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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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