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“Financing Tools to Help You Increase Exports and Avoid Pitfalls” Lansing, Michigan
Bill Richeson, SVP Global Trade & Supply Chain Solutions International Division National City Bank March 24, 2009
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Agenda Global Trade Overview
Trade Concepts, Payment Procedures and Risks Pricing Terms Foreign Exchange Payment Methods Letters of Credit A Fundamental Reality Using the Letter of Credit as a Financing Tool Documentary Collections Export Credit Insurance & Other Financing Options Examples and “War” Stories Questions & Answers
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Global Trade Overview
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Classification of Countries
Industrialized Countries 30 Countries Emerging Countries 200 Countries
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Definitional Differences
Industrialized Countries Mature Economies Emerging Countries Newer Economic Systems Convertible Currencies Non-convertible Currencies Stable Political Systems Political Uncertainties Higher Per Capita Standard of Living Lower Per Capita Standard of Living Low Perceived Political and Economic Risks High Perceived Political and Economic Risk Looking for Expanded Markets Provider of Investment Capital Capital Shortage - Reliance on Foreign Investments 20
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General Patterns of Trade
Industrialized Countries Market Determines Exchange Rates Emerging Countries Fixed Exchange Rates Invoice in Local Currencies Invoice in Dollars Open Account Terms Prevalent Letters of Credit or Collections Inter-company Shipment Direct Sales to Buyer General Feeling of Low Risk External Credit Guarantee Insurance is Nice to Have Insurance Prevents Baldness Buyer Creditworthiness is Key Buyer Credit Limits Payment Terms Relaxed Country Creditworthiness is Key Country Limits Payment Terms Tight 21
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Trade Concepts, Payment Procedures and Risks
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General Trade Concepts: Starting Right!
Know your customer Know their country Know their “credit” bank Understand the Trade Cycle Understand Terminology Understand Transaction Risks Understand Ground Rules Work with your bank
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Terminology Transaction Parties Supporting Parties
Seller – Exporter – Shipper – Beneficiary (Bene) Buyer – Importer – Account Party – Applicant Issuing Bank – Opening Bank Advising – Confirming Bank Negotiating – Paying – Reimbursing Bank Supporting Parties Carrier Freight Forwarder Customs House Broker Insurer Attorney In international trade you will often hear different terminology for the same thing.
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Identify & Understand the Risks
Risk Awareness Credit Risk Performance Risk Country Risk Currency Risk Transportation Risk Regulatory Risk Transaction Structure Risk Fraud Identify & Understand the Risks
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Risk Evaluation Sources of Information:
Your bank – Bank credit reference Export Import Bank – Country Limitation Schedule Credit Agencies (D&B, Veritas, etc.) Internet U.S. Dept. of Commerce Trade references Measure the Risks
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Pricing/Shipping Terms
Known as Incoterms 2000 Published by: ICC Publishing Corporation 156 Fifth Avenue New York, New York 10010 (212) Website: A set of international rules, initially formulated in 1936 by the International Chamber of Commerce (ICC) to define & interpret a standard set of pricing/shipping terms for international trade. Know the Rules I recommend that you purchase the ICC publication “A Guide to Incoterms” as a reference tool – approx. cost $35
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International Chamber of Commerce (ICC)
Uniform Customs & Practices (UCP) Pub. 600 Rules that govern letters of credit Often referred to as the “silent” terms to the letter of credit because they are incorporated into the letter of credit by reference. Uniform Rules for Collections (URC) Pub. 522 Rules that govern documentary collections ICC Publication 525 (Rules for Reimbursements) ISP 98 Rules for Standby Letters of Credit Know the Rules
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Export Regulations Know the Rules Shippers Export Declaration (SED)
