Presented to: Western Maquiladora Trade Association April 15, 2009 Introduction of Basic Terms of Trade Payment

Agenda Basic Terms of Payment Special Letters of Credit Financing Trade

Basic Terms of Payment

Few Common Options Open Account Documentary Collection Letter of Credit Cash in Advance

Buyer Seller Open Account Documentary Collection Letter of Credit Cash in Advance High Low R I S K High R I S K Risks Associated with Terms of Payment

Open Account

Seller Bears All Risks –Commercial –Country No Risk to Buyer (Importer)

Documentary Collections

An order by the seller to his bank to collect payment/acceptance from the buyer in exchange for the transfer of documents that enable the holder to take possession of the goods. Unlike letters of credit, banks involved in the transaction do not guarantee payment but act only as collectors of payment.

Common Terms for Collections Documents Against Payment (D/P) Documents Against Acceptance (D/A)

Letters of Credit

Bank’s commitment to pay the seller a specified sum of money on behalf of the buyer under precisely defined terms and conditions. The buyer specifies certain documents (including a title document) from the seller before the bank is to make payment, and the seller is assured that payment will be received after goods are shipped so long as the specified documents are provided.

Letters of Credit Governed by Rules –Uniform Customs and Practice for Documentary Credits, International Chamber of Commerce Publication No. 600 Banks Deal in Documents, not Goods. Payment Must be Made for Conforming Documents.

Common Letter of Credit Terms Sight –Payment is Due When Conforming Documents Are Presented Usance - Banker’s Acceptance –Payment is Due at a Later Date up to 180 Days –Can be Paid at a Discount Before Maturity

Usance Letters of Credit Importer Receives Terms of Sale to 180 Days Seller Receives Payment at Sight Favorable US Dollar Financing Rates

Special Letters of Credit Standby Credit Transferable Credit Red Clause Credit

Common Usage Of Standby Credit Bid Bond Performance Bond Advance Payment Bond Customs Bond Credit Enhancement Trade Support

Standby Letters of Credit Not Intended as Primary Source of Payment –Backup Source of Payment Used for –Credit Enhancement –Bonds –Financial Backing to a Guarantee

Transferable Letter of Credit One where the original beneficiary transfers all or part of the proceeds of an existing credit to another party (typically the ultimate supplier of the goods). It is normally used by middleman as a financing tool.

Transferable Credit Having any credit line Disclosing his profit margin Disclosing the identities of the buyer Allows a middleman to get a deal done without:

Red Clause Credit Provides LC beneficiary a pre-shipment advance payment (usually a portion of the LC face value). In essence, it represents a working capital loan from buyer (importer) to seller/manufacturer.

Cash in Advance

Cash In Advance Buyer (Importer) Bears All Risks –Commercial –Country

Financing Trade

Import Financing - Usance Letter of Credit - Trade Loan - Banker’s Acceptance (B/A)

Global Trade Sales Mike Marcal, Vice President (949)