fitt webinar - trade finance

Introduction & Basic PrinciplesIntroduction & Basic Principles

Global Business Essentials (Part 3 of 3):

International Trade International Trade FinanceFinance

© 2010 Copyright FITTFor PERSONAL use only.

Your Panel Today

Mr. Malaket is an internationally recognized expert in trade finance, co-author of two FITTskills textbooks, and member of the Trade Finance Experts Panels at the World Bank and the EBRD. Alexander has advised blue-chip public and private sector clients, and delivered training seminars in Asia, Europe and the Middle East, in addition to undertaking trade policy & capacity analysis in Africa, related to ACP/EU trade negotiations.He is a frequent feature writer for leading industry publications, from London to Hong Kong and Bahrain.A.R. Malaket, CITP, President,

OPUS Advisory Services International Inc.

Mr. Gnaedinger is a Project Management Professional (PMP) and Certified International Trade Professional (CITP), and is currently the Director of International Trade Resources for FITT - one of the world's leading providers of international trade training.

As part of his current position, Rob's main focus has been on planning and overseeing the implementation of an internal management system for FITT's Body of Knowledge in international trade.

PHOTO

Rob Gnaedinger – PMP, CITPDirector,

International Trade ResourcesFITT

© 2010 Copyright FITT. For PERSONAL use only.

FITT: The Professional Path to Global Markets

• A Canadian, non-profit organization established by industry and government

• World-class programs including Going Global Seminar Series & FITTskills courses leading to CITP/FIBP Professional Designation

• Over 900 members in Canada and internationally• 400+ CITP’s in leadership positions in government,

corporate and entrepreneurial contexts• Annual Conference attended by the elite of the

international trade community


FITT: Related Resources

FITTskills – International Trade Finance

Going Global – An Introduction to International Trade Finance

CITP Competency Profile


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Webinar OutlineWebinar Outline

Defining Trade Finance The Four Pillars The Documentary Letter of Credit

The Theory The Reality

Understanding the Role of the Banks ECA’s & Non-Bank Providers Trends & Emerging Solutions Questions


Trade FinanceTrade Finance

• A specific branch of finance dealing with import/export transactions

• Short-term, up to 18 months timeframe• Instruments and mechanisms in use for hundreds of

years and well-understood across commercial/legal jurisdictions

• Closely linked to cash management and Foreign Exchange

Transactional Focus: Exclude the Financing Related to the Launch of a Venture© 2010 Copyright FITT. For PERSONAL use only.

Four Pillars of Trade Four Pillars of Trade FinanceFinance

Every trade finance product or solution offers some combination of:

Payment Facilitation – flow of monies across bordersFinancing – some form of lending to the importer, exporter or to one of the banks involvedRisk Mitigation – instruments, features or solutions which mitigate risks such as country, bank or commercial riskInformation – timely information about status of payment or shipment

Optimal combination depends on transaction and on trade skill/relationship © 2010 Copyright FITT. For PERSONAL use only.

The Four PillarsThe Four Pillars

The optimal combination depends on the nature of the transaction:

• The maturity of the trade relationship• The negotiating leverage of one party over the other• The risk profile of the markets involved• The standing of the financial institutions involved


OptionsOptions

Importer(Buyer/Applicant)


Exporter(Seller/Beneficiary)


Confirmed Documentary Credit

Documentary Credit

Documentary Collection

Payment in Advance – Safest for Exporter

Payment on Delivery – Safest for Importer

The Documentary Credit offers the most balanced solution for importer/exporter


The Documentary Credit The Documentary Credit (L/C)(L/C)

• Independent, binding Payment Undertaking by a bank on behalf of the Importer/Buyer

• Use/interpretation of L/Cs governed by UCP 600, published by ICC in Paris

• Banks act as intermediaries, verifying documents against L/C terms

• Exporter receives payment if documents are compliant, importer receives documents (control of shipment) once payment authorized or effected

• Versatile instrument, numerous features


L/C Transaction FlowL/C Transaction Flow



Advising Bank (Confirming Bank)

Issuing Bank

Sales Contract and Delivery of Goods

Verification & Transmission of Documents, Remittance of

Funds

ImporterPayment,

Exchange for Documents

Exporter Documents,

Exchange for Payment


What is in an L/C?What is in an L/C?

• L/C’s are most commonly transmitted via SWIFT message

• Authenticated, secure message

• Specify documents, payment conditions

• Importer’s bank sends to exporter’s bank

• SWIFT also used for payment

Payment Facilitation


Risk & Trade FinanceRisk & Trade FinanceRisk Mitigation

Importer (Buyer)Exporter (Seller)

Issuing BankConfirming Bank

Country Risk

Commercial Risk: Non-performance or financial failure of a trading partner

Bank Risk: Non-payment or financial failure by a financial institution

Country Risk: risk related to the stability of a market, exchange

controls, expropriation

Any one of these can threaten your deal, and your business


Risk MitigationRisk Mitigation

WARNING: The next slide looks “messy” and complicated – intentionally!

MESSAGE: Trade finance offers many ways to shift/manage risk in a transaction

WHY: As a Canadian exporter, would you rather be paid in Canada, or in an unfamiliar market across the

globe?