Government required document stating the type of export license used to determine if the merchandise is authorized for shipment. (Required for all exports with a value greater than $2,500) RESOURCE: Bureau of Export Administration – U.S. Dept. of Commerce. ( Office of Foreign Asset Control (OFAC) Anti-boycott language prohibitions Blocked Countries/Specially Designated Individuals RESOURCE: Office of Foreign Asset Control ( Know the Rules
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Logistics Talk to your freight forwarder to understand:
Costs Transportation Connections Packaging Requirements Risks of using certain carriers/forwarders Differences in documentation Loss potential (regardless of Insurance or Incoterms) Know Whom to Ask
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Role of the Freight Forwarder
Pre-Shipment Packaging Freight quotes Import documentation requirements Export documentation Shipment Transportation Document handling Insurance Post-Shipment Tracking Arrival handling
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Pricing Terms
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Incoterms 2000 Departure Group Main Carriage Unpaid Group
Ex Works = Warehouse/Factory Main Carriage Unpaid Group FCA = Free Carrier FAS = Free Along Side Vessel FOB = Free On Board Vessel Main Carriage Paid Group CFR/CPT = Cost & Freight to arrival port CIF/CIP = Cost, Insurance & Freight to arrival Port Arrival Group DAF = Delivered at Frontier DES = Delivered Ex Ship DEQ = Delivered Ex Quay DDU = Delivered Duty Unpaid DDP = Delivered Duty Paid
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Foreign Exchange There is foreign exchange risk to someone in every international transaction – even those payable in U.S. dollars Four Basic Risks - Fluctuation risk - Transaction risk – cash flow risk - Economic risk – operating risk vs. competitors - Translation risk – accounting risk You must quantify and manage this risk Banks have tools and expertise to help you mitigate these risks
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Common Uses of Foreign Exchange
Transactions – used to make or receive payments in another currency Precautionary hedges – to protect against unexpected changes in exchange rates Speculative positions – to profit from expected changes in exchange rates Foreign investments – to buy and sell foreign assets
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Payment Methods
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Now! Later! There is a mismatch between Buyer and Seller Goals
When do you want to get paid? When do buyers want to pay? Now! Later!
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Payment Methods: 4 Methods
Buyer (Importer) Perspective Open Account Documentary Collection Letter of Credit Cash In Advance Seller (Exporter) Perspective Cash In Advance Letter of Credit Documentary Collection Open Account Best Cash Flow Lowest Risk Highest Risk Worst Cash Flow Buyer & Seller have Reversed Priorities!
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Choice of Methods (What Determines?) Buyer-Seller Relationship
Buyer’s credit standing Competition Uniqueness of the product (custom made?) Country conditions (political, economic) Cash flow considerations Transaction costs Other
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Payment Methods: 4 Methods
Cash in Advance Terms Favor Seller Letter of Credit Documentary Collection Terms Favor Buyer Open Account
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Risk Evaluation and Mitigation
High Risk – Cash-in-Advance or Confirmed LC Moderate Risk – Advised or Confirmed LC Low Risk – Documentary Collection (at sight) Very Low Risk: Documentary Collection (Time) or, Open Account (possibly with Credit Insurance) Lowest Risk – Open Account on extended terms Make Decisions to Mitigate the Risks Consider ALL risks, not just credit risks
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Cash In Advance Buyer Pays Seller Ships Wire Transfer Check Draft
Credit Card Seller Ships No risk for seller except order cancellation Foreign Import Regulations may prohibit Hard sell to buyer Consider the type of payment (Wire Transfer Best) Requires little to no credit understanding of the buyer KYC (Important)
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Open Account Seller Ships Buyer Pays Ship it and hope you get paid
Wire Transfer Check Draft Credit Card Ship it and hope you get paid Foreign import regulations may prohibit Full Country & Buyer Credit Risk Consider payment type (wire transfer best) Requires extensive knowledge of the buyer (underwriting, trade references, excellent reputation)
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Letters of Credit A versatile tool for closing the gap that exists between buyers and sellers.
