Trade Finance: Risks and Rewards

Export Finance Adds Complexity More payment options More Risks Political Risks War is not the only political risk! Payment Risks Most transactions are successful but: Who do you call if there is a problem? Currency Risks Even if you get paid in dollars, you face this risk.

Balancing Financial Risks and Benefits Wire Transfer Funds in Advance Least risky for seller, most risky for buyer Letters of Credit Provides protection to both parties Bank Drafts Provides limited protection to seller Credit Card Payments More risky than you might think Open Account Terms Highest risk to seller Best relationship builder Your best customers will probably demand these terms

Letters of Credit Buyer Seller Buyer’s Bank Seller’s Bank 1 Order/Contract Buyer Orders from Seller 2 Letter of Credit Buyer Instructs Buyer’s Bank Seller’s Bank offers to Confirm 3 Documents Shipping Documents to Buyer’s Bank from Seller’s Bank 5 Product Is Released to Buyer 4 Dollars Buyer’s Bank verifies Documents, Wires Money to Seller’s Bank

Letters of Credit Letters of Credit are Not Related To Your Contract of Sale Both Buyer and Seller are Protected Seller is protected from Risk of Non-Payment Buyer is Protected from Risk of Non-Performance Bank(s) Guarantee Performance Discrepancies 80% of all L/C’s are discrepant Costs Buyer must collateralize L/C Fees Minimum fees apply estimated $1000 Types of L/C’s Sight or term/usance Standby Assignable or Transferable or Back-to-Back Confirmed or Unconfirmed

Bank Draft Buyer Seller Buyer’s Bank Seller’s Bank 1 Order/Contract Buyer Orders from Seller 2 Documents Shipping Documents to Buyer’s Bank from Seller’s Bank 5 Product Is Released to Buyer when buyer presents shipping documents 4 Dollars Buyer’s Bank, Wires Money to Seller’s Bank *If they receive funds from Buyer 3 Documents Shipping Documents to Buyer from Buyer’s Bank On condition of payment or signature

Credit Card Transactions Risks You Face, and Mitigants High incidence of fraud – some regions and countries are particularly prone to problems Charges can be reversed at any time. For small transactions with many customers, risk is spread, may be an appropriate option. No insurance available against risks – internal mitigants apply: Know your customer rules apply Set a maximum dollar amount for credit card transactions Reserve against possible losses

Open Account Sales: You’re the Bank. Seller bears the majority of the risk Seller finances work in process and inventory Seller is the source of financing for the buyer Buyer’s cost to finance transaction is the lowest available Buyer’s risk of seller non-performance is minimized Be prepared to offer N60 or longer Your international customers are knowledgeable about credit insurance, they expect you to be as well

Credit and Risk Mitigation General Rules Know Your Customer Choose appropriate terms Factors Single/first sale, or relationship/repeat business Amount Financing needs: yours and your customer’s WIP cost, manufacturing lead time Transit time to customer Credit Insurance

Know Your Customer Tips and Techniques Correctly identify legal entity you’re doing business with Where is your customer? Simple check: Google Maps! Get a tax ID number Visit your customer (?) Credit reports Financial Statements Trade references – may cost more than you think.

Export Credit Insurance What is Credit Insurance How does Credit Insurance work? Coverages Pricing Why Credit Insurance Expanding your global opportunities Offer competitive terms Financing can help with margin/pricing negotiation Cost savings and higher efficiency Flexible Tool Financial leverage for buyer and seller Market expansion Credit Decision Assistance

Credit Insurance Underwriters Ex-Im Bank Current Status: Ex-Im Bank is not authorized. Underwriters Differences between products Rates, minimum premiums Deductible Available coverages Key buyer coverage Political risks cover Country availability Content restrictions Underwriting differences- administrative overhead

Claims Transactional documents requirement Written purchase orders Invoice Shipping document Credit Limit Filing Deadline

Specialty Brokers Provide options Manage complexity Ensure you understand your policy Assist with updates New buyers New products Higher limits for policy or buyer Longer terms