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Lecture 8

GMS 400 Lecture 8: GMS400 – Lecture 8

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Ryerson University
Global Management Studies
GMS 400
Dale Carl

GMS400 – Lecture 8 Financing and Insurance Payment for Exports  Open Account: The exporter provides credit for a specified number of days (e.g. 30), after which payment for the goods must be made  Letter of Credit (LC): substituting the credit of the bank for that of the customer o A document from the importer’s bank guaranteeing payment by the bank, in a specified number of days, if all conditions of the sales contract are met (e.g. 30, 45, 60, 90, 180-day LC)  Irrevocable LC: The foreign bank cannot withdraw the LC (this is the international standard) if the terms of the contract are followed A Confirmed Letter of Credit  Confirmed LC: Confirmed by exporter’s bank (the exporter’s bank agrees to pay should the foreign bank fail to do so.)  Why? o Not all banks are scrupulous (honest) o May be a new government policy or alteration of exchange controls in the buying country o Foreign bank may run short of hard currency  Every stage of confirmation costs more Export Development Canada (EDC)  Provides financing or loan guarantees for major capital projects in foreign markets o A loan guarantee is when a bank guarantees that the loan will be repaid, thereby eliminating the risk, but it does not actually loan the money (usually provided by a consortium of banks for a lower interest rate than normal because EDC has already covered the risk)  Provides buyer financing for capital equipment and services: lends money to the importer of Cdn goods but actually pays the Cdn exporter directly and then the foreign purchaser pays back EDC  Provides insurance for Canadian exports o Country risk insurance o Foreign receivables insurance (not available from your domestic bank) – will guarantee up to 90% of your receivables  Provides foreign investment insurance: political risk protection for new Canadian investments abroad Bid Bonds and Performance Bonds  Bid Bond: submitted by the company when it submits a bid to guarantee that it will not withdraw later o It is returned to the bidder after the project is awarded, but is cashed if the bidder withdraws e.g Bombardier in Israel  Performance bond: This is a guarantee that the piece of equipment (e.g. a hydro electricity turbine) actually performs the way it is supposed to o This will be returned to the bidder after a predetermined period of time (e.g. one year) after the buyer takes possession of the equipment if everything is working according to the specifications International Sources of Financing  Multilateral Development Banks provide financing for many infrastructure projects in LDCs (Less Developed Countries) o World Bank: see o Regional Development Banks:  Asian Development Bank (Manila)  African Development Bank (Abidjan)  The European Bank for Reconstruction & Development (London)  Inter American Development Bank (Washington)  Canada is a member, meaning that Cdn firms can bid on all projects financed by development banks o You will get paid Checking the Credit-Worthiness of a Foreign Buyer (Due Diligence)  Especially if selling on open account (no LC), y
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