financing tools to help you increase exports and avoid pitfalls lansing, michigan march 24, 2009...
TRANSCRIPT
“Financing Tools to Help You Increase Exports and Avoid
Pitfalls”Lansing, Michigan
March 24, 2009
Bill Richeson, SVP
Global Trade & Supply Chain Solutions
International Division
National City Bank
Agenda Global Trade Overview Trade Concepts, Payment Procedures and Risks Pricing Terms Foreign Exchange Payment Methods Letters of Credit A Fundamental Reality Using the Letter of Credit as a Financing Tool Documentary Collections Export Credit Insurance & Other Financing Options Examples and “War” Stories Questions & Answers
Global Trade Overview
Classification of Countries
IndustrializedCountries
30 Countries
EmergingCountries200 Countries
Definitional DifferencesIndustrialized Countries Mature Economies
Emerging Countries Newer Economic Systems
Convertible Currencies Non-convertible Currencies
Stable Political Systems Political Uncertainties Higher Per Capita Standard of Living Lower Per Capita Standard of Living
Low Perceived Political and Economic Risks
High Perceived Political and Economic Risk
Looking for Expanded Markets
Provider of Investment Capital
Capital Shortage - Reliance on Foreign Investments
General Patterns of TradeIndustrialized Countries Market Determines
Exchange Rates
Emerging Countries Fixed Exchange Rates
Invoice in Local Currencies Invoice in Dollars Open Account Terms Prevalent Letters of Credit or Collections
Inter-company Shipment Direct Sales to Buyer
General Feeling of Low Risk External Credit Guarantee
Insurance is Nice to Have Insurance Prevents Baldness Buyer Creditworthiness is Key
– Buyer Credit Limits– Payment Terms Relaxed
Country Creditworthiness is Key– Country Limits– Payment Terms Tight
Trade Concepts, Payment Procedures
and Risks
General Trade Concepts: Starting Right!
Know your customer
Know their country
Know their “credit” bank
Understand the Trade Cycle
Understand Terminology
Understand Transaction Risks
Understand Ground Rules
Work with your bank
Terminology Transaction Parties
– Seller – Exporter – Shipper – Beneficiary (Bene)– Buyer – Importer – Account Party – Applicant– Issuing Bank – Opening Bank– Advising – Confirming Bank– Negotiating – Paying – Reimbursing Bank
Supporting Parties– Carrier– Freight Forwarder– Customs House Broker– Insurer– Attorney
Risk Awareness Credit Risk Performance Risk Country Risk Currency Risk Transportation Risk Regulatory Risk Transaction Structure Risk Fraud
Identify & Understand the Risks
Risk Evaluation
Sources of Information: Your bank – Bank credit reference Export Import Bank – Country Limitation Schedule Credit Agencies (D&B, Veritas, etc.) Internet U.S. Dept. of Commerce Trade references
Measure the Risks
Pricing/Shipping Terms Known as Incoterms 2000
– Published by:ICC Publishing Corporation156 Fifth AvenueNew York, New York 10010(212) 206-1150 Website: http://www.iccwbo.org
A set of international rules, initially formulated in 1936 by the International Chamber of Commerce (ICC) to define & interpret a standard set of pricing/shipping terms for international trade.
Know the Rules
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 by reference.
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
Know the Rules
Export Regulations Shippers 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 Individuals
RESOURCE: Office of Foreign Asset Control (www.treas.gov/ofac)
Know the Rules
Logistics Talk 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)
Know Whom to Ask
Role of the Freight Forwarder Pre-Shipment
– Packaging– Freight quotes– Import documentation requirements– Export documentation
Shipment– Transportation– Document handling– Insurance
Post-Shipment– Tracking– Arrival handling
Incoterms 2000 Departure Group
– Ex Works = Warehouse/Factory Main Carriage Unpaid Group
– FCA = Free Carrier– FAS = Free Along Side Vessel– FOB = Free On Board Vessel
Main 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
Foreign Exchange There is foreign exchange risk to someone in every
international transaction – even those payable in U.S. dollars
Four 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 mitigate these risks
Foreign Exchange
Common Uses of Foreign Exchange Transactions – used to make or receive payments in
another currency Precautionary hedges – to protect against unexpected
changes in exchange rates Speculative positions – to profit from expected
changes in exchange rates Foreign investments – to buy and sell foreign assets
Payment Methods
When do you want to get paid?When do buyers want to pay?
