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

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

3. 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

4. International Risk

5. 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

6. 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

7. Resources to Determine Risk
Commercial Credit Risk Resources
Public:
U.S. Department of Commerce “Doing Business In” Guides
Private:
Coface North America,
Dun & Bradstreet,
Graydon,
Political Risk Resources
CIA World Factbook,
Private
Dun & Bradstreet International Risk and Payment Review,
Coface North American, 7

8. International Methods of Payment

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

10. 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

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

12. 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

13. 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

14. 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

15. 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

16. 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

17. Questions? 11