The Bill of Exchange – an Instrument of Short-term Export Credit

Shipping on open account, documentary letters of credit and documentary collectionsare the methods by which banks facilitate payment. We could also say that the banks supervise the transfer of money from importers to exporters against the transfer of goods or services from exporters to importers. They can do this, and facilitate short-term credit (up to six months) at the same time, by using a medieval Italian invention - the Bill of Exchange.

The Bill or draft may be drawnon the importers or a bank. The drawee (usually the bank which issued the credit) accepts the Bill against correct documents. But whoever the drawee is, the value of the Bill is guaranteed if it is accepted by a well-known bank. This means that that bank will honor it when the Bill matures and take on the risk and work of collecting payment plus the commission from the importers. The fact that the Bill has a life or tenor of one or more months means that the importers get credit for that period of time. At the same time the exporters may obtain their money by selling the Bill on the discount market. The buyer discounts it by paying the face value minus the discount which is the interest on the Bill for the remainder of its life. At maturity, the holder presents the Bill to the accepting house for payment. The interest is determined partly by the status of the accepting house (bank) and partly on the interest rates prevailing in the discount market at the time. A first-class name means a lower rate, and a less well-known name produces a higher rate. The higher the rate the greater the discount and the less the value of the Bill in the market. Conversely, the better known the accepting house, the finer the rate and the smaller the discount. However the exporters have to cost the discount into the total price of the export contract. Banks can also provide short-term export finance by means of overdrafts or loans to the exporters. The kind of security taken by the bank may vary. The bank might even provide unsecured finance for an established customer.

But from the point of view of the exporters, the problem with borrowing their own national currency from their bank is that, by the time they are paid by the importers, the value of the currency they are paid in may have gone down. So they might receive less than the original price when they come to change it into their own currency. They can overcome this problem by taking out the loan in a foreign currency. Another possibility is to take out insurance against the risk of an adverse changein the exchange rate.Leads and lags are early and late payments by importers. Leads occur when importers decide to pay for goods earlier than the end of the credit period, if they think the cost of their payment currency is going to rise in terms of their own currency. Lags happen when importers delay payment because the price of the payment currency is falling. The later they pay, the less it will be in their own currency.

Factoring services are available to UK exporters for credit periods of up to 120 days. Clearly the banking system is still used, as with all forms of payment, and the status of the debtors (importers) and the debtors' country is most important. Export credit may also be provided by non-bank institutions. Export Merchants buy from exporters and become the exporters themselves. This eliminates the exchange risk for the producer and reduces the credit period. Export agents act as independent export departments for the exporter. They do the work of exporting but do not take any financial responsibility. Confirming houses are agents of importers. They also eliminate the exchange risk for the exporter and reduce the credit period. They may open or confirm documentary letters of credit on behalf of the importers and offer longer periods of credit. They are paid interest for credit periods and commission by the importers.

1. What is the Bill of Exchange?

2. What is exchange risk?

3. What is the exchange rate?

4. What is the discount market?

5. What is a confirming house?

6. What are Documentary Letters of Credit?

7. What are export merchants?

8. What are leads and lags?

Text 5

Read the text and see if the writer’s ideas are the same as yours. Be ready to answer the questions given below.

Medium- and long-term export finance – supplier credit

Documentary Letters of Credit and Documentary Collections are methods of payment in international trade used with Bills of Exchange for short-term credit (up to 6 months). But export finance is needed to provide money for longer periods of credit - for large-scale engineering and building projects, for machinery and installations supplied over several years. The aim is still the same - to provide money for the exporters and to get it back later from the importers - only the amounts of money are greater and the periods of credit longer: 6 months to 2 years (medium-term) and up to 5 years or even longer (long-term).

