Introduction to Finance

FIGURE 6.4
 Order Bill 
of Lading

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6.6 Financing International Trade
147
A New York exporter dealing with an importer in Portugal with whom there has been 
little experience may ship goods on the basis of a documentary draft that has been deposited 
for collection with the local bank. That bank, following the specifi c instructions regarding the 
manner of collection, forwards the draft and the accompanying documents to its correspond-
ent bank in Lisbon. The correspondent bank holds the documents until payment is made in the 
case of a sight draft, or until acceptance is obtained if a time draft is used. When collection is 
made on a sight draft, it is remitted to the exporter.
Financing Through the Exporter’s Bank 
It is important to recognize that 
throughout the preceding transaction the banking system only provided a service to the ex-
porter and in no way fi nanced the transaction itself. The exporter’s bank, however, may off er 
fi nancing assistance by allowing the exporter to borrow against the security of a documentary 
draft. Such loans have the fi nancial strength of both the exporter and the importer to support 
them, since documents for taking possession of the merchandise are released only after the 
importer has accepted the draft.
The amount that the exporter can borrow is less than the face amount of the draft and 
depends mainly on the credit standing of both the exporter and the importer. When the exporter 
is fi nancially strong enough to off er suitable protection to the bank, a substantial percentage of 
the draft may be advanced even though the importer may not be known to the exporter’s bank. 
In other cases, the advance may be based on the importer’s fi nancial strength.
The character of the goods shipped also has an important bearing on the amount lent, 
since the goods off er collateral security for the advance. Goods that are not breakable or per-
ishable are better as collateral; goods for which there is a ready market are preferable to those 
with a very limited market.
Financing by the Importer
Like the exporter, the importer may also arrange payment for goods without access to bank credit. 
When an order is placed, payment in full may be made or a partial payment off ered. The partial 
payment gives some protection to both the exporter and the importer. It protects the exporter 
against rejection of the goods for no reason, and it gives the importer some bargaining power 
in the event the merchandise is damaged in shipment or does not meet specifi cations. When the 
importer is required to make full payment with an order but wants some protection in the transac-
tion, payment is sent to a bank in the exporter’s country. The bank is instructed not to release pay-
ment until certain documents are presented to the bank to prove shipment of the goods according 
to the terms of the transaction. The bank, of course, charges a fee for this service.