NOMBRE DE LA DEPENDENCIA O CARRERA

HASTA DOS LÍNEAS

INTERNATIONAL TRADE FINANCE I

Lecture 1. Applying for credits
2020-2
Oscar Melo-Vega Angeles
Luis Pretell Pardo
Means of Payment: factors influencing the election
Time

Needs from the

Exporter

Country Power for

negotiation

Needs from
the Importer
Finally…
Term of
payment

RISK
Thinking over

➢ What is the activity of the company?

➢ What aspects are highlighted by the representatives of
the company?
➢ What do they need currently? ¿What is their objective?
➢ What conditions do they require?
➢ Is there any information missing?
➢ Why is it important all this information?
Financing: Well Known Objective

Almost half of all new

ventures fail because
of poor financial
management
-Dun & Brandstreet 4
Financing: Well Known Objective

When requesting finance it is necessary to know:

What do I need the money for? = what do I
need to finance?
✓Working capital
✓Import finance
✓Inventory
✓Accounts Receivable
What am I achieving with the finance?
✓Business Growth
✓Speeding service of orders (operating
cycle)
✓Purchase of premises
✓Machinery acquisition

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 Trade Finance:
Financiamiento deelements for the approval
Importaciones

Mean
Destination of Payment Source of
of Funds repayment
(IMP) (EXP)

Exporter Credit Type of Financing

BANK Evaluation
Importer
Support

Guarantee
Financing: requirements

Basic Criteria
• Standing Client with current accounts.
• Experience: at least 2 years.

Required Documents
▪ Financial Statements: 2 last years with full details and annex of
the main accounts
▪ Financial Statements presented to SUNAT: 2 last years
▪ . Copy of PDT of IGV of the last 3 months
▪ Commercial Report of the Company
▪ . Equity declaration of Shareholders

Complementary (Collateral)
• Offered Guarantees
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Steps in the Lending Process

• Fill out a loan application

• Interview with a loan officer usually follows
right away
• If a business or mortgage loan is applied
for, a site visit to assess the property
• The customer is asked for financial
statements & other documents
• The credit analysis division of the bank
analyses the application and prepares a
brief summary and recommendations.
• Recommendation goes to a loan
committee for approval
• If the loan is approved, the loan officer
check on the property or assets that are
pledged as collateral in order to ensure that
the bank has immediate access to the
collateral if the loan agreement is
defaulted.

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 The 5C’s of Credit Worthiness
Capacity: Your ability to pay (income)
• Credit Limit: Maximum amount you can borrow.

Character:
• Earned by paying bills on time and being a trustworthy, reliable, Experian
stable person. TransUnion
• References – people you have borrowed from in the past. Equifax
• Credit History: Indicates the amount of debt you have and your
The Fair Isaac Corporation
payment history.
(FICO)
Collateral:
• It gives the lender the assurance that if the borrower defaults on
the loan, the lender can repossess the collateral. For example, car
loans are secured by cars, and mortgages are secured by homes.

Capital : How much you have beyond what you owe.

Conditions: Conditions refer to how a borrower intends to use the money.

• Cosigner: Responsible for a loan if you, the original debtor, do
not pay.
Trade Finance: elements for the approval

COMPANY REQUEST FOR LINES BANK

QUALITATIVE QUANTITATIVE
ASPECTS ASPECTS

Information supplied by the client

and his Bank Relationship Manager

MEAN OF PAYMENT In exports, source for repayment.

In import, destination of funds.
Additionally in
Trade is TYPE OF
FINANCING Per activity (X o M)
important
Support in case of no payment.
GUARANTEES Special Guarantees.

Elements in a Credit Line (or approval for a specific operation):

Related Operation
(support)
Amount Term Rate
Disbursement Conditions 10
Credit Worthiness
Getting a Credit History

Checking Your Credit File

Once a credit rating is established, it is a good idea to check it
periodically by contacting one of the credit bureau(s).

Credit Bureaus
A credit bureau is a business that gathers credit information on
borrowers and then sells it to credit grantors and lenders. Information
is collected on both individuals and businesses for a period of seven
years. After that, it is removed from their files.

Credit Rating
A credit rating is an indication of the level of risk that a consumer,
business, or government will pose if credit is granted.

