Forms of Finance for International Businesses

What are the four methods of finance for international trade?

The exporter will arrange for the buyer of the product to send payment before it is delivered

• Export credit

• Payment by the importer

• Bank loan

• Letters of credit

What is a benefit of this method: prepayment by the importer

• This provides security for both parties

• It means that it will have greater liquidity as cash flows into the business before the product has actually been sold

• This transfers the risk from the seller to the bank

• This means that the business will have to fund the export itself, deferring payment to a later date

Total or part payment in advance may be necessary when importing goods if:

• Political situation

• Little trust

• High demand for goods and paying in advance price can be fixed at a particular level

• Importer new and cannot negotiate better terms

What is a letter of credit?

• A receipt for the purchase of the goods

• A letter from the buyer promising that they will pay for the goods

• An amount of money received from the bank

• A bank guarantee that the seller of a product will receive an agreed payment from the buyer

Why use letters of credit? Select two.

• This provides security for both parties

• This provides security for the exporter, knowing that they do not have to worry about credit control

• This is a more traditional style arrangement, with businesses borrowing directly from financial institutions to import products

• This transfers the risk from the seller to the bank

What is export credit?

• When exporters borrow money from the bank

• When importers receive an extension on their bank loan

• Financial support or guarantees that are given to foreign businesses to help in buying goods or services from UK exporters

• When part of the payment is paid up-front

What does export credit mean for the British company exporting overseas?

• This means that they will receive only part of the payment up front

• This means that the business will have to fund the export itself

• This means that they will have to wait for the bank's approval

• This means that there is little trust between the two companies

What is the benefit of working with a bank when wanting to trade internationally?

• Banks charge interest on loans

• Banks ensure that loans are paid back and keep companies regulated

• Banks have vast experience of international business and can be a great source of financial and non-financial support for businesses looking to trade globally

• There is little benefit from banks as there are better methods of support nowadays