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Letters of Credit Definition:
- An undertaking issued by a bank for the account of the applicant (buyer) to pay to the beneficiary (seller) the value of the letter of credit, provided that the terms and conditions evidenced by documents presented, are complied with In other words: - A letter of credit substitutes a bank’s creditworthiness, which is generally well known or easily ascertainable for that of its customer, which may not be as well known
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Letters of Credit Two Common Types Documentary / Commercial
Active payment instrument Active financing tool Standby Passive payment instrument Passive financing tool Performance Financial Trade-Related
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Independence Principle
Importer (Buyer) Exporter and Importer have a sales contract between them which supports the underlying transaction Buyer has an obligation to the Issuing Bank to pay upon claim for payment Separate Contracts Issuing Bank Advising/ Confirming bank Exporter (Seller) Issuing Bank has the obligation to the Exporter to pay if he has complied with all the terms and conditions in the L/C
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Sight LC Transaction Flow
Buyer (Applicant) Seller (Beneficiary) 1 Sales Contract Importer (Buyer) Issuing Bank Exporter (Seller) Advising/ Confirming bank 2 4 Application LC Advised 4 parties to all international letter of credit transactions Process begins with an underlying sales contract that specifies payment by letter of credit. Important for sales staff to understand LC’s. Foreign BANK 3 LC Issued (Issuing Bank) (Advising Bank)
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Sight LC Transaction Flow
Seller Buyer 5 (Applicant) Shipment Buyer pays BEFORE receipt of goods 8 $ 6 $ 8 Documents 8 Foreign BANK $ Payment Claim 7
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Time LC Transaction Flow
Seller Buyer 5 (Applicant) Shipment Payment At Maturity 8 $ 6 $ 8 6 Documents Documents 8 $ Foreign BANK Payment Documents 6 Acceptance 7
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Advised Letters of Credit
Beneficiary: Bears credit risk of the issuing bank Bears full country risk of the transaction Responsible for ensuring compliance with Pro Forma Advising Bank: Responsibility limited to authentication Has no payment obligation Advocate for beneficiary
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Role of the Advising Bank
Verify the authenticity of the Letter of Credit, thereby protecting the beneficiary from fraud Advocate for the beneficiary No conflict of interest Other benefits of using your bank Commitment to Customer Service Relationship Pricing Consistency in Processing If you want more protection the next step is to consider having the letter of credit confirmed
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Confirmed Letters of Credit
Eliminates issuing bank country and commercial risk If the issuing bank’s letter of credit is confirmed, the confirming bank substitutes its own creditworthiness for that of the issuing bank’s and takes on all duties and responsibilities of an issuing bank Must be requested by issuing bank to confirm credit If the issuing bank is not deemed creditworthy, or if there are country risk issues a bank may refuse to add confirmation
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Confirmed Letters of Credit
Confirmation eliminates: Commercial credit risk of issuing bank Country risk of issuing bank Confirmed credit means payment obligation moves to the confirming bank and its country However: Confirmation is location specific Verify country of confirming bank Confirmation by branch or subsidiary of issuing bank May shift country risk May not shift commercial
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Payment Method: Letter of Credit Set it up right!
