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Trade Finance Essay

1924 words - 8 pages

5AC008- Final Time-Constrained Assessment
Question 1
Part (a)
Advantages of SWIFT system:
* Considering the circumstances outlined in the case study Super Sparkles could benefit from SWIFT because it reduces delays in payment processing. According to Chris Marshall (2003) SWIFT offers a fast, efficient and secure method of transmitting payments in most major currencies, with urgent payments available the next day. I believe this is important to Super Sparkles who trade globally and security is vital for them.
* Mr Day has concerns due to cash flow problems resulting from financing his debtor book. According to Groves (2011) SWIFT allows Super Sparkles funds to arrive and be ...view middle of the document...

(b)
The instructions I would expect are the name of the beneficiary and address. These details should be correct or they could delay payments. According to Chris Marshall (2003) these should entail:
* The dates (must be correct)
* The name and address of advising bank
* The details of the applicant
* Signed commercial invoice in triplicate (or the number the American supplier asks for)
* Bill of lading providing proof of shipment
* Certificate of origin showing U.K. origin
* Packing list
* Inspection report
* Insurance policy
* Documents to be presented stating the period from
* Description of goods
* List of documents required
* Terms
* Drafts

2 (a)
Forfaiting
Forfaiting is a form of supplier credit. According to Chris Marshall (2003), forfaiting is a medium term financing where a bank agrees to purchase bills of exchange. The bills will then be avalised, which means they have been guaranteed by the importer’s bank and this would allow security to the purchasing bank. The exporter, in this case Super Sparkle would forfait the bills in exchange for cash.
Also Chris Marshall (2003) argues that the value of the promissory notes is discounted at a fixed rate at one go instead of several occasions as notes mature. This then means that the exporter receives a cash sum to the value of the notes, less bank charges and interest.
Forfaiting has immediate advantages for the exporter. According to Chris Marshall (2003), it allows the exporter to receive cash for what normally is a credit agreement and any charges due to the forfaiting process can be passed on to the importer.

Factoring
According to Chris Marshall (2003), factoring is the process where the supplier sells the buyer’s debt to a factor in exchange for an agreed percentage of the invoice value payable either when the credit term has run its course or when the invoice for the transaction is raised. Then the balance is paid when the factoring house receives payment from the buyer.
Factors only accept customers who have been examined and may set limitations on the terms after evaluating the risks. Normally a charge is involved for using this facility and the exporter is liable for any legal costs involved in recovering the outstanding debts.

After studying these two financing method, I believe forfaiting is the one that best meets Mr Days needs and minimises his concerns. According to Groves (2011):
* Significantly improves liquidity
* Transfers currency exposure risk
* Unburdens the balance sheet of long term debtors

This forfaiting approach allows Mr Day to have more funds to use for his business- more working capital. Also one major concern Mr Day had was currency exchange rate and forfaiting takes away this problem as it transfers it to the buyer.
(b)
EXW sellers factory: Under this term the buyer is responsible for most duties. According to Chris Marshall (2003) the buyer is responsible...

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