Financing Of International Trade And Commercial Law Essay.

This coursework comprises two questions covering international trade and commercial law. You are required to answer both questions in full. Question 1 comprises 2 subquestions and Question 2 comprises 3 sub-questions. Marking criteria and weighting of each sub-question is provided in the table below. This coursework represents 100% of the referred coursework.

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Financing of international trade

Financing of international trade is concerned with managing currency and third-party risks. There is a gap between securing an order and receiving payment, which often takes months. Several methods exist to help an exporter to manage the risk of nonpayment, among which are invoice discounting, factoring and forfeiting. The following task is set up in two sub-questions.

1. a) Invoice discounting is a very common method of financing international trade. Explain how invoice discounting works and why businesses use it. 15 Marks.
2. b) Factoring and forfeiting are commonly used by businesses as methods to finance their exports. Define and compare both methods.

The following context is provided for the task.

Any business which trades internationally must ensure that it has an effective and enforceable sales contract, which clearly outlines;

1) The agreed terms of trade between buyer (importer) and seller (exporter)

2) When shipment is due to take place and the responsibilities of both parties in the trade journey from the exporter’s premises to receipt of goods at the buyer’s premises

Managing currency and third-party risks

The term invoice discounting is a tool that is used in the financing in international trade. It helps the company to get their funds after sending certain invoices. This tool is an important thing for the expansion and grows of a company (Zhang and Thomas 2015). Invoice discounting helps to allow all the capital to be used for the development of the company and it helps to maintain the cash flow within the company to retain a balance in the expansion process. The speedy process of the tool assists the company not to take any alternative way to collect the funds. Therefore, the company can work without any additional pressure (Chataway et al. 2016).

There are certain processes present that show the way this tool works. It has been mentioned as follows:

• It is required to provide the goods and services to the customers and invoice them regarding the same;
• All the details regarding the invoice should be send to the invoice finance provider;
• There are certain face values for the invoice and the percentage of the value are required to be mentioned specifically. This specification should be given within 48 hours (Goh 2017);
• The invoice collection process is generated by company’s own credit controller or by the invoice service provider;
• After the debtor has made the payment, the balance of the invoice will be available to the company. However, certain service charges will be imposed on the same.

Therefore, it can be observed that this process of invoice discounting is quite systematic and time can be saved in this. In various business sectors, this tool is used for certain reasons. The company could obtain certain advances from the customers on selective or whole ledger basis. Further, the fast funding method has helped the company to expand their business. The process of invoice discounting is quite easy and the companies in this method are facing less trouble. Therefore, the business entrepreneurs could experience a hassle free method by using digital interface. Further, certain personal customer support could be obtained from this system and there is no hidden cost. It helps to understand all the business costs specifically.

  The term factoring is a part of the financial transaction and this process is adjacent to the invoice discounting method. Financial transaction is an agreement that used in between the buyer and exporter to generate the payment process (Lekkakos and Serrano 2016). In factoring process, certain invoices are sending by a company to a third party on certain discount. Certain companies are factoring their receivable assets in some urgent situations. In summary, factoring is a cash management method that has been used by many companies. In this process, after an invoice has been generated when the customer makes sale, right to collect the invoice has been enable by the factoring process. The credit in this process extends on the client’s customer and therefore, the paying ability of the customers could be understood in this process. it is a sale of an asset (Tanrisever et al. 2015).

The term forfaiting is an arrangement that is used in the international trade finance. Originally, the exporters who have a will to sell their receivable to a forfeiter have used this tool. It is a medium term capital goods financing (Busse 2014). In this process, the forfeiter is taking all the risks regarding the receivables of the exporter on certain marginal costs. Sale of the firm transaction is the main subject matter in this process and this distinct the term from the factoring, where the subject matter of the transaction is buying financial assets.

