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Trade Technologies Export LC WebinarTrade Technologies Export LC Webinarg pg pSeptember 16th, 2015September 16th, 2015

Agenda

International Payment RiskInternational Payment MechanismsInternational Payment Mechanisms

LCs as a payment instrument – Why it makes $ Sense

Letter of Credit StructureParties to the LC processKey LC TermsIncoterms® 2010

SolutionsLC Process – Best PracticesInternal Process – Best Practices

©2015 Trade Technologies, Inc. All rights reserved. 3

International Payment Risk

Commercial RiskBuyer historyC di i li i dCredit reporting limitedFinancial standards differentCultural performance and norms vary

Political RiskPolitical RiskGovernment stability and consistency

Economic RiskC fl t tiCurrency fluctuationsForeign Bank solvencySovereign risk

Legal RiskLegal RiskContract enforceabilityGoods recoverableTime language and distanceTime, language and distance


International Payment Mechanisms

Cash in AdvanceCash in Advance

L tt f C ditLetter of Credit

Documentary Collections

Open Account



PAYMENT TERMS RISK CHARTPAYMENT TERMS RISK CHART

HIGH LOWHIGH LOWOPEN ACCOUNT

DOCUMENTARY COLLECTION

LETTER OF CREDIT

LOW HIGH

LETTER OF CREDIT

CASH IN ADVANCE


LOW HIGH


LCs as a payment instrument – Why it makes $ Sense:Letter of Credit (LC)

LC assures prompt payment if terms are complied withBecomes documentary collection if terms are not met

In many cases goods cannot be collected until payment is madeCredit risk is with buyer’s bank and payment not contingent on buyer

Irrevocable obligation of issuing bank to pay if terms are met

Rules are well defined and predictableRules are well defined and predictableGoverned by UCP 600 and JSBP 2007

Transport and other risks are governed by INCO terms 2010W k ll f hi h i k t ti i diffi lt t i ith kWorks well for higher risk transactions in difficult countries with unknown or untrusted buyers




Eliminate buyer risk if terms are not metReduces risk and cost of default

Assures prompt payment in difficult marketsAccelerates cash flow. Payment made within 10 days

Predictable outcome under Exporter’s controlTerms are defined up‐frontp

Confirmations eliminate foreign bank riskTransfers risk to sellers bank

Usance LCs and discounting very cost effective (perhapsUsance LCs and discounting very cost effective (perhaps profitable) tools to accelerate payment and provide sales advantage through extended terms




Provide an accepted middle ground with significant risk reduction for both sides and also mitigate currency regulations

UCP 600 provides the rules

Opportunity for mischief somewhat mitigated by banks involvementOpportunity for mischief somewhat mitigated by banks involvement

Complex and not for the unprepared



Polling Question:

Why might your company choose to use Letters of Credit as their payment mechanism?

A. Our buyer insists on Letters of CreditB. Our credit department risk assessment requires Letters of CreditC To protect lengthy production timeline and costsC. To protect lengthy production timeline and costsD. OtherE. Not sure



Polling Question:

Why might your company choose to use Letters of Credit as their payment mechanism?

Answer: Any company may choose to use a Letter of Credit for a variety of reasons. All these answers may be correct, but certainly not inclusive of all conditions where a Letter of Credit may be required.


Letter of Credit Structure

Parties to the LC ProcessThe Banks

Issuing BankIssuing BankBuyer’s bank ‐ implies credit relationshipBank backs LC with its capital – obligation to pay

Advising BankS ll ’ kSeller’s BankMay or may not have correspondent relationship with issuing bank

Nominated Bank (Examining or Negotiating Bank)Bank that negotiates the LC termsgDoes not have obligation to pay (unless is same as confirming bank)

Confirming BankAccepts issuing bank risk – implies credit relationshipObligation to pay if LC terms are metObligation to pay if LC terms are met

Reimbursement BankAuthorized by issuing bank to pay upon claimMay or may not be required



Parties to the LC ProcessApplicant / Buyer

Must have relationship with issuing bank

Must have financial means to support LC

Beneficiary / SellerMust comply with LC terms for issuing bank to pay

Needs to structure terms that can be met• Get LC application done right – removes pain down the road

Other Significant Parties:Freight Forwarders

• Supply shipping documents

Insurance Brokers

Inspection Companies

Others


Letter of Credit StructureGoods ShippedGoods Shipped

Freight ForwarderG dBuyer / Applicant Seller / Beneficiary Freight ForwarderGoods

Transport DocumentsL/C ApplicationL/C Application

cumen

ts

Advising Bank Seller’s BankDoc

L/C & DocumentsReimbursing Bank

Documents


Issuing Bank Negotiating BankDocuments


Parties to the LC Process:Polling Question

True or False: It is the responsibility of the seller / exporter of goods to open the Letter of Credit



Parties to the LC Process:Answer


False: It is the responsibility of the buyer to have a relationship with the issuing bank in order to open the Letter of Credit.



Key LC Terms:Key Fields – parties to the LC

51D: APPLICANT BANK51D: APPLICANT BANK: : CANARA BANK: : FOREIGN DEPARTMENT Bank : : PLOT NO. 1, SECTOR 34A: : CHANDIGARH 160022 INDIA: :

Opening Bank

:50 : APPLICANT: : PREMIER GOODS AND EQUIPMENT

SECTOR 72,CHANDIGARH NARU 160019,INDIA.

