rbs international solutions

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CORPORATE BANKING

RBS International Solutions

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Presentation to TBCCI

By Mark Hernaman, International Manager

Global Transaction Services

June 2009

International Solutions

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Trade – a definition

Trade Risks

The Risk Ladder

What are Letters of Credit?

Export L/C’s – how they can help

Trade Flow using L/C’s

Working Capital – A Trade Cycle

Inco Terms – will affect margin

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What is Trade?

Commerce, business, buying and selling (Collins Dictionary)

The business of distribution, selling and exchange (Webster’s Dictionary)

Trade is closely linked with cash - the absence of it requires funding

Trade has risks that need to be mitigated


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Fundamental risks faced in Trade

Commercial risk

End Buyer default, contractual dispute, control of goods

Financial risk

exchange rate, interest rate, additional funding requirements

Economic risk

country, political, bank

Market risk

Local market forces: Cyclical fluctuation, collapse in demand?

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IMPORTER

EXPORTER

High Risk

Low Risk High Risk

Low Risk

Open Account

D/A Collection

D/P Collection

Unconfirmed L/C

Confirmed L/C

Cash in Advance

IMPORTER

EXPORTER

Trade Risk Ladder

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Documentary Credits (Letters of Credit)

“A written undertaking given by a bank on behalf of the buyer, to pay to the seller an amount of money within a specific time, provided the seller presents documents strictly in accordance with the terms laid down in the LC”

It may also be called an Import Letter of Credit (ILC) or an Export Letter of Credit (ELC)

It is a conditional guarantee of payment to the seller as long as they: ship on time

present correct and compliant documents (as the LC calls for)

present documents within the laid-down timescales

Conversely, it is a guarantee to the buyer that the seller will only be paid if they fully meet all the conditions of the LC.

N.B. Banks pay against DOCUMENTS not the underlying goods

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How Export L/C’s Can Help Exporters

More secure export sale as compared to open account in absence of credit insurance

Who is the Issuing Bank – Is payment confirmation beneficial?

Accelerate cash flow – Discounting Term L/C’s.

Transferable L/C’s – Where agreed and workable self financing solution

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Flowchart of a typical documentary credit

CONTRACT

Payment

Documents

Documents

Payment

Advising/ConfirmingBank

Issuing Bank

Buyer/ImporterSupplier/Exporter

Sales Contract and Agreement to settle by L/C

As stipulatedby L/C

Documents

L/C

L/C L/C

Goods shippedL/Cadvised

Payment

Issuing Bank

Supplier/Exporter

Buyer/Importer

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Day 0 Day 30 Day 45 Day 60 Day 75 Day 120

Importer placesorder

with supplier

Documentsreceived& payment

made to supplier

Goodsshipped

Goods on-soldand invoiced

End buyerpays

Goods arrivein the UK

Importer receivesorder from

end buyer & raisesLetter of Credit

Import Loan to fundpayment(s) underLetter of Credit

Invoice Financeto fund the

Import Loan

Invoice Financerepaid

Financing the Funding Gap

Trade Cycle Finance(a worked example)

Contingent Risk Actual Trade Risk Invoice Finance Risk

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Things to consider when trading internationally Inco Terms (www.incoterms.org) – Will affect negotiated price

EXW - Ex works - Buyer collects from factory

FOB - Free on Board - Seller obligation ends when goods on board

CFR - Cost and Freight - Seller pays cost and freight

CIF - Cost, Insurance and Freight - Seller pays all costs, except duty

DDP - Delivered, Duty Paid - Seller pays all costs, including duty

Sight - offers no credit period

- payment made when compliant documents presented

Term – Also called “Usance” extends a credit period of, e.g. 180 days from shipment

- payment made at the end of the term

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RBSG delivers real solutions to importers and exporters.


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Mark Hernaman

The Royal Bank of Scotland

Global Transaction Services

Waterhouse Square London EC1N 2TH

Tel: 0207 - 427 8782

Mob: 07747 098 927

Email: [email protected]
