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Financing Tools to Help You Increase Exports and Avoid Pitfalls Lansing, Michigan March 24, 2009 Bill Richeson, SVP Global Trade & Supply Chain Solutions.

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Presentation on theme: "Financing Tools to Help You Increase Exports and Avoid Pitfalls Lansing, Michigan March 24, 2009 Bill Richeson, SVP Global Trade & Supply Chain Solutions."— Presentation transcript:

1 Financing Tools to Help You Increase Exports and Avoid Pitfalls Lansing, Michigan March 24, 2009 Bill Richeson, SVP Global Trade & Supply Chain Solutions International Division National City Bank

2 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

3 Global Trade Overview

4 Classification of Countries Industrialized Countries 30 Countries Emerging Countries 200 Countries

5 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

6 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

7 Trade Concepts, Payment Procedures and Risks

8 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

9 Terminology Transaction 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

10 Risk Awareness Credit Risk Performance Risk Country Risk Currency Risk Transportation Risk Regulatory Risk Transaction Structure Risk Fraud Identify & Understand the Risks

11 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

12 Pricing/Shipping Terms Known as Incoterms 2000 –Published by: ICC Publishing Corporation 156 Fifth Avenue New York, New York (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

13 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

14 Export Regulations 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. (www.bxa.doc.gov) Office of Foreign Asset Control (OFAC) –Anti-boycott language prohibitions –Blocked Countries/Specially Designated Individuals RESOURCE: Office of Foreign Asset Control (www.treas.gov/ofac)www.treas.gov/ofac Know the Rules

15 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

16 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

17 Pricing Terms

18 Incoterms 2000 Departure 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

19 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

20 Foreign Exchange 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

21 Payment Methods

22 When do you want to get paid? When do buyers want to pay? There is a mismatch between Buyer and Seller Goals Now! Later!

23 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 Buyer & Seller have Reversed Priorities! Lowest Risk Highest Risk Best Cash Flow Worst Cash Flow

24 Choice of Methods (What Determines?) Buyer-Seller Relationship Buyers credit standing Competition Uniqueness of the product (custom made?) Country conditions (political, economic) Cash flow considerations Transaction costs Other

25 Payment Methods: 4 Methods Cash in Advance Documentary Collection Terms Favor Seller Terms Favor Buyer Letter of Credit Open Account

26 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

27 Cash In Advance Buyer Pays –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)

28 Open Account Seller Ships Buyer Pays –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)

29 Letters of Credit A versatile tool for closing the gap that exists between buyers and sellers.

30 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 banks creditworthiness, which is generally well known or easily ascertainable for that of its customer, which may not be as well known

31 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

32 Independence Principle Importer (Buyer) Buyer has an obligation to the Issuing Bank to pay upon claim for payment Issuing Bank has the obligation to the Exporter to pay if he has complied with all the terms and conditions in the L/C Exporter and Importer have a sales contract between them which supports the underlying transaction Issuing BankExporter (Seller) Separate Contracts Advising/ Confirming bank

33 Sales Contract (Issuing Bank) (Advising Bank) Sight LC Transaction Flow Buyer (Applicant) Seller (Beneficiary) 2 2 Application Foreign BANK 4 4 LC Advised 3 3 LC Issued 1 1 Importer (Buyer) Issuing Bank Exporter (Seller) Advising/ Confirming bank

34 Shipment Documents Payment Claim Buyer pays BEFORE receipt of goods Sight LC Transaction Flow 5 $ Buyer Seller (Applicant) Foreign BANK 8 7 $ 8 6 $ 8

35 Time LC Transaction Flow Shipment Payment Documents Payment At Maturity 5 $ Buyer Seller (Applicant) Foreign BANK 8 $ 8 6 $ 8 Documents 6 Acceptance 7 6

36 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

37 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

38 Confirmed Letters of Credit Eliminates issuing bank country and commercial risk If the issuing banks letter of credit is confirmed, the confirming bank substitutes its own creditworthiness for that of the issuing banks 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

39 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

40 Payment Method: Letter of Credit Set it up right! 1. Irrevocable 2. Issue Date, Expiry Date & Location 3. Issuing Bank/Advising Bank 4. Importer/Exporter 5. Value & Currency 6. Description of Goods/Services 7. Required Documents 8. Payment Terms 9. Incoterms 10. Port-To-Port Info 11. UCP LC Fees - Who Pays? 13. Latest Ship Date 14. Presentation Date 15. Partial Shipments (Y/N) 16. Transshipments (Y/N) 17. Paying Bank 18. Drawee Bank 19. Reimbursing Bank 20. Confirming Bank 20 Points of Negotiation in Structuring your LC

41 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

42 A Fundamental Reality… When dealing with letters of credit, the only things that count are the documents

43 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

44 Letter of Credit Fees Standard Fees: –Advising fee –Negotiation (Examination) –Courier Optional Fees: –Confirmation –Acceptance –Discount –Transfer –Assignment of proceeds –Steamship guarantee or air release

45 Letter of Credit Fees Fees to Avoid: –Amendment Fees –Discrepancy Fees –Reimbursing bank fees –Copy Fees Ancillary Fees: –Faxes –Communication charges –Special processing

46 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 dont understand If incorrect, reject the LC immediately If necessary, request the buyer amend the Letter of Credit

47 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

48 Documentary Collections Disguised open account transactions Less secure than letters of credit More secure than open account Benefits –Dont encumber buyers line of credit –Very inexpensive –Effective if properly structured Use of correct Incoterms Role of banks and freight forwarders

49 Shipment Buyer pays BEFORE receipt of goods Sight Collection (D/P) 2 Documents $ 4 $ 4 $ 4 Foreign BANK BuyerSeller Buy/Sell Agreement 1

50 Buyer pays AFTER receipt of goods Time Collection (D/A) Documents $ 6 $ 6 $ 5 Foreign BANK Payment at Maturity 5 Acceptance BuyerSeller Shipment 2 Buy/Sell Agreement 1

51 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

52 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)

53 Export Credit Insurance & Financing Options

54 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

55 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

56 Eximbank Programs Pre-Shipment - 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

57 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

58 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

59 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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