Financing Tools Increase Exports Avoid Pitfalls

8/8/2019 Financing Tools Increase Exports Avoid Pitfalls

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Financing Tools to Help You

Increase Exports and AvoidPitfallsLansing, Michigan

March 24, 2009

Bill Richeson, SVP

Global Trade & Supply Chain Solutions

International Division

National City Bank


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AgendaGlobal Trade OverviewTrade Concepts, Payment Procedures and RisksPricing TermsForeign Exchange

Payment MethodsLetters of Credit A Fundamental RealityUsing the Letter of Credit as a Financing ToolDocumentary CollectionsExport Credit Insurance & Other Financing OptionsExamples and War StoriesQuestions & Answers


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Global Trade Overview


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Classification of Countries

Indust rialize dCount rie s

30 Countries

Em ergi n gCount rie s200 Countries


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Definitional DifferencesIndust rialize d Count rie s

Mature EconomiesEm ergi n g Count rie s

N ewer Economic Systems

Convertible Currencies N on-convertible Currencies

Stable Political Systems Political UncertaintiesHigher Per Capita Standardof Living

Lower Per Capita Standardof Living

Low Perceived Political andEconomic Risks

High Perceived Political andEconomic Risk

Looking for ExpandedMarketsProvider of InvestmentCapital

Capital Shortage - Relianceon Foreign Investments


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General Patterns of TradeIndust rialize d Count rie s

Market DeterminesExchange Rates

Em ergi n g Count rie sFixed Exchange Rates

Invoice in Local Currencies Invoice in Dollars

Open Account TermsPrevalent

Letters of Credit or Collections

Inter-company Shipment Direct Sales to Buyer

General Feeling of Low Risk External Credit Guarantee

Insurance is N ice to Have Insurance Prevents Baldness

Buyer Creditworthiness isKey Buyer Credit Limits Payment Terms Relaxed

Country Creditworthiness isKey Country Limits

Payment Terms Tight


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General Trade Concepts: StartingRight!Know your customer Know their country

Know their credit bankUnderstand the Trade Cycle

Understand Terminology

Understand Transaction Risks

Understand Ground Rules

Work with your bank


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TerminologyTransaction Parties Seller Exporter Shipper Beneficiary (Bene) Buyer Importer Account Party Applicant Issuing Bank Opening Bank Advising Confirming Bank N egotiating Paying Reimbursing BankSupporting Parties Carrier Freight Forwarder Customs House Broker Insurer Attorney


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Risk EvaluationSources of Information:

Your bank Bank credit referenceExport Import Bank Country Limitation Schedule

Credit Agencies (D&B, Veritas, etc.)InternetU.S. Dept. of CommerceTrade references

M easure the Risks


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Pricing/Shipping TermsKnown as Incoterms 2000 Published by:

ICC Publishing Corporation156 Fifth AvenueN ew York, N ew York 10010(212) 206-1150Website: http://www.iccwbo.org

A set of international rules, initially formulated in 1936by the International Chamber of Commerce (ICC) todefine & interpret a standard set of pricing/shippingterms for international trade.

K now the Rules


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International Chamber of Commerce

(ICC)Uniform Customs & Practices (UCP) Pub. 600 Rules that govern letters of credit Often referred to as the silent terms to the letter of credit

because they are incorporated into the letter of credit byreference.

Uniform Rules for Collections (URC) Pub. 522 Rules that govern documentary collections

ICC Publication 525 (Rules for Reimbursements)ISP 98 Rules for Standby Letters of Credit

K now the Rules


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Export RegulationsShippers Export Declaration (SED) Government required document stating the type of export

license used to determine if the merchandise is authorized for shipment. (Required for all exports with a value greater than

$2,500)RESOURCE: Bureau of Export Administration U.S.Dept. of Commerce. ( www.bxa.doc.gov )Office of Foreign Asset Control (OFAC) Anti-boycott language prohibitions

Blocked Countries/Specially Designated IndividualsRESOURCE: Office of Foreign Asset Control(www.treas.gov/ofac )

K now the Rules


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LogisticsTalk to your freight forwarder to understand: Costs Transportation Connections

Packaging Requirements Risks of using certain carriers/forwarders Differences in documentation Loss potential (regardless of Insurance or Incoterms)

K now Whom to Ask


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Role of the Freight Forwarder Pre-Shipment Packaging Freight quotes Import documentation requirements Export documentationShipment Transportation Document handling InsurancePost-Shipment Tracking Arrival handling


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Pricing Terms


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Incoterms 2000Departure Group Ex Works = Warehouse/FactoryMain Carriage Unpaid Group FCA = Free Carrier

FAS = Free Along Side Vessel FOB = Free On Board VesselMain Carriage Paid Group CFR/CPT = Cost & Freight to arrival port CIF/CIP = Cost, Insurance & Freight to arrival Port

