
foreign government, but where will you get the tallow from?
3 How will you pay for the tallow?
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Figure 9.1 Financing Paris trader’s purchase
Figure 9.2 Financing Paris trader’s sale

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