There is a mismatch between Buyer and Seller Goals
Now!
Later!
Payment Methods: 4 Methods
Buyer (Importer) Perspective• Open Account• Documentary Collection• Letter of Credit• Cash In Advance
Seller (Exporter) Perspective• Cash In Advance• Letter of Credit• Documentary Collection• Open Account
Buyer & Seller have Reversed Priorities!
LowestRisk
HighestRisk
BestCashFlow
WorstCashFlow
Choice of Methods
(What Determines?) Buyer-Seller Relationship Buyer’s credit standing Competition Uniqueness of the product (custom made?) Country conditions (political, economic) Cash flow considerations Transaction costs Other
Payment Methods: 4 Methods
• Cash in Advance
• Documentary Collection
TermsFavorSeller
TermsFavorBuyer
• Letter of Credit
• Open Account
Risk Evaluation and Mitigation High Risk – Cash-in-Advance or Confirmed LC Moderate Risk – Advised or Confirmed LC Low 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
Make Decisions to Mitigate the Risks
Consider ALL risks, not just credit risks
Cash In Advance Buyer Pays
– Wire Transfer– Check– Draft– Credit Card
Seller Ships– No risk for seller except order cancellation– Foreign Import Regulations may prohibit– Hard sell to buyer– Consider the type of payment (Wire Transfer Best)– Requires little to no credit understanding of the buyer– KYC (Important)
Open Account Seller Ships Buyer Pays
– Wire Transfer– Check– Draft– Credit Card
Ship it and hope you get paid Foreign import regulations may prohibit Full Country & Buyer Credit Risk Consider payment type (wire transfer best) Requires extensive knowledge of the buyer
(underwriting, trade references, excellent reputation)
Letters of Credit
A versatile tool for closing the gap that exists between buyers and
sellers.
Letters of Credit Definition:
- An undertaking issued by a bank for the account of the applicant (buyer) to pay to the beneficiary (seller) the value of the letter of credit, provided that the terms and conditions evidenced by documents presented, are complied with
In other words:- A letter of credit substitutes a bank’s creditworthiness, which is generally well known or easily ascertainable for that of its customer, which may not be as well known
Letters of Credit Two Common Types
– Documentary / Commercial• Active payment instrument• Active financing tool
– Standby• Passive payment instrument• Passive financing tool
– Performance– Financial– Trade-Related
Independence Principle
Importer (Buyer)Buyer has an obligation to the
Issuing Bank to pay upon claim for
payment
Issuing Bank has the obligation to the Exporter to pay if he has complied with all the terms and
conditions in the L/C
Exporter and Importer have a sales contract between them which
supports the underlying transaction
Issuing Bank Exporter (Seller)
Separate Contracts
Advising/Confirming bank
Sales Contract
(Issuing Bank) (Advising Bank)
Sight LC Transaction FlowBuyer (Applicant) Seller (Beneficiary)
22
Application
Foreign BANK
44
LC Advised
33
LC Issued
11
Importer (Buyer)
Issuing Bank
Exporter (Seller)
Advising/Confirming bank
Shipment
Documents
Payment Claim
Buyer pays BEFORE receipt
of goods
Sight LC Transaction Flow
5
$
Buyer Seller
(Applicant)
Foreign BANK
8
7
$
8
6$8
Time LC Transaction Flow
Shipment
Payment Documents
Payment At Maturity
5
$
Buyer Seller
(Applicant)
Foreign BANK
8
$
8
6$8 Documents6 Documents
Acceptance7
6
Advised Letters of Credit
Beneficiary: Bears credit risk of the issuing bank Bears full country risk of the transaction Responsible for ensuring compliance with Pro Forma
Advising Bank: Responsibility limited to authentication Has no payment obligation Advocate for beneficiary
Role of the Advising Bank Verify the authenticity of the Letter of Credit, thereby
protecting the beneficiary from fraud Advocate for the beneficiary
– No conflict of interest
Other benefits of using your bank– Commitment to Customer Service– Relationship Pricing– Consistency in Processing
If you want more protection the next step is to consider having the letter of credit confirmed
Confirmed Letters of Credit Eliminates issuing bank country and commercial risk If the issuing bank’s letter of credit is confirmed, the
confirming bank substitutes its own creditworthiness for that of the issuing bank’s and takes on all duties and responsibilities of an issuing bank
Must be requested by issuing bank to confirm credit If the issuing bank is not deemed creditworthy, or if
there are country risk issues a bank may refuse to add confirmation
Confirmed Letters of Credit Confirmation eliminates:
– Commercial credit risk of issuing bank– Country risk of issuing bank
Confirmed credit means payment obligation moves to the confirming bank and its country
However: 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
Payment Method: Letter of CreditSet it up right!
