What are Advances and how this is handled in the System?
'Advances' are the source of financing provided by the banks to the companies, to meet their short-term requirements. Advances are a credit facility by nature.
Advances on sight documents and the discounting of usance documents are special features of the application. The advanced or discounted documents are handled as subcontracts of the respective export/import documents (BE) and (BR), export collections (BO), import collections (BC), or documents under a transfer (BT).
For all advances prepared in connection with a main contract, it is possible to create an advance in some other currency than that of the main contract.
Usually, the advance takes place because of respective instructions and an agreement with the exporter. The advancing of debts is done up to the total amount of the documentary value, depending on the exporter's credit standing. The advanced amount is debited on a separate advance account and the interest for the advance is deducted from the net amount. As soon as the funds have been received, the advance must be settled first. If there are amounts left for the exporter, as not 100% of the documentary value have been advanced, the repatriation of the advanced amount and the pay-out of the remaining amount to the exporter can be done together in the settlement.
As the advance and the discounting of export/import documents, export collections, import collections and the documents under a transfer are integrated into the processing of the transactions, the relevant effects on liability and limits are described in the respective business sectors.
An advance can also be opened directly (without having a parent contract).
The application supports discounting of export bills prior to receipt of acceptance from the Issuing bank. This is done against the customer's risk. However, provision is available to change this risk to the Issuing bank upon receiving their acceptance for the documents. For more details, please refer to 'Transfer of Risk' in Amendment.
Types of Advances:
- Bankers Accep.
- ECR Financing.
- Invoice Advance.
- Bankers Acceptance:
This type of advance enables the customer to receive funding in local currency, helping to improve the customer's cash flow.
- ECR Financing:
ECR stands for 'Export Credit Refinancing'. This is a refinancing option available for banks. The importers and exports benefit from lower costs since the risks are covered by EXIM Bank. ECR financing can be granted before or after shipment of the merchandise.
Forfaiting is a method of Export trade financing. In this process, exporters sell their foreign receivables, either for a long-term or a medium-term, to a forfaiter at a discount. The forfaiter then gets the sum due from the importer on the contracted payment date.
A forfaiting transaction occurs on a non-recourse basis. The term ‘non-recourse’ here means that the forfaiter has no right to recover payment from the exporter in case of default by the importer.