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 Establishing Creditworthiness

Risk that borrower may not repay

• The process of extending credit begins with some basic
questions:
•How much money does the customer want?
•For what purpose is the money going to be used?
•For how long does the customer need to borrow the
money?
•How does the customer plan to repay the money?
•Does the customer’s business generate sufficient cash
for repayment?
• In addition, the customer must provide specific
information about its financial strength and reputation.
The bank analyzes the customer’s financial statements in
order to assess capacity and capital. The financial
statements include the income statement, balance
sheet, and cash flow report which should be prepared
and signed by independent auditors.
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 Setting Interest Rates
Interest rate reflects degree of risk
• As compensation for assuming risk, the bank charges a certain interest rate for the use
of its funds for a predetermined time.
• If the risk is higher, or the term of the loan longer, then the interest rate is higher.
Fixed / floating interest rate
• A fixed interest rate does not change during the life of the loan.
• A floating interest rate is reset periodically, depending on the existing market rate.
Prime rate
• Each bank sets its own prime rate for domestically-funded loans.
• The prime rate is a floating rate that a commercial bank on short-term loans charge to
its most creditworthy customers. If a borrower is not a most creditworthy customer, the
bank will quote an interest rate of prime plus a spread.
• Each bank’s prime rate should cover: cost of funds, operating expense & a profit.
LIBOR (London Interbank Offered Rate)
• LIBOR is also a floating rate & represents the cost to obtain funds in the market.
• These loans are quoted as “LIBOR + x percent p.a.” (“x” = “spread” = bank’s earnings).
• Notice the difference in earnings between these 2 kinds of funding:
• Prime Rate includes the cost of funds + the bank’s overhead + a profit.
• LIBOR only accounts for the cost of funds. The bank must cover its overhead + 16
compensation for credit risk + a profit.
 Setting Interest Rates
Prime Rate
It is the interest rate charged by banks to their most creditworthy customers . The rate is almost
always the same amongst major banks. It is usually adjusted at the same time and in
correlation to the adjustments of the Fed Funds Rate. The chart reported below are based
upon the rates on the first day of each respective month over the past decade. Also known as
“Reference Rate” or “Base Lending Rate” .

Source: Federal Reserve Board, Proprietary Bank Surveys

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Setting Interest Rates

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 Establishing Credit Terms

• Each customer’s financial situation is unique, and the bank tries to find the best solution
to meet the customer’s needs.

Secured loans
• When the bank makes a secured loan, it requires a collateral that provides additional
protection for the bank. Sometimes the bank will lend only if collateral is pledged. (an
unsecured loan is granted on the financial strength & reputation of the borrower).

Guaranteed loans
• Sometimes, a borrower may not qualify for a loan based on its own financial strength or
have collateral available to secure the loan. In this situation, another individual, bank, or
company can guarantee repayment of the loan to the bank. This is called a guaranteed
loan.
• The guarantor is the third party that assumes responsibility if the original borrower fails
to repay the loan. The bank makes the credit decision based on the guarantor’s
creditworthiness. In international trade, the country risk of the guarantor also must be
considered.

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 Determining the Type of Financing
• The nature of the transaction determines which type of financing should be used.
Short Term Loan - Loan up to one year
• The principal and interest are paid at maturity date and this is evidenced by a
promissory note (a legal contract that formally recognizes the borrower’s obligation to
repay the loan , with interest, over a certain period of time).
Medium Term Loan - Maturity greater than one year
• Loan with a maturity greater than 1 year and less than 5 years. It is payable in
installments and is evidenced by a credit agreement and a promissory note. It will
include a schedule of repayments (installments).
Line of Credit - Short-term borrowings on demand
• A line of credit is an agreement with a bank for short-term borrowings on demand. It is
the maximum amount a bank is willing to lend to a particular customer over a future
period. Customers use a line of credit when they have a series of transactions to be
financed over a period of time.
Syndication Loan made by several lenders
• If a single bank is unwilling or unable to fund a single loan, it may invite several other
banks to extend the loan jointly in order to spread the risks among the banks.
• In a syndication, a lead bank manages the transaction, and all other banks in the
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consortium are disclosed to each other and to the customer (borrower).
Cash Flow Time Line
 Risks for the Bank

• When trade is conducted between countries, a range of risks can affect the success of the
transaction. For example, changes in economic or political conditions may affect the
repayment of a loan.
• Following, we will define, in more detail, the credit, country, and other risks associated
with international trade :

Categories of trade-related risk 22

 Credit Risk

Customer related risk

• Credit risk : customer-related & reflects the ability to fulfill all obligations to the Bank.
• Obligation is the responsibility to pay a sum of money or perform some act when due.
• Credit risk for the Bank falls into 2 categories: lending and counterparty.
Lending Risk
• Lending risk involves extensions of credit (loans & overdrafts) where the Bank takes the
full risk for the life of the transaction. The 2 types of lending risk are direct and contingent:
• Direct lending risk: is the possibility that customer obligations will not be settled on time. Direct
lending risk occurs in products such as loans, overdrafts, credit cards, residential mortgages &
bankers’ acceptances. The risk exists for the entire life of the transaction.
• Contingent lending risk : is the possibility that potential customer obligations will become actual
obligations and will not be settled on time. Occurs in LCs & confirmations of LCs.
Counterparty Risk
• A counterparty is a customer with whom the Bank has a contract to pay agreed values at a
stated future date. It may occurs either before settlement date or at maturity:
• Presettlement risk (PSR) is the risk that a counterparty with whom the Bank trades may default on
a contractual obligation to the Bank before the settlement date of the contract.
• It is measured in terms of potential replacement cost (consequences if a contract has to be
replaced).
• Settlement risk occurs on the maturity date when the Bank simultaneously exchanges funds with a
counterparty but cannot verify that payment has been received.
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 Country (Political and Cross-Border) Risk