Irrevocable Issue Date, Expiry Date & Location Issuing Bank/Advising Bank Importer/Exporter Value & Currency Description of Goods/Services Required Documents Payment Terms Incoterms Port-To-Port Info UCP 600 LC Fees - Who Pays? Latest Ship Date Presentation Date Partial Shipments (Y/N) Transshipments (Y/N) Paying Bank Drawee Bank Reimbursing Bank Confirming Bank 20 Points of Negotiation in Structuring your LC
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Documents often requested
Draft Transportation documents Commercial Invoice Insurance Policy or Certificate Packing List Invoice / Consular Invoice / Customs Invoice Certificate of Origin Weight Certificate Inspection Certificate Your Freight Forwarder Can Provide Guidance On Which Documents Are Required – By Country
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A Fundamental Reality…
When dealing with letters of credit, the only things that count are the documents
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Reducing Cost and Accelerating Payment
Set up the LC correctly – negotiating all points Check with your bank on S.W.I.F.T arrangements prior to LC opening Avoid discrepancies Use LC template Get copy of LC application before issuance Have the LC confirmed/payable at National City Bank In some cases, discount Consult with National City
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Letter of Credit Fees Standard Fees: Optional Fees: Advising fee
Negotiation (Examination) Courier Optional Fees: Confirmation Acceptance Discount Transfer Assignment of proceeds Steamship guarantee or air release
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Letter of Credit Fees Fees to Avoid: Ancillary Fees: Amendment Fees
Discrepancy Fees Reimbursing bank fees Copy Fees Ancillary Fees: Faxes Communication charges Special processing
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What to do When the LC Arrives
Read the letter of credit very carefully Ensure you can comply with the terms (all 20+ points) Send copy of LC to freight forwarder Ask about anything you don’t understand If incorrect, reject the LC immediately If necessary, request the buyer amend the Letter of Credit
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The Letter of Credit as a Financing Tool
The protections afforded both parties in a letter of credit transaction provide each additional benefits as well One of these is the ability to use the credit already evidenced by the letter of credit itself to lower Trade Cycle cash flow financing costs for both Buyer and Seller
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Documentary Collections
Disguised open account transactions Less secure than letters of credit More secure than open account Benefits Don’t encumber buyer’s line of credit Very inexpensive Effective if properly structured Use of correct Incoterms Role of banks and freight forwarders
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Sight Collection (D/P)
Buyer Seller Buy/Sell Agreement 1 Shipment 2 4 $ 4 4 $ 2 Documents Documents 4 Foreign BANK $ 3 Documents Buyer pays BEFORE receipt of goods
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Time Collection (D/A) Buyer Seller Buy/Sell Agreement Shipment
1 Shipment 2 $ 6 5 Payment at Maturity 6 $ 2 Documents Documents 5 Acceptance 6 Foreign BANK $ 3 Documents Buyer pays AFTER receipt of goods
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Documentary Collection
Transaction Flow Seller ships Seller presents documents to National City National City sends documents to a correspondent Correspondent bank releases documents against: Payment (if Documents against Payment – D/P) Acceptance (if Documents against Acceptance – D/A) Note: D/A terms represent more risk to the seller. Correspondent wires funds to National City National City pays seller
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Payment Method Variations
CIA Variation 50% in advance, balance with order 100% upon shipment LC Variation Transfer Assignment Financing Open Account Variation Insured Performance guaranty (Standby LC)
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Export Credit Insurance & Financing Options
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Financing Options for U.S. Exporters
Banks: Letters of Credit Documentary Collections Avals Other Private Sources: Accounts receivable financing Factoring Forfaiting Credit Insurance Countertrade Government: Eximbank CCC / TDA / USAID OPIC
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Trade Finance Products
Export working capital loans Loans to provide working capital during production cycle Foreign receivable financing Loans and financial structures to finance export sales Financial Institution Buyer Credit Facilities Short-term loans extended to foreign buyers for the purchase of US goods Medium term export sales finance Term loans up to five years in length to foreign buyers
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Eximbank Programs Pre-Shipment Post-Shipment - Short Term
- Working capital guarantee Post-Shipment - Short Term * Small business insurance policies * Single sale and portfolio policies * Buyer policy * Bank insurance policy - Medium Term * Small business policies * Single sale * Guarantees * Loans * Project finance
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Working Capital Guarantee
Needed for: - Pre-shipment financing To be used when: - There is a lack of collateral to acquire traditional bank financing - Lender is unwilling to increase line of credit - Company needs working capital to finance exports - Banks will not lend against foreign A/R - Company needs to increase availability - Exporter wants to improve cash flow Benefits: - Helps pay for raw materials - Increases borrowing base (WIP included) - Higher advance rates and lower collateral requirements - Is relatively inexpensive - Provides local bank with a 90% guarantee
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Examples and “War” Stories
Cattle Triangle Poultry Equipment to Asia Cotton, Corn Germ Logs, Lumber, Veneer Meat “Know your Incoterms!” Understand bills of lading and consignee Be careful with acceptance certificate requirement
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Contact Information Bill Richeson Senior Vice President Global Trade & Supply Chain Solutions National City Bank Phone: (616) Global Client Care Center:
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