59 BENEFICIARY

Applicant / Buyer

:59 : BENEFICIARY: : Company Name: : Any Street, NORTH HOUSTON,: : CYPRESS, TX 77429 USA

:41D: AVAILABLE WITH BYBeneficiary / Seller

:41D: AVAILABLE WITH ... BY ...: : ANY BANK IN USA: : BY NEGOTIATION

:57A: "ADVISE THROUGH" BANK BOFAUS3NXXX


Negotiating Bank


Key LC Terms:Key Fields – Dates

Start the clock

:31C: DATE OF ISSUE: : 150530:31D: DATE AND PLACE OF EXPIRY TIMES UP!:31D: DATE AND PLACE OF EXPIRY: : 150627 INDIA

:44C: LATEST DATE OF SHIPMENT: : 150606

TIMES UP!

:48 : PERIOD FOR PRESENTATION: : DOCUMENTS ARE TO BE PRESENTED: : WITHIN 21 DAYS FROM SHIPMENT DATE.

LC should be received prior to the shipmentMissing latest shipping date causes material discrepancy

: : WITHIN 21 DAYS FROM SHIPMENT DATE.

Negotiating Bank


Letter of Credit StructureKey LC Terms:Key Fields – Finance Terms

:40E: APPLICABLE RULES: : UCP LATEST VERSION: ::40A: FORM OF DOCUMENTARY CREDIT: : IRREVOCABLE.: :: ::32B: CURRENCY CODE, AMOUNT: : USD252550,00: ::41D: AVAILABLE WITH ... BY ...: : ANY BANK IN USA: : BY NEGOTIATION: ::42C: DRAFTS AT ...: : AT SIGHT MARKED WITH OUR LC NUMBER: : AND DATE.

Promise to pay in time

: ::49 : CONFIRMATION INSTRUCTIONS: : WITHOUT: ::71B: CHARGES: : COMM/ALL BANK CHARGES OUTSIDE


: : COMM/ALL BANK CHARGES OUTSIDE: : INDIA ARE FOR THE BENEFICIARY'S ACCOUNT.


Key LC Terms:Key Fields – Shipping Conditions

43P: PARTIAL SHIPMENTS: : NOT ALLOWED: ::43T: TRANSHIPMENT: : ALLOWED: : ALLOWED: ::44A: PLACE OF TAKING IN CHARGE/PLACE OF RECEIPT: : ATLANTA, GA USA : :

O O O G/ O O:44E: PORT OF LOADING/AIRPORT OF DEPARTURE: : ANY PORT IN USA: ::44F: PORT OF DISCHARGE/AIRPORT OF DESTINATION: MUMBAI PORT, INDIA: MUMBAI PORT, INDIA: ::44C: LATEST DATE OF SHIPMENT: : 150606

WHICH AIRPORT?



Key LC Terms:Key Fields – Description and Inco Term

:45A: DESCRIPTION OF GOODS AND/OR SERVICES: : PUMPING EQUIPMENT AND ACCESSORIES PER PROFORMA: : INVOICE 22134 DTD 121010. FOB (INCOTERMS 2010)

Key issues with Product DescriptionNo need for line item detailsSimple is best

Inco TermCost elementResponsibility elementRisk element



Key LC Terms:Key Fields – Description and Inco Term

:46A: DOCUMENTS REQUIRED:46A: DOCUMENTS REQUIRED: : 1.SIGNED COMMERCIAL INVOICE IN DUPLICATE.: : 2. FULL SET CLEAN ON BOARD OCEAN BILL OF LADING CONSIGNED

TO CANARA BANK, CHANDIGARH, INDIA DATED NOT: : EARLIER THAN THE DATE OF THIS LC AND EVIDENCING NAME AND: : ADDRESS OF APPLICANT AND OURSELVES AS NOTIFY PARTY.

: :3. PACKING LIST IN DUPLICATE INDICATING NET/GROSS WT OF EACH PACKAGE.

h bl d dOther possible documents required Certificates of OriginInspection CertificatesForwarder’s Cargo ReceiptAir WaybillTest Report



Key LC Terms:Key Fields – Additional Conditions

:47A: ADDITIONAL CONDITIONS:47A: ADDITIONAL CONDITIONS: : 1.DOCUMENTS EARLIER THAN THIS CREDIT NOT ACCEPTABLE.

: : 2.INVOICE TO QUOTE IMPORT IS COVERED UNDER NON-NEGATIVE LIST OF: : IMPORT-EXPORT POLICY 2009-2014 AND I E CODE NO.22378006299

: : 3.BENEFICIARY'S CERTIFICATE CERTIFYING THAT ONE SET OF NON-: : NEGOTIABLE DOCUMENTS HAVE BEEN FORWARDED TO THE APPLICANT

IMMEDIATELY AFTER SHIPMENT..: : 4.HOUSE AIR WAY BILL NOT ACCEPTABLE

: : 5.THIRD PARTY DOCUMENTS NOT ACCEPTABLE.

: : 6.ALL DOCUMENTS TO BE DRAWN IN ENGLISH AND DULY MARKED WITH OUR: : LC NUMBER AND DATE.

Other additional conditions may:Hide document requirementsHide terms that may make compliance difficult



Polling Question:

The Latest Ship Date (LSD) refers to which actual date?

A. The Latest Date that goods can leave the warehousee atest ate t at goods ca ea e t e a e ouseB. The Latest Date that goods must be on board the vessel / aircraftC. The Latest Date that the transport document can be issued

O hD. OtherE. Not sure



Answer:

The Latest Ship Date (LSD) refers to which actual date?

A. The Latest Date that goods can leave the warehousee atest ate t at goods ca ea e t e a e ouseB.B. The Latest Date that goods must be on board the vessel / aircraftThe Latest Date that goods must be on board the vessel / aircraftC. The Latest Date that the transport document can be issued

O hD. OtherE. Not sure



Incoterms® 2010What are they & what do they do?

Standardize

Define Responsibilitye e espo s b ty

Outline costs included in each rule

Reveal Gaps

Determine Delivery Point



Incoterms® 2010Divided into 2 distinct sections

Any mode of Transport or combinationