Assessing Credit Risk To Manage Your International Payments Trade Finance 101 Assessing Credit Risk To Manage Your International Payments

Why We’re Here Where to Start International Risks International Methods of Payment Why We’re Here

Trade Agreements: Underlying Sales Contract What merchandise will be purchased In what quantity At what price Shipping method (sea, air, rail, etc.) When it will be shipped Who will insured it (buyer or seller) How and when payment will be made 7

International Risk

International Risks Commercial risk (credit risk) Risk associated with the individual or institution responsible for payment (risk factors such as poor profitability, lack of sales, cash flow problems, insolvency, etc.) Political risk (country risk) Inability of your customer to pay the receivable in full or on time due to government action (risk factors such as, war or military actions, revolution, changes in export- import laws, currency inconvertibility) Foreign exchange risk Transaction, translation and economic exposure 7

Questions to Ask Before Selecting Method of Payment What’s our leverage with this buyer? Can the business afford the loss if it is not paid? Will extending credit and the possibility of waiting several months still make the sale profitable? Can the sale only be made by extending credit? If the shipment is made and not accepted can an alternative buyer be found? 7

Resources to Determine Risk Commercial Credit Risk Resources Public: U.S. Department of Commerce “Doing Business In” Guides http://export.gov/about/eg_main_016806.asp Private: Coface North America, www.coface-usa.com Dun & Bradstreet, www.dnb.com Graydon, www.graydonamerica.com Political Risk Resources CIA World Factbook, www.cia.gov/cia/publications/factbook Private Dun & Bradstreet International Risk and Payment Review, www.dnbcountryrisk.com Coface North American, www.coface-usa.com 7

International Methods of Payment

Forms of Payment in International Trade Open Account Cash in Advance Documentary Collection Letter of Credit 7

Intl Methods of Payment: Risk Assessment Seller Exporter Buyer Importer Relies completely on buyer to pay as previously agreed No Risk Open Account Relies on buyer to pay draft on presentation or upon maturity Relies on exporter to ship goods as described in documents Documentary Collections Risk of his own non- performance in adhering to all the requirements in the LC Relies on seller to ship goods as described in the documents Letter of Credit No risk on exporter to ship goods as ordered Cash in Advance High Risk Low Risk 7

Determining Terms of Payment *Confirmation by U.S. or Other World Class Bank Suggested 7

Letter of Credit Usage Country/Continent L/C Usage Japan Asia (not including Japan) South America Europe Eastern Europe Middle East Rare Yes Yes No, but may use Bankers Guarantee Yes Yes 7

Open Account In an open account trade arrangement, the goods are shipped to a buyer without guarantee of payment. Quite often, the buyer does not pay on the agreed time. Unless the buyer's integrity is unquestionable, this trade arrangement is risky to the seller. Seller has High Risk of non-payment on their invoices 7

Cash in Advance The cash in advance is the safest term of payment for the seller, the Seller receives payment before merchandise is shipped to the buyer. Seller has No Risk, receives payment on invoices before the product is shipped Draw back to the Seller is that they may lose business because competitors are willing to agree to more flexible payment terms 7

Documentary Collections Documents controlling merchandise forwarded through banking channels Documents surrendered when buyer: Pays, or Accepts seller’s draft Not a guarantee of payment A seller will usually agree to receive payment on a documentary collection basis when the buyer’s creditworthiness and country of domicile represent acceptable risks 7

Commercial Letter of Credit An Irrevocable commitment by a bank to pay a seller of merchandise when documents evidencing shipment are presented to issuing bank. The issuing bank substitutes its credit for that of the buyer, thus assuring the seller that payment will be made by the bank provided that the terms and conditions of the L/C are met. If the L/C is “confirmed” by a U.S. bank, the U.S bank undertakes to pay seller, thus eliminating the foreign bank and country risk associated with an unconfirmed L/C. 7

Questions? 11