Arrival Group DAF = Delivered at Frontier DES = Delivered Ex Ship DEQ = Delivered Ex Quay DDU = Delivered Duty Unpaid DDP = Delivered Duty Paid


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Foreign ExchangeThere is foreign exchange risk to someone in everyinternational transaction even those payable in U.S.dollarsFour Basic Risks- Fluctuation risk- Transaction risk cash flow risk- Economic risk operating risk vs. competitors- Translation risk accounting riskYou must quantify and manage this riskBanks have tools and expertise to help you mitigatethese risks


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Foreign ExchangeCommon Uses of Foreign Exchange

Transactions used to make or receive payments inanother currency

Precautionary hedges to protect against unexpectedchanges in exchange ratesSpeculative positions to profit from expectedchanges in exchange rates

Foreign investments to buy and sell foreign assets


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Payment Methods


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Wh en do you want to get paid?Wh en do buyers want to pay?

There is a mismatch betweenBuyer and Seller Goals

N ow!

La ter !


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Choice of Methods

( Wh at Determines?)Buyer-Seller RelationshipBuyers credit standingCompetitionUniqueness of the product (custom made?)Country conditions (political, economic)Cash flow considerationsTransaction costsOther


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Payment Methods: 4 Methods

Cash in Advance

Documentary Collection

Ter m sFav o r

S eller

Ter m sFav o r Buyer

Letter of Credit

Open Account


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Risk Evaluation and MitigationHigh Risk Cash-in-Advance or Confirmed LCModerate Risk Advised or Confirmed LCLow Risk Documentary Collection (at sight)

Very Low Risk: Documentary Collection (Time) or,Open Account (possibly with Credit Insurance)Lowest Risk Open Account on extended terms

Ma ke Deci s ions to Mitiga te the Ri sksCons id er A LL risks , not just cre d it risks


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Open AccountSeller ShipsBuyer Pays Wire Transfer Check Draft Credit CardShip it and hope you get paidForeign import regulations may prohibit

Full Country & Buyer Credit RiskConsider payment type (wire transfer best)Requires extensive knowledge of the buyer (underwriting, trade references, excellent reputation)


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Letters of Credit

A versatile tool for closing t h e gapt h at exists between buyers and

sellers.


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Letters of CreditTwo Common Types Documentary / Commercial

Active payment instrumentActive financing tool

StandbyPassive payment instrumentPassive financing tool Performance

Financial Trade-Related


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Independence Principle

Im po r ter ( B uy er)B uy er ha s a n ob liga tion to the

Issu in g B a nk to p a y upon clai m f o r p a ym e nt

Issu in g B a nk ha s the ob liga tion to the Ex po r ter to p a y if he ha s c o m p lie d with all the ter m s a nd

c ond itions in the L/C

Ex po r ter a nd Im po r ter have a s ale s c ont rac t b e tw ee n the m which

suppo r ts theund erl yin g tra ns ac tion

Issu in g B a nk Ex po r ter (Seller)

S eparateContracts

Ad vis in g /Con fir m in g b a nk


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Sale s Cont rac t

(Issu in g B a nk ) (Ad vis in g B a nk )

Sight LC Transaction FlowB uy er (Applicant) Seller (Beneficiary)

2

App lica tion

Fo reig n B ANK

4

LC Ad vis e d

3

LC Issu e d

1

Im po r ter (B uy er)

Issu in gB a nk

Ex po r ter (Seller)

Ad vis in g /Con fir m in g b a nk


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Time LC Transaction Flow

Shi p m e nt

Pa ym e nt Do c u m e nts

Pa ym e nt At Ma tu rity

5

$

B uy er Seller

(App lica nt )

Fo reig n B ANK

8

$

8

6$8 Do c u m e nts6 Do c u m e nts

Acce pt a n ce7

6


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Advised Letters of CreditBeneficiary:

Bears credit risk of the issuing bankBears full country risk of the transaction

Responsible for ensuring compliance with Pro Forma

Advising Bank:Responsibility limited to authenticationHas no payment obligation

Advocate for beneficiary


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Role of the Advising BankVerify the authenticity of the Letter of Credit, therebyprotecting the beneficiary from fraud

Advocate for the beneficiary

N

o conflict of interestOther benefits of using your bank Commitment to Customer Service Relationship Pricing Consistency in Processing

If you want more protection t h e next step is to consider h aving t h e letter of credit confirmed


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Confirmed Letters of CreditEliminates issuing bank country and commercial riskIf the issuing banks letter of credit is confirmed, theconfirming bank substitutes its own creditworthiness

for that of the issuing banks and takes on all dutiesand responsibilities of an issuing bankMust be requested by issuing bank to confirm creditIf the issuing bank is not deemed creditworthy, or if there are country risk issues a bank may refuse toadd confirmation


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Confirmed Letters of CreditConfirmation eliminates: Commercial credit risk of issuing bank Country risk of issuing bank

Confirmed credit means payment obligation moves tothe confirming bank and its countryHowever:

Confirmation is location specific Verify country of confirming bank

Confirmation by branch or subsidiary of issuing bank May shift country risk May not shift commercial


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Payment Method: Letter of CreditSet it up right!