From this it can be seen that the size of the risk is often too great for one bank to take on. This is why all the various techniques of export finance such as forfeiting export insurance, leasing and lease purchase have been developed. Also, financial institutions besides individual banks are involved. For instance export insurance is provided by the Export Credits Guarantee Department (ECGD) in the UK for long-term contracts and by the Dutch company NCM for contracts up to 2 years. Some projects are syndicated by a consortium of banks and leasing is provided by subsidiary finance companies of banks. The ECGD is a government department set up in 1919 on a commercial basis, to protect exporters from buyer default and political risk. It has a database of over 200,000 credit ratings on importers around the world. The insurance is in the form of guarantees to banks.

These guarantees may be given either to the supplier or the buyer. If the suppliers (exporters) have a credit guarantee they receive payment from their bank as soon as they have shipped the goods, or handed over the factory in working order, according to agreement. There is no risk for them as long as they carry out the contract according to the terms of the agreement. Their bank has a guarantee from the ECGD or NCM and will not therefore have recourse to them.

When the ECGD or NCM provides a guarantee of buyer credit, the bank also receives the money to pay the exporters. In addition it has promissory notes or acceptance bills as collateral security from the buyer. If these are not paid when they mature/ the insurers (i.e. the ECGD or NCM) pay. The main advantage of this from the suppliers' point of view is that they are freed from all recourse problems, as long as they carry out the contract.

Leasing and lease purchase are methods of finance operated by finance company subsidiaries of banks, which work rather like buying a car or house. Leasing is a form of renting while lease purchasing is a form of buying. They are both used to finance major capital assets which have a long life, such as factories and other business premises.

As soon as the plant is set up and in working order the exporters get paid and the importers get immediate use of it. Part of the total price comes from the importers and the rest is provided by the finance company. The importers agree to pay the balance in installments. The bank may be in the importers' country. If it is in the exporters' country, the operation is known as cross border leasing.

As with export insurance, the big advantage of leasing to the exporters of leasing is that there is no recourse to them in the case of buyer default.

1. Are Documentary Letters of Credit a method of payment or a method of finance?

2. Are Bills of Exchange a method of payment or a method of finance?

3. Does The Export Credit Guarantee Department provide export insurance or guarantees?

4. Large projects are often too big to be financed by one bank, aren’t they?

5. Who can be given the guarantees the supplier or the buyer?

Language

1.Practise reading the following words correctly. If necessary, use the dictionary.

Guarantee, default, leasing, consortium, merchant, maturity, adverse change, dispenser, personal identification number, cashier, cheque, voucher, enquiry.

2.Give the Russian equivalents for the following words and phrases:

Financial institution, commercial bank, global business environment, market-driven strategies, competitive pressure, demand deposits, floating-rate deposits, fluctuating economy, cashing checks, automated teller machine, retail store point-of-sale (POS) terminals, correspondent banking, borrowings, obligations, maturity, trustee, trustor, mortgage loans, overdrafts, interest-earning deposits, savings deposits, nonnegotiable certificates of deposit, automated withdrawal, telephone transfer, overdrafts, loans, security, unsecured finance, exchange risk, adverse charge, exchange rate, leads and lags, factoring services, export merchants, eliminates the exchange risk, export agents, confirming houses, Short-term export finance, merchant bank, accommodation finance, trade bill, accommodation bill, acceptance bill, accepting house, the discount market, obtain payment, export order.

3. Fill in the blanks with the pronouns some, any, no, other, anotherandthe other:

1. Are there … commercial banks in your town? Yes, there are. 2. Is there … money in your savings account? No, there isn't … . 3. Does a credit union lend … money to its members? Yes, it does. It lends … money to its members. 4. Do pension funds invest … money into the industry? No, they don't. They invest … money into the industry. 5. There are … commercial finance companies that provide collateralized loans to businesses.6. Our company lets the bank handle the financing while … companies have their own financial people on the staff. 7.Big businesses prefer long, term. financing while small companies prefer …short-term financing. 8. Commercial bank … of the financial institutions that provide loans for … financial institutes that serve businesses in savings and loan association.