Risk MitigationRisk Mitigation





Issuing Bank

Country 1


Issuing Bank

Country 2


Payment type/ timing

Confirmed L/ C

L/ C

Confirmed L/ C Payment Terms

Confirmed L/ C

I ncoterm

ECA Cover

Guarantee/ I FI Programs

ECA Cover Importer(Buyer/Applicant)




Issuing Bank

Country 1


Issuing Bank

Country 2


Payment type/ timing

Confirmed L/ C

L/ C

Confirmed L/ C Payment Terms

Confirmed L/ C

I ncoterm

ECA Cover

Guarantee/ I FI Programs

ECA Cover

Trade Finance allows Risk Transfer through L/C’s & other Options


FinancingFinancing

Negotiations Contracting L/C Issuance Document Preparation

Shipment Settlement

TF as a competitiveadvantage

Payment Terms Bank Re-Finance

Invoice Financing/Factoring

Pre-shipmentFinance Buyer Credit

ECA CoverECA CoverUCP

Importer/Buyer Exporter/Seller

Financing shifts the timing of Financial Flows & Risks between parties

Negotiations Contracting L/C Issuance Document Preparation

Shipment Settlement

TF as a competitiveadvantage

Payment Terms Bank Re-Finance

Invoice Financing/Factoring

Pre-shipmentFinance Buyer Credit

ECA CoverECA CoverUCP

Importer/Buyer Exporter/Seller

Financing shifts the timing of Financial Flows & Risks between parties

Financing

Financing is available at multiple stages in a trade transaction


L/C’s: Selected L/C’s: Selected ObservationsObservations

• L/C’s can, through terms/conditions and the document required, provide a lot of information about the shipment (Inspection Certificates)

• L/C-related transactions such as SWIFT payments can assist companies in managing flows of funds

• Banks and service providers increasingly include detailed reporting in their services

Information


L/C’s: The RealityL/C’s: The Reality

Used correctly, L/C’s work very well, but:

• Goodwill between importer and exporter is key• L/C’s will not protect against intentional fraud• If an exporter is non-compliant, the protection of the

L/C evaporates• Importers have used non-compliance to demand

substantial discounts on threat of refusing the shipment

• Estimates indicate 60-70% of requests for payment involve discrepant (non-compliant) documents

The global crisis has shown the effectiveness/importance of L/C’s in trade© 2010 Copyright FITT. For PERSONAL use only.

Other OptionsOther Options

• Various other forms of payment and financing exist• Pre-crisis trade flows were largely on the basis of

Open Account, as is much of Canada-US trade• Documentary Collections were also popularly used

when trading relationships had been tested and proven: straight exchange of documents for payment (or a payment promise) – no verification role for banks

• Such options may require separate risk mitigation solutions such as foreign A/R insurance


Understanding the BanksUnderstanding the Banks

• Banks are constrained in their ability to support trade transaction, by credit limits at the country and foreign bank level

• Credit committees can also restrict the type and term of exposure that a bank will undertake

• In some cases, such as L/C’s, banks provide standalone undertakings and may not always be able to act strictly in the interest of their clients

• Local and regional banks also may be limited due to lack of experience in certain markets

Engaging early with a bank may assist in securing trade finance support© 2010 Copyright FITT. For PERSONAL use only.

Understanding the BanksUnderstanding the Banks

Your Bank

Exporters have more flexibility in choosing a provider under an L/C.

Commercial bankers RARELY understand the mechanics of trade finance

The standing of the foreign bank can be critical – if you are unsure, check with your trade finance specialist

Other parties such as export credit agencies and private sector risk

insurers can be critical complements to bank support

Any one of these can threaten your deal, and your business

Foreign Bank

?


ECA’s & Non-Bank ECA’s & Non-Bank ProvidersProviders

• Export Credit Agencies, private insurers and non-bank providers provide options, and complementary products

• Northstar Trade Finance – unique Public/Private Model

• GE Capital, UPS Capital• Coface, Euler-Hermes• Canada’s “Financial Crowns” (EDC, BDC, CCC)


International Financial International Financial InstitutionsInstitutions

IFC Global Trade Finance Programhttp://www.ifc.org/ifcext/gfm.nsf/Content/TradeFinance

IDB Trade Financing Programhttp://www.iadb.org/pri/trade_finance.cfm?language=en&parid=2&item1id=2

ADB Trade Finance Facilitation Programhttp://www.adb.org/PrivateSector/Finance/trade_fin.asp

EBRD Trade Facilitation Programhttp://www.ebrd.com/apply/trade/about/index.htm


Trends & Emerging Trends & Emerging SolutionsSolutions

• Global crisis has had significant impact on trade and trade finance

• Bank consolidations included major providers in the US and Europe

• Pricing increases by up to 400%, slowly normalizing• Product development slowed by a return to

traditional instruments – primarily the L/C• Risk mitigation and compliance now at the forefront• Supply chain finance and working capital

optimization continue to evolve; more attention now to risk mitigation element


Questions?Feedback?

Rob Gnaedinger – PMP, CITPFITT

[email protected]: +1 613 230-3553 ext. 110

Alexander R. Malaket, CITP, PresidentOPUS Advisory Services International Inc.

[email protected]: +1 647 680-6787www.opus-advisory.com www.opus-seminars.com


fitt webinar - trade finance

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