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GMS 723 (16)
Chapter 5

GMS 723- Chapter 5- Completing a Successful Transaction .docx

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Ryerson University
Global Management Studies
GMS 723
Michael Manjuris

GMS 723 - Chapter 5 – Completing a Successful Transaction Introduction Steps for completing an import or export transaction 1. Financing 2. E-banking 3. Avoid risk 4. Letters of Credit 5. Physical distribution 6. Documentation Financing  All businesses need new money – new money is money that is not yet earned but can become the engine for growth  For importer, financing offers the ability to pay for the overseas manufacture and shipment of foreign goods destined for the domestic market  Exporting, financing could mean working capital to pay for international travel and the marketing effort The Bank  Commercial banking is the primary industry that supports the financing of importing and exporting  When shopping for a bank, look for the following:  A strong international department  E-banking  Speed in handling transactions  The bank’s relationship overseas bank  Credit policy E-banking  Banking transactions electronically without physically visiting an institution  Terms/Forms of electronic banking:  Personal computer (PC) banking  Internet banking  Virtual banking  Online banking  Home banking  Remote electronic banking  Phone banking  Most frequently used: PC banking, Internet or online banking  Internet banking uses the Internet as a delivery channel for bills, transfers, etc  Some Internet Banks exist without physical branches - - Web banks are not restricted to conducting transactions within national borders and have the ability to conduct transactions involving large amounts of assets instantaneously  Attractions possibilities for remote account access including:  Availability of inquiry and transaction services around the clock  Worldwide connectivity  Easy access to transaction data, both recent and historical  Direct customer control of international movement of funds without intermediation of financial institutions in customer’s jurisdiction Forms of Bank Financing Loans for international financing falls into two categories: secured and unsecured Secured Financing  Financing against collateral is called secured financing and is the most common method to raise money  Reduce exposure to loss  Another popular method is the banker’s acceptance (BA) – a time draft presented to a bank by an exporter  This differs form what is known as a trade acceptance between buyer and seller in which a bank is not involved. 1 GMS 723 - Chapter 5 – Completing a Successful Transaction  By accepting the draft, the bank undertakes and recongnizes the obligation to pay the draft at maturity and has placed its creditworthiness between the exporter (drawer) and the importer (drawee)  The criteria for eligibility for a BA are:  The BA must be created within 30 days of the shipment of the goods  The maximum for tenor is 180 days after shipment  It must be self-liquidating  It cannot be used for working capital purposes  The credit recipient must attest to no duplication Unsecured Financing  Secured financing are for those who have a sound credit standing with their bank or have had a long-term trading experience Factors  A factor is an agent who will buy recievables  Banks do 95% of factoring, the remaining is done by private specialists  The factor makes a profit on the collection and provides a source of cash flow for the seller Other Private Sources of Financing  Private Export Funding Corporation (PEFCO)  Overseas Private Investment Corporation (OPIC)  Government Sources  Small Business Administration (SBA)  Export-Import (EXIM) Bank  The Agency for International Development  The International development Cooperation Agency (IDCA) Avoiding Risk  A certain amount of uncertainty is always present across international borders, but much of it can be hedged, managed, and controlled.  Commercial Risks: not being paid; non-delivery of goods: insolvency or protracted default by the buyer; competition; and disputes over product, warranty and so forth  Foreign Exchange Risks  Political Risks: war, coup d’etat, revolution, expropriation, expulsion, foreign exchange controls, or cancellation of import or export licenses  Shipping Risks: Risk of damage and/or loss at sea or via other transportation Avoidance of Commercial Risk  The goal is to at least minimize the risk of nonpayment  Make sure it is exactly what the buyer has ordered  Mistrust in natural over international borders  Two key risk avoidance is a check of the buyer’s credit rating and reputation, as well as, a written contract Getting Paid  The methods of payment, in order of decreasing risk to the seller are: open account, consignment, bank drafts, authority to purchase, letter of credit and cash in advanace Open Account  The open account is a trade arrangement in which goods are shipped to a foreign buyer without guarantee of payment  Many firms that have a long-standing business relationship with the same overseas firm use this method  Should use an open account when the buyer has a continuing need for seller’s product or service  Requires the greatest amount of working capital Consignment 
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