International Payments & Finance

Paul Eversman, Associated BankJohn Stotz, BMO Harris Bank

Credit Considerations

• Transaction Details

• How much money? What currency? How may shipments/payments?

• Destination Country

• Developed or emerging market? Good economy? Stable politics?

• Type of Product

• Custom/perishable/time-sensitive? Ready to ship or to be built?

• Type of Market

• Many competitors or few? Customary payment terms?

Which Payment Terms

Favors Seller Favors Buyer

Cash in Advance

Commercial Letter of Credit

Documentary Collection

Open Account

Incoterms® 2010

• Every transaction starts with Incoterms®

• Key to quoting an international price

• Assign logistical responsibilities to seller or buyer

• Buyer always pays all costs, but seller may prepay some and add to commercial invoice

• Implications for regulatory compliance and payment arrangements, including credit insurance

• Eleven terms; must always be used as a place of reference

• Always 3-letter English abbreviations

Incoterms® 2010

An

y M

ea

ns

of

T

ran

spo

rta

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nEXW Ex Works (seller’s location)

FCA Free Carrier (place on seller’s side)

CPT Carriage Paid To (place on buyer’s side)

CIP Carriage & Insurance Paid to (place on buyer’s side)

DAT Delivered At Terminal (place/terminal on buyer’s side)

DAP Delivered at Place (place on buyer’s side)

DDP Delivered Duty Paid (final destination)

Ma

rin

e -

Re

stri

cte

d FAS Free Alongside Ship (port of origin)

FOB Free On Board (port of origin)

CFR Cost and Freight (port of arrival)

CIF Cost, Insurance & Freight (port of arrival

Prepay & Open Account

Cash in Advance• Buyer bears all the risk• May not be competitive

Open Account• Seller bears all the risk• In case of non-payment

• Seller must prove debt exists• Banks cannot help

• Consider credit insurance

Applicable to both:• Works with any Incoterms and with any shipping method• May be prohibited/restricted in countries with capital controls

Prepay & Open Account Best Practice

• Choice of Incoterms is still important

• Regulatory compliance and credit insurance require copy of the transport document

• ‘C’ or ‘D’ terms are best: Freight forwarder works for you

• Wire transfer is always preferable

• Use separate bank account for incoming foreign wires

• If payment is by check, accept only USD check drawn on a US bank

• Don’t use just email to send wire transfer instructions – fraud is a big problem

Documentary / Secure Terms

Commercial LCs and Documentary Collections

• Difference: Who is promising to pay

• Letter of Credit – Buyer’s bank and confirming bank (if any)

• Documentary Collection – Only the buyer

• Seller ships goods and sends documents through banks for payment

• Main transport document controls access to the goods

• Ocean bill of lading is negotiable title document – may be consigned to order of the buyer’s bank or to order of shipper, blank endorsed. Buyer needs original to get goods.

• Air waybill is a straight consignment note and not negotiable. Should be consigned to buyer’s bank, not the buyer. There is no ‘original’ to be surrendered for the goods.• Buyer will need bank’s letter of release to get the goods.

Commercial LC Best Practice

• The LC should reflect the terms of the sales contract

• Give the buyer clear instructions, stretch deadlines, avoid amendments

• Choice of Incoterms is key to controlling the goods.• ‘C’ or ‘D’ term are best: Freight forwarder works for you.

• Avoid requirement for any documents coming from the buyer

• Make checklists and assign responsibilities• What will your company do? What will your forwarder do?

• Internally, who will prepare which documents?

• Who will present documents to the bank for payment?

• Avoid using LCs for small transactions due to relatively high costs

Documentary Collection Best Practice

• Buyer’s bank is instructed to release shipping documents against either: • Immediate payment: Sight draft, Documents Against Payment / Cash Against Document

• Written promise of future payment: Time draft, Documents Against Acceptance

• Low cost makes collections suitable for smaller transactions

• ‘C’ or ‘D’ term are best: Freight forwarder works for you.

• Know what documents buyer needs to clear goods on arrival

• Main transport document controls access to the goods

• If buyer is new/unfamiliar, get 50% down payment and use sight collection for the balance

• Not ideal for goods that are custom-made, time-sensitive or perishable

Payment Instruments Comparison

Currency Considerations

• Exchange rate risk cannot be avoided:

• Direct risk – Selling in the buyer’s currency: how many dollars will I actually get?

• Indirect risk – Selling in USD; what will my buyer’s cost actually be?

• FX market is the world’s largest at some $6.3 trillion daily volume

• Markets are constantly moving; events can affect degree of volatility

• Exporters should be aware of exchange rates where they do business

• Selling in the buyer’s currency can be a good marketing tool

• Strategies and tools exist to manage foreign exchange risks

Financing International Trade

Importers

• Want extended payment terms

• 60, 90, 120+ days

• Struggle with complex terms that vary by supplier, prefer consistency

• Need to unlock working capital

Exporters

• Want to decrease payment terms

• Prefer 30, 15 or fewer days

• Often need to finance their receivables

• Concerns about non-payment risk

Trade Risk Reduction and Working Capital Enhancement

Commercial Techniques

• Negotiating favorable trade terms with suppliers and customers

• Stay current with the market and other risks/opportunities

• Cargo Insurance

• Credit Insurance

Banking Techniques

• Letter of Credit terms

• Confirming LCs

• Discounting LCs

• Usance LCs

• Clean Banker’s Acceptances or AvalizedDrafts

• Supply Chain Finance – Open Account

EXIM Bank – Working Capital Guarantee Program

The Export-Import Bank of the United States (EXIM Bank) is the official export credit agency of the United States. EXIM Bank’s mission is to assist in financing the export of U.S. goods and services to internationalmarkets.

• EXIM Bank works with commercial banks to provide working capital guarantees for the export related activities of U.S. businesses.

Benefits

• Eligibility of Work in Progress destined for export (up to 75%).

• 90% coverage on foreign export receivables.

• Commercial & Standby LCs (with the exception of warranty SBLCs) collateralized at 25% of face value.

• Typically approved for 1 year or less, may be committed to up to 3 years with annual reviews.

• Costs

• Exim WCGP Fees including an application fee and an annual fee of 1.25% to 1.75% of the maximum loan facility amount.

• ABL equivalent reporting requirements

• Restrictions on use of funds (cannot use to purchase fixed assets or to finance acquisitions.)