Task: Financing Foreign Trade
For foreign trade to occur, there needs to be a buyer to buy the goods and a seller to sell the goods. There are various ways to finance foreign trade including discounting, bankers' acceptances, forfaiting, and factoring. With discounting, a financial institution takes exporters' drafts and converts them to cash less the discounted interest and fees. A banker's acceptance is a promised upcoming payment that's guaranteed by a bank. Forfaiting involves the purchase of receivables from exporters by a forfaiter. The forfaiter earns a fee for taking on all the risks that come with the receivables. With factoring, a company sells accounts receivable at a discount to another company which is known as the factor. The factor assumes all the payment risk.
References:
Klapper, L.F. (2005, June 24). The role of factoring for financing small and medium enterprises. Retrieved from
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=748344.
Mann, R.J. (2000, March 31). The role of letters of credit in payment transactions. Retrieved from
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=214633.
How can the Export-Import Bank help to facilitate international trade?