1. Irrevocable2. Issue Date, Expiry Date &
Location3. Issuing Bank/Advising Bank4. Importer/Exporter5. 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
Documents often requested Draft Transportation documents Commercial Invoice Insurance Policy or Certificate Packing List Invoice / Consular Invoice / Customs Invoice Certificate of Origin Weight Certificate Inspection Certificate
Your Freight Forwarder Can Provide Guidance On Which Documents Are Required – By Country
A Fundamental Reality…
When dealing with letters of credit, the only things that count are the documents
Reducing Cost and Accelerating Payment
Set up the LC correctly – negotiating all points Check 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 National City Bank In some cases, discount Consult with National City
Letter of Credit Fees Standard Fees:
– Advising fee– Negotiation (Examination)– Courier
Optional Fees:– Confirmation– Acceptance– Discount– Transfer– Assignment of proceeds– Steamship guarantee or air release
Letter of Credit Fees Fees to Avoid:
– Amendment Fees– Discrepancy Fees– Reimbursing bank fees– Copy Fees
Ancillary Fees:– Faxes– Communication charges– Special processing
What to do When the LC Arrives Read the letter of credit very carefully Ensure you can comply with the terms (all 20+ points) Send copy of LC to freight forwarder Ask about anything you don’t understand If incorrect, reject the LC immediately If necessary, request the buyer amend the Letter of
Credit
The Letter of Credit as a Financing Tool
The protections afforded both parties in a letter of credit transaction provide each additional benefits as well
One of these is the ability to use the credit already evidenced by the letter of credit itself to lower Trade Cycle cash flow financing costs for both Buyer and Seller
Documentary Collections Disguised open account transactions Less secure than letters of credit More secure than open account Benefits
– Don’t encumber buyer’s line of credit– Very inexpensive– Effective if properly structured
• Use of correct Incoterms• Role of banks and freight forwarders
Shipment
Buyer pays BEFORE receipt of goods
Sight Collection (D/P)
2
Documents2
Documents3
4
$
4 $4$
Documents4
Foreign BANK
Buyer SellerBuy/Sell Agreement
1
Buyer pays AFTER receipt of goods
Time Collection (D/A)
Documents2
Documents3
6
$
6 $6$
Documents5
Foreign BANK
Payment at Maturity
5 Acceptance
Buyer Seller
Shipment2
Buy/Sell Agreement
1
Documentary Collection
Transaction Flow Seller ships Seller presents documents to National City National City sends documents to a correspondent Correspondent 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 the seller.
Correspondent wires funds to National City National City pays seller
Payment Method Variations CIA Variation
– 50% in advance, balance with order– 100% upon shipment
LC Variation– Transfer– Assignment– Financing
Open Account Variation– Insured– Performance guaranty (Standby LC)
Export Credit Insurance&
Financing Options
Financing Options for U.S. Exporters Banks:
– Letters of Credit– Documentary Collections– Avals
Other Private Sources:– Accounts receivable financing– Factoring– Forfaiting– Credit Insurance– Countertrade
Government:– Eximbank– CCC / TDA / USAID– OPIC
Trade Finance Products Export working capital loans
– Loans to provide working capital during production cycle
Foreign receivable financing– Loans and financial structures to finance export sales
Financial 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
Eximbank Programs Pre-Shipment
- Working capital guarantee Post-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
Working Capital Guarantee Needed for:
- Pre-shipment financing To 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 flow
Benefits:- 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
Examples and “War” Stories Cattle Triangle Poultry Equipment to Asia Cotton, Corn Germ Logs, Lumber, Veneer Meat “Know your Incoterms!” Understand bills of lading and consignee Be careful with acceptance certificate requirement
Contact Information
Bill Richeson
Senior Vice President
Global Trade & Supply Chain Solutions
National City Bank
Phone: (616)771-8849
e-mail: [email protected]
Global Client Care Center: 800-622-4685