Methods for financing international trade

There are certain differences present in between factoring and forfaiting. Both the terms are quite popular in the different business segmentation; more specifically in the export financing. However, the scope, application and concept of both the terms are different. It states as under:

• Factoring involves sale of a business’s receivable to other firm at certain discounted price. On other account, forfaiting involves certain relinquishment of rights. In this method, certain rights of the exporters are given to the forfeiter and they are doing the tasks at certain payment.
• Further, in case of factoring, no recourse is required. However, recourse is an important thing in case of forfaiting.
• In factoring, all the receivables are of short maturity level; on the other hand, forfaiting involves medium to long term maturity (Kim and Park 2015);
• In factoring, the trade receivables are based on ordinary goods and in forfaiting, the receivables are on capital goods;
• There can be two types of factoring such as the recourse and non-recourse. There is only non-recourse forfaiting.
• Costs of the factoring are obtained from the clients and costs of the forfaiting are obtaining from the abroad buyer.
• There is no scope of secondary market in factoring; however, in forfaiting, secondary market is an important thing.

In case of international trade business, two contracts are quite popular such as the Free on Board (FOB) and Cost, Insurance and Freight (CIF) contracts. The terms of these contracts are included in the trade agreement with an intention to retain uniformity and clarifications in the international agreements. However, the nature of the terms is not mandatory and the parties can change or amend the rules as required. The International Chamber of Commerce develops the terms of these contracts (Maggi 2014). The terms of those contracts are imposing certain duties on the parties to the contract, price of the goods and delivering method of the goods. Certain terms are required to be included in the Sale contract between the exporter and the importer. The terms could be categorised as follows:

• Preamble of the contract, where the name of both the parties and a brief discussion on the contract are required to be mentioned.
• The process of the sale of goods is to be taken into place. In this phrase, brief discussion on the ownership is to be mentioned and obligations of the importers should also included in this paragraph (Baier, Bergstrand and Feng 2014);
• It is an important thing to specify the character of the goods and price should be fixed to maintain certain predictability in the contract.
• The next term for the agreement should be based on the payment process.
• Financial obligation is one of the foremost problems in case of business in international countries. Therefore, the sale contract should have certain provisions on the currency clause. Under this provision, certain clauses will be there to identify the face value of the currency of different states. Recounting of exchange rate is also required to be included under this provision (Feenstra 2015).
• The quality and quantity of the goods is the basic principle in sales contract. Before the shipment process, it is important to check all the goods and this duty has been imposed on both the buyer and the exporter.
• Delivery terms are an important provision in the international trade agreement and in this provision; certain time has been mentioned regarding the delivery of the goods and negotiation in between the parties are necessary in this case (Todd 2016).
• Provision regarding the transfer of the ownership should be there in the sale agreement and exporter should have to give certain warranty regarding the nature and character of the goods. This provision is essential for the buyer and imposed certain burden on the exporter.
• In the sale agreement, there should be certain terms on liquidated damage, where certain liabilities will be imposed on the exporter, if he has failed to meet certain terms of the sale contract. The exporter is required to deliver all the goods in time. Otherwise, he will be liable to pay certain liquidated damage to the buyer (Soyer and Tettenborn 2016).
• Except those terms, there should be certain other provisions on the changes or amendment of the existing terms of the contract and provisions on the communication between the parties.

In case of international trade and contract, goods are generally delivered through ship. Therefore, shipping is an important thing. However, before generating process of shipment, certain processes are required to be taken into place such as enter into an agreement to sale and both the parties are required to be given their consent on the same. When all the parties to the sale agreement will be agreed on the terms of the contract, the exporter will generate the shipment process. The rules relating to the shipment should be based on the Shipping Incoterms rules (Kim and Jang 2015). Further, in this case, certain export documents are necessary and further, transportation documents are required. Insurance certificate is also required here and after collecting all such certificates, the shipment process will be taken into place.

In case of international trade, both the parties have certain duties and responsibility regarding the proper delivery of the goods. However, the duties of the exporter and importer have been discussed below:

It is the common principle of sale contract that both the parties have to maintain the terms and conditions of the contract. According to the general rule of the international trade, the exporter should have to deliver the goods in time and hand over all the necessary documents to the importer or the buyer (Picciotto 2017). Further, after the goods have been delivered, the exporter must have to transfer the ownership to the buyer and the process should have to follow the guidelines of CISG. Further, the exporter should have to deliver the goods within the stipulated period and to the place agreed between the parties. Before the shipment process, both the parties should have to check the quality and quantity of the goods. This rule has been mentioned in Kling & Freitag GmbH v. Societa Reference Laboratory S.r.1. (2004). Article 31 of CISG should govern the contractual autonomy of the parties. In this Article, certain standards have been mentioned for the exporters so that they can deliver the goods by maintaining all the provisions of the sale contract.

