Consider an importer that issues a promissory note to pay for the imported capital goods over a period of five years. The notes are extended to an exporter who sells them at a discount to a bank. This reflects:

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This scenario reflects forfaiting, which involves the export of goods at a discounted price in exchange for a lump-sum cash payment. In this case, the exporter is selling the promissory notes to a bank at a discount, allowing them to receive cash immediately rather than waiting for the importer to pay over a period of five years. Accounts receivable financing involves a company borrowing against their outstanding customer invoices, while factoring involves selling accounts receivable to a third party at a discount. A letter of credit is a financial guarantee issued by a bank to ensure payment between parties in a transaction.

Consider an Importer That Issues a Promissory Note to Pay