Financial and Legal Costs/Bank Charges
|Unit 4.8-Financial and Legal Costs|
Banks will charge customers fees and interest based on creditworthiness and length of time of the loan. There is no set formula since banks will often require assets as collateral to cover the amount of the loan. With some customers, they require “compensating balances,” meaning that the company needs to keep a minimum balance; therefore, an indirect cost to the customer exists since the funds cannot be used.
Banker’s Acceptances Fees
A banker’s acceptance is a negotiable instrument which may be used to obtain immediate funds by discount selling to the drawee bank or an investor. The instrument's marketability is limited only by the reputation of the accepting bank and market demand. The net proceeds of the sale are obtained by deducting the following two items from the face amount of the acceptance: (1) the discount rate (Interest Rate x Days to Maturity x Face Amount) and (2) the bank's acceptance commission. The combination of these is referred to as the "all-in" rate.
Discount Rate (rate earned by investor) -- 5.13 % p.a.
Bank Commission -- 1.50 % p.a.
All-in Rate -- 6.63 % p.a.
Letters of Credit Fees
Depending on what has been negotiated, bank charges may be placed against (for the account of) a buyer/applicant or may be shared between a buyer/applicant and a seller/beneficiary. Rarely will all charges be for the account of a seller/beneficiary. If the charges are to be shared, the customary procedure is that each party will pay the applicable fees for his respective country and/or bank.
On average the charges could be 1% of the face amount of the letter of credit. These rates are negotiable and may be reduced if a significant amount of letter of credit business is done with a particular bank. In addition to the normal and customary fees, additional fees could be charged for
- documentary examination
- collection without examination
- assignment of proceeds
The important step is to identify these costs before the methods of payment are finalized since both parties may feel the costs outweigh the risks and will then choose a less costly method of payment.
Documentary Collection Fees
To avoid the higher costs associated with letters of credit, many international businesses are utilizing the documentary collection services of banks. Similar to a letter of credit only in that documents/drafts are passed through the banking system and cannot normally be retrieved by the buyer without payment, there is no bank guarantee or elimination of risk. Because the banks are not absorbing any form of risk, the fees for this type of transaction are much lower than a letter of credit and make this method of payment worthy for consideration when transaction values are below US$10,000 or when the transaction is between parties that have begun to develop a relationship. Fees include
- cost of transmitting funds
- cost of issuing banker’s draft
- cost of receipt of transfers
- cost of issuing banker’s draft
- cost of clearing foreign checks
- cost of clearing checks in foreign currency
Electronic Funds Transfers Fees
Electronic funds transfers (also commonly known as wire transfers) are a quick and effective method of transferring larger sums of money between buyers and sellers, particularly when the buyer and seller are located in different countries. Banks rates vary, usually as a percentage of the transaction, and can be 1% to 3% of the transaction or a flat fee agreed upon with the customer.
Foreign Exchange Fees
Since this discussion is focused on international transactions, it is unlikely that every party involved in the transaction will avoid an exchange of currency. Such will happen only if foreign currency accounts are held by the buyer and seller or the companies are related. In a situation where the companies are not related and are located in countries that have different currencies and the banks do not offer foreign currency accounts, a currency exchange will take place. As expected, banks charge fees for the exchange service as well as for the opportunity of reducing foreign currency fluctuation-related losses by offering forward and option currency contracts.
The fees for these services will depend on the volume of currency being exchanged as well as the currencies involved in the transactions.