The Exporter or Importer Provides the Credit

Up to this point we have indicated only very sketchily the ways in which both short- and intermediate-term credit is used in foreign trade to solve a dual credit problem: (1) the exporter's desire to obtain cash as soon as possible in payment for the goods sold to the importer; (2) the importer's need of credit until the imported goods can be resold to some customer.

The Exporter or Importer Provides the Credit

In the simplest case the American exporter bears the credit load either by selling on open account or by drawing a D/A time draft which he does not discount or use as collateral for a loan. So far as manufacturers are concerned, over 80 per cent of those questioned reported that they were not discounting their export drafts nor borrowing on their foreign collections. This means that these exporters find their working capital adequate to carry their exports or that from time to time they depend on a general bank loan to carry both domestic and export business over the peak season. They put their export drafts through the bank for collection only, paying to the bank merely the small fee (one-eighth of 1 per cent) plus customary correspondent's charges. It should be noted, however, that if exporters draw in foreign currencies, they are more likely to sell 1 their drafts than to send them through the bank on a collection basis--as will be explained in the final section of this chapter.

On the other side are the very numerous cases in which the American exporter sells on sight draft or cash and the foreign importer draws on his own resources to make the immediate payment required.

Credit Load Transferred to the Money Market

The remainder of these exporters and importers of manufactured goods, and what is probably a considerably larger proportion of the traders in crude or semifabricated products, turn to the banks and the general money markets of which they are part to find someone onto whom to transfer the credit load. What sorts of credit arrangements may they make? The American exporter who grants credit to the foreign importer, but wants his money at once, may: (1) discount or sell his drafts; (2) handle his drafts through his bank on a loan basis; (3) arrange an acceptance credit.

The American importer who must pay the foreign exporter in advance or on arrival of the documents or goods but finds his working capital inadequate for the purpose, may: (1) arrange a letter of credit; (2) arrange an acceptance credit; (3) borrow from his bank. These various types of foreign trade financing need some further description, especially in the case of the rather complicated acceptance credit. The exporter who does not wish to carry his export drafts to maturity may, to repeat, transfer the credit load to his bank on one of three bases: (1) discount; (2) loan; (3) acceptance. In any case, the percentage of the face of the draft which will be advanced to the exporter will depend on how the bank has evaluated the risk.

If he discounts his drafts, the exporter will receive immediate credit for the face amount of the draft less a flat discount. The discount rate is quoted on a fractional basis and generally includes interest for the approximate time the bill is outstanding, collection charges, and bill-stamp charges.

When exports are financed on a loan basis, the bank credits the customer (exporter) with either the face amount or a prearranged percentage of the face amount of all acceptable items lodged with it. Upon reimbursement from abroad, the bank bills the exporter for interest at a prearranged rate, plus collection and other charges. By reason of the multiplicity of transactions and the relatively small amounts involved, the loan rate on collections is usually somewhat higher than the rate simultaneously being charged by the domestic department of the bank on clean, prime loans to merchants and manufacturers. This explains why so many manufacturing exporters depend on general bank loans rather than on discounting or borrowing on their foreign drafts.