1. Irrevocable2. Issue Date, Expiry Date &

Location3. Issuing Bank/Advising Bank4. Importer/Exporter 5. Value & Currency6. Description of

Goods/Services7. Required Documents8. Payment Terms9. Incoterms10. Port-To-Port Info

11. UCP 60012. LC Fees - Who Pays?13. Latest Ship Date14.

Presentation Date15. Partial Shipments (Y/ N )16. Transshipments (Y/ N )17. Paying Bank18. Drawee Bank19.

Reimbursing Bank20. Confirming Bank

20 Points of Negotiation in Structuring your LC


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Documents often requestedDraftTransportation documentsCommercial Invoice

Insurance Policy or CertificatePacking ListInvoice / Consular Invoice / Customs InvoiceCertificate of OriginWeight CertificateInspection Certificate

Y our Freight Forwar d er Can Provi d e Gui d ance OnWhich Documents Are Require d By Country


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A Fundamental Reality

Wh en dealing wit h letters of credit, t h e only t h ings t h at count are t h e documents


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Reducing Cost and AcceleratingPayment

Set up the LC correctly negotiating all pointsCheck with your bank on S.W.I.F.T arrangements

prior to LC opening Avoid discrepancies

Use LC template Get copy of LC application before issuance

Have the LC confirmed/payable at N ational City BankIn some cases, discountConsult with N ational City


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What to do When the LC ArrivesRead the letter of credit very carefullyEnsure you can comply with the terms (all 20+ points)Send copy of LC to freight forwarder

Ask about anything you dont understandIf incorrect, reject the LC immediatelyIf necessary, request the buyer amend the Letter of Credit


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Documentary CollectionsDisguised open account transactionsLess secure than letters of creditMore secure than open account

Benefits Dont encumber buyers line of credit Very inexpensive Effective if properly structured

Use of correct IncotermsRole of banks and freight forwarders


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Shipment

B uy er p a ys B E FOR E recei pt o f g oods

Sight Collection (D/P)

2

Documents2

Documents3

4

$

4 $4$

Documents4

Fo reig n B ANK

B uy er Seller Buy/Sell

Agreement1


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B uy er p a ys AFT E R recei pt o f g oods

Time Collection (D/A)

Documents2

Documents3

6

$

6 $6$

Documents5

Fo reig n B ANK

Payment at Maturity

5 Acceptance

B uy er Seller

Shipment2

Buy/Sell Agreement1


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Documentary CollectionT ransaction Flow

Seller shipsSeller presents documents to N ational City

N ational City sends documents to a correspondentCorrespondent bank releases documents against: Payment (if Documents against Payment D/P) Acceptance (if Documents against Acceptance D/A)

Note: D/ A terms represent more risk to t h

e seller.Correspondent wires funds to N ational CityN ational City pays seller


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Payment Method VariationsCIA Variation 50% in advance, balance with order 100% upon shipment

LC Variation Transfer Assignment Financing

Open Account Variation Insured Performance guaranty (Standby LC)


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Export Credit Insurance

&Financing Options


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Financing Options for U.S.ExportersBanks:

Letters of Credit Documentary Collections Avals

Other Private Sources: Accounts receivable financing Factoring Forfaiting Credit Insurance CountertradeGovernment: Eximbank CCC / TDA / USAID OPIC


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Trade Finance ProductsExport working capital loans Loans to provide working capital during production cycle

Foreign receivable financing

Loans and financial structures to finance export salesFinancial Institution Buyer Credit Facilities Short-term loans extended to foreign buyers for the purchase

of US goods

Medium term export sales finance Term loans up to five years in length to foreign buyers


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Eximbank ProgramsPre-Shipment

- Working capital guaranteePost-Shipment- Short Term

* Small business insurance policies* Single sale and portfolio policies* Buyer policy* Bank insurance policy

- Medium Term* Small business policies

* Single sale* Guarantees* Loans* Project finance


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Working Capital GuaranteeN eeded for:

- Pre -s hi p m e nt fin a n ci n gTo be used when:- There is a lack of collateral to acquire traditional bank financing- Lender is unwilling to increase line of credit

- Company needs working capital to finance exports- Banks will not lend against foreign A/R- Company needs to increase availability- Exporter wants to improve cash flowBenefits:- Helps pay for raw materials- Increases borrowing base (WIP included)- Higher advance rates and lower collateral requirements- Is relatively inexpensive- Provides local bank with a 90% guarantee


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Contact Information

Bill RichesonSenior Vice PresidentGlobal Trade & Supply Chain Solutions

N ational City BankPhone: (616)771-8849e-mail: [email protected]

G lob al Clie nt Care Ce nt er: 8 00 -6 22 -468 5


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