Political or economic instability

• Country risk is the possibility that the country in which the Bank has business may
experience internal instability that reduces the offshore lender’s ability to collect in a timely
manner.
• Economics, political or sovereign actions may make impossible to get money or assets out
of that country.
• Country risk includes political (sovereign) and cross-border (transfer and convertibility) risk.
Political (Sovereign) Risk - Government actions or independent events
• Political (sovereign) risk is the possibility that the actions of a government (e.g.,
confiscation, expropriation or nationalization) or independent events (e.g., wars, riots, civil
disturbances) affect the ability of customers in that country to meet their obligations.
• Political risks are most significant in transactions between a developed & emerging-market.
Cross Border - Transfer Risk: Inability to move funds
• Transfer risk exists in any transaction in which the borrower may be unable, due to legal or other
barriers, to transfer funds in the foreign currency of payment to the place of payment .
Cross Border - Convertibility Risk: Inability to exchange local currency for foreign currency
• The risk exists in any transaction in which regulatory barriers may prevent the borrower from
converting local currency into foreign currency required for payment (exchange control barrier).
• This risk does not refer to devaluation of currency; rather, it reflects the risk that the local
currency will be inconvertible.
• Less-developed countries usually are short of hard currencies. 24
 Other Risks
• Besides Credit & Country risk (primary risks) banks deal with other risks that include:
image, product, operational / systems, legal & regulatory, documentation &
performance .
Image Risk - Damage to the Bank’s reputation
• Possibility that some activity of the Bank or its representatives damages their reputation.
• Banks protect themselves by maintaining confidentiality at all times as well as avoiding
to finance products or services, such as weapons, that may damage the Bank’s
reputation.
Product Risk - Faulty or inadequate trade product or service
• Risk that the structure of a trade product or service is inadequate or faulty.
• Letters of credit, bankers’ acceptances, documentary collections, and bank-to-bank
reimbursements are trade products that have this risk.
• Guidelines &quality standards for handling trade transactions help alleviate product risk.
Operational / Systems Risk - Failure of internal / external processing systems
• Risks associated with the functional aspects of the products. High in trade transactions
due to reliance on the manual examination of documents & bills.
• Example Operational / systems risk may be internal or external to the Bank.
• For instance, in a money transfer system there is a risk associated with an external system.
When the Bank transfers funds by wire, it may use private international communications
systems such as SWIFT. There is always a risk that a disruption of services may prevent or
delay the transfer.
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 Other Risks
Legal and Regulatory Risk - Noncompliance with regulations
• Many legal and regulatory factors affect trade transactions: foreign currency laws, local
legal lending limits, US sanctions, and US anti-boycott regulations and taxes.
• When a transaction does not comply with all applicable laws and regulations, the Bank
may face civil, criminal, and administrative proceedings.
• Trade products that carry legal and regulatory risk include: letters of credit, bankers’
acceptances, documentary collections, and bank-to bank reimbursements.
Documentation Risk - Incorrect or unenforceable documentation
• Written instruments such as legal forms, receipts, and applications are required to
enforce the Bank’s rights under contracts or transactions.
• Documentation risk is the possibility that these instruments are incorrect, incomplete,
or unenforceable.
Performance Risk - Failure of exporter to perform
• Performance risk is the possibility that an exporter may fail to perform under the
contract established with the importer. For example, if an exporter does not deliver
critical parts or sends unacceptable parts, the importing manufacturer may be unable to
produce his or her final product. The exporter’s performance failure affects the
importer’s ability to generate cash from the sale of goods and repay his or her obligation
to the Financing Bank.
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Case: Loan Proposal - Consorcio Agroexportador PEREZ

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Case: Loan Proposal - Consorcio Agroexportador PEREZ

1. How would you qualify the general situation of the company?

2. What type of facilities have been approved? What is that they cover?
3. What sort of guarantees will be backing up their operations? Classified them by
type.
4. What are covenants? When are they required?
5. Why are sales variables, and other ratios being evaluated in the credit
proposal?
6. What would you consider are the strengths of the company?
7. What would you say are the weaknesses of the company and how is the
Financial Institution mitigating them?
8. What would you think is the meaning of Riesgo de Subordinación? What is the
meaning of LTV (Loan To Value)?

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