4. Fill in the blanks withmany, much, little, a little, few anda fewwhere necessary:

1. … insurance companies protect their customers against risk. 2.It takes one … money to join a credit union. 3.Starting a business without financial support from the bank may cause you … trouble. 4.Banks in the USA are subject to … government regulations. 5. Savings and Loan Associations attract … small savers who do not want to have any risk.6.Only … major customers can keep up with the rise of the service prices. 7. No matter how … money you have you can open a bank account. 8. Very … financial institutions nowadays keep off technical innovations in the banking industry. 9. You can't do without … cash on hand when you go to a retailer shop.

5. Put the verb in brackets into the right tense form:

1.Large commercial banks (install) automatic teller machines nowadays. 2.Customers usually (use) their debit cards to transfer money from their checking account to the merchant's account. 3. As a rule a customer (pay) a fee of forty cents for each transaction outside the state. 4. Financial supermarkets (appear) all over the USA these days. 5.The customers often (look) around for the highest return on their savings or the lowest rate they can get on a loan. 6.Small banks now (compete) with larger banks by finding a special need and meeting it. 7.Small banks often (develop) strong ties with businesses and the general public in their own geographic area. 8.The Fed (lend) money to member banks. 9.Member banks (obtain) money from the district reserve banks. 10.The Federal Reserve System (receive) paper securities from the dealers that (receive) cash in return. 11.The Fed (buy) the government securities and (increase) the money supply. 12. Banks (keep) 20 percent of all the funds on deposit. 13. Our firm (extend) its resources through the use of credit next fiscal year. 14. I (invest) some more of other people's money next winter to expand my business. 15.The firm (secure) the mortgage by its building and equipment when it decides to do so.

6. Change direct speech into indirect speech:

1.The retailer said, "You can buy machinery and tools on an open account." 2. The customer said, "I bought a new car at your shop and it needs repair." 3.The banker said, "I am opening a credit account for you." 4.The businessman said, "As a rule, we sell our goods abroad." 5. The manager said, "We haven't raised enough money to expand." 6.The wholesaler said, "I sold a large amount of tools to retailer shops but they are not paying me in due time. 7.The manager asked, "Does this project require long term financing?" 8.The director asked, "Are we repaying debts in due time?" 9.The lender asked, "Have you found any collateral to back up the loan with?" 10. He asked, "Did this debt carry interest?" 11.The head of the company asked the Board of Directors, "Are we able to repay the loan?" 12.The manager asked the customer, "Can you wait a little longer?" 13.The borrower asked, "Do you require that we obtain your permission before taking on another loan?" 14. The bondholder asked, "Is the bond a secured one?" 15. The businessman asked, "Have you used debentures in recent years?" 16.The customer asked, "Were the terms specified in any agreement?" 17.The manager asked, "Is this really an accurate assumption?" 18. He asked, "Do you pay dividends quarterly or annually?" 19.We asked, "Did the investors prefer common stock?"

7.Fill in the blanks with the verbscan, may, must, have to, andneedwhere necessary:

1.The businessman … use the money which his friends offer to him. 2.We do not … an installment loan. We have enough personal assets. 3. My business went bankrupt, so I … sell my home to pay debts. 4. … I obtain a loan from your venture capital firm? 5.We … apply for more cash yesterday because we ran out of money. 6. The venture capital firm … lend you about $20,000 to start your business with. 7. The company doesn't … additional cash. It receives high revenue. 8.The lender … become a shareholder in a corporation. 9.You … not exceed the cash surrender value when you borrow from the insurance company.

8. A. Using suffixes-er, -or, -ier, -ent, -ial, etc.,give nouns which are related to the following:

Bank, invest, cash, manage, direct,office, deposit, own, execute, work, hold.

B. Using suffixes-al, -able, -ory, -ive,etc.,give adjectives which are related to the following verbs:

Change, profits, control, sell, desire, speculate, negotiate, transfer, pay, value.

C. Using prefixesil-, im-, in-, ir-, un-, non-, dis-,etc., give negative adjectives which are related to the following:

Expensive, negotiable, regular, important, orderly, specified, legal, payable, stable, matured, proper, sufficient, movable, profitable, transferable, active, licensed, listed, cleared, direct, endorsed, honoured.

9. Complete the sentences using the correct forms of the verbs given below.

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