1. Alternative Trade Finance Options
Massachusetts Export Expo
December 11, 2012

2. Why We’re Here International Risks Discounted Letters of Credit
Standby Letters of Credit
Documentary Collections
Forfaiting
Why We’re Here

3. International Risk

4. 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

5. 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

6. International Methods of Payment

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

8. 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

9. Commercial Letters of Credit

10. Commercial Letter of Credit
An Irrevocable commitment by a bank to pay a seller of merchandise
when documents evidencing shipment are presented to the
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

11. Benefits to Exporter
Issuing Bank’s credit replaces the buyer’s credit.
Eliminates foreign bank and country risk if confirmed a U.S Bank.
Protects seller against order cancellation.
Provides seller with the highest degree of protection, short of cash in
advance.
Seller receives payment as quickly as possible.
Time LCs or usance credits offer a built-in financing mechanism. 7

12. The Draft Sample Draft: Also know as “Bill of Exchange”
An unconditional obligation of the drawee to pay it at maturity
A draft is a demand for payment
Draw on and accepted by a bank
For payment at a future specific date
Sample Draft:
No August 15, 2012
At 60 Days from Sight OF THIS SOLE BILL OF EXCHANGE PAY TO THE
ORDER OF XYC, Inc.
THE SUM OF $1,000, U.S. DOLLARS
One Hundred Thousand and 00/100 United States Dollars
TO: Korea Bank ABC, Inc.
Seoul, Korea
AUTHORIZED SIGNATURE

13. Acceptance and Deferred Payment
A time draft, or a bill of exchange, on which the drawee has written
the word "Accepted" and affixed a signature. It is an unconditional
obligation of the drawee to pay it at maturity.
Banker's Acceptance: A draft drawn on and accepted by a bank (drawee).
Trade Acceptance: A draft drawn on and accepted by a buyer (drawee).
Deferred Payment:
Paid at some future date without requirement of bill of exchange or
draft (high stamp duty in certain countries) 7

14. Letter of Credit Financing Solutions
What is L/C Discounting?
Bank purchases the draft under an L/C from the client at discount of the face value on a non-recourse basis, then SVB collects the proceeds of the L/C at maturity.
Utilize Commercial Letters of Credit to obtain extended payment terms from suppliers
Eliminate Country and Commercial Risk
Discounting allows access to cash tied up in Letters of Credit that have yet to pay
Source of Cash beyond Traditional Lines of Credit or Equity 7 14

15. Letters of Credit Discounting - Calculation
Discounting of $1,000,000 L/C for 180 days
Formula: Amount of L/C X Discount Rate X No. of Days / 360
$1,000,000 X 4.11% (0.61% [6Mo Libor] + 3.5%) X 180 / 360 = $20,550.00
Net proceeds = $979,450
Pricing Considerations:
Credit worthiness of Issuing Bank of the L/C
Country Risk
Tenor of Draft
Party responsible for discount fee 7 15

16. Potential Benefits Benefits to Seller
Accelerates Cash Flow and provides Non-recourse Financing
Mitigates Foreign Risk and Vendor Performance Risk
Competitive advantage – allows seller to offer financing to buyer
Reduces DSO
Finance AR that may be Ineligible under client’s Line

17. Standby Letters of Credit

18. Standby Letters of Credit
A Irrevocable undertaking of the issuing bank to honor, by payment, the beneficiary’s draft/documents when properly presented under the terms of the standby letter of credit
Supports applicant’s obligation under a contract or agreement by adding bank’s undertaking
In the event that the applicant fails to comply with the terms of the underlying agreement, the bank is obligated to pay the beneficiary upon presentation of documents in compliance with the terms and conditions of the letter of credit.
Secondary mechanism of payment – because the letter of credit should be drawn on only if the applicant fails to fulfill his obligation covered in the underlying contract.
In merchandise trade transactions, they are commonly used for invoice support, advance payments, performance bonds or to guarantee payment to a supplier 7

19. Standby Letters of Credit
Standby Letters of Credit are often used to support a variety of
transactions. Frequent uses include:
Invoice Support Standby
can be used in conjunction with Open Account payment terms. As supplier may be willing to ship on Open Account terms but only if it has received a separate assurance from a bank, that the buyer will pay those invoices. The Invoice Support Standby serves the purpose, and provides the buyer with a bank undertaking that the invoice will be promptly paid. 7

20. Standby Letters of Credit
Standby Letters of Credit are often used to support a variety of
transactions. Frequent uses include:
Performance Standby
can be used when a supplier is required to provide a Performance Standby to a buyer. The performance Standby serves to assure the buyer that the supplier will perform in accordance with the terms of the contract and in fact supply the goods, etc.
Advance Payment Standby
can be used when a buyer is required to make an up-front payment to the supplier, in advance of the actual supply of goods. In such circumstances, the buyer may require a separate assurance, issued by the supplier’s bank, that the advance payment will be refunded in the event that the supplier fails to perform under the contract. 7

21. Standby Letters of Credit
Standby Letters of Credit are often used to support a variety of
transactions. Frequent uses include:
Guarantee – Federal Reserve Regulations prevent nationally chartered banks in the United States from issuing Guarantees. That is the reason why U.S. banks generally issue Standby Letters of Credit in lieu of Guarantees.
Counter Standby Guarantees – Some international contracts require that a Standby Letter of Credit or Guarantee be issued in a specific foreign country and under the laws or in the language of, that foreign country. When a U.S. bank cannot issue its own Standby Letter of Credit or Guarantee under the required term, they will instead issue a Counter Standby to a correspondent bank in the foreign country. The correspondent bank will then use the U.S. bank’s counter Standby Guarantee as security for its issuance of the local Guarantee in the required format. 7

22. Documentary Collections

23. 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

24. Documentary Collections - Tenor
Sight or Documents Against Payment:
The payment is made when the documents are received by the
buyer’s bank and the buyer agrees to pay.
Tenor or Documents Against Acceptance (30, 60, 90 etc. days):
The documents are received by the buyer’s bank, the buyer signs
draft or bill of exchange and agrees to pay at a specific future date.
Risk: The seller is counting on the buyer’s ability to pay on the maturity date. Remember, the buyer has possession of the merchandise before payment is due. If the buyer’s bank adds their Aval, which is their unconditional obligation to pay at maturity, the draft can be discounted for immediate funds. 7

25. Documentary Collections – Benefits to Exporter
More competitive sales terms - gives exporter advantage over
other sellers that are offering Cash in Advance or LC terms
Banks monitor the collection and automatically send out
periodic tracers
Slightly more secure for the seller than an open account.
Documents are controlled by agent banks until payment is
obtained or the draft is accepted by buyer.
Less costly than an LC. 7

26. International Credit Products - Forfaiting

27. Alternative Financing Solutions
What is Forfaiting?
It’s an international trade finance practice, where a bank purchases, at a discount, larger dollar amount, longer-term receivables from exporters. It could be a one-off deal or a series of on-going transactions.
Forfaiting is a non-recourse transaction
Ideally, amount is $500,000 or more and the term is 6 months or longer, up to years.

28. Potential Benefits Benefits to Seller
Accelerates Cash Flow and provides Non-recourse Financing
Mitigates against all Foreign Risk of non-payment.
Competitive advantage – allows seller to offer financing to buyer under open account payment terms.
Reduces DSO

29. Questions? 11