Invoice Discounting

Certain duties have been imposed under the CIF contract that is mandatory in nature in case of international trade. An invoice regarding the contracting goods is required to provide by the exporter for making the confirmation of the sale. The export should have to obtain certain export licence in his expenditure and should have to perform all the necessary formalities. Further, the goods are required to be delivered at the contracted place and the exporter should have to bear the expenses for that. Further, he has the liability to deliver good quality products to the buyer (McGovern 2018). The cargo insurance must be borne by the exporter. If the goods are damaged before the delivery, the exporter should be held responsible for this and before the delivery, the exporter will deal with the costs of the goods. The exporter should have to serve proper notice to the buyer regarding the delivery of the goods. He is also responsible for transmitting all the necessary electronic messages to the buyer.

Concurrently, buyer has certain responsibilities regarding the delivery of goods in international sale contract. According to Article 6 of CISG, the buyer should have to pay the contracting price to the exporter after the goods have been delivered in the contracted place. Further, it has been mentioned under Article 38 of CISG, it is the foremost responsibility of the buyer to check the quality and quantity of the goods when it will reach at the place. After the delivery of the goods, if any damage has been caused to the goods, buyer will be responsible for such consequence (Quinn and Alston 2017). However, no responsibility is there for the buyer in case of cargo insurance; but after the delivery, all the risks will be transferred to him and he will be held responsible for maintaining the quality and quantity of the goods. Further, buyer is required to serve receive notice to the exporter after the delivery.

Reference:

Baier, S.L., Bergstrand, J.H. and Feng, M., 2014. Economic integration agreements and the margins of international trade. Journal of International Economics, 93(2), pp.339-350.

Busse, J., 2014. Forfaiting: an alternative financing model to project finance for PPPs? (Doctoral dissertation).

Chataway, J., Banda, G., Cochrane, G. and Manville, C., 2016. Innovative procurement for health and industrial development. In Making Medicines in Africa (pp. 243-260). Palgrave Macmillan, London.

Feenstra, R.C., 2015. Advanced international trade: theory and evidence. Princeton university press.

Goh, K., 2017. Trading Places: Benefits of Invoice Finance for Small and Medium Sized Enterprises as Opposed to Bank Lending. Aberdeen Student L. Rev., 7, p.56.

Kim, H.S. and Jang, J.H., 2015. The problems for the usage and practical application of INCOTERMS 2010 in international trade contracts. Journal of the Korea Institute of Information and Communication Engineering, 19(12), pp.2993-3002.

Kim, J.S. and Park, S.H., 2015. Legal Issues in Forfaiting Transactions.

Lekkakos, S.D. and Serrano, A., 2016. Supply chain finance for small and medium sized enterprises: the case of reverse factoring. International Journal of Physical Distribution & Logistics Management, 46(4), pp.367-392.

Maggi, G., 2014. International trade agreements. In Handbook of international Economics (Vol. 4, pp. 317-390). Elsevier.

McGovern, E., 2018. International trade regulation (Vol. 2). Globefield Press.

Picciotto, S., 2017. Rights, responsibilities and regulation of international business. In Globalization and International Investment (pp. 177-198). Routledge.

Quinn, G. and Alston, P., 2017. The nature and scope of states parties’ obligations under the International Covenant on Economic, Social and Cultural Rights. In Economic, Social and Cultural Rights (pp. 3-76). Routledge.

Soyer, B. and Tettenborn, A. eds., 2016. International Trade and Carriage of Goods. CRC Press.

Tanrisever, F., Cetinay, H., Reindorp, M. and Fransoo, J., 2015. Reverse factoring for SME finance.

Todd, P., 2016. International trade and insolvency. In International Insolvency Law (pp. 69-86). Routledge.

Zhang, J. and Thomas, L.C., 2015. The effect of introducing economic variables into credit scorecards: an example from invoice discounting. Journal of Risk Model Validation, 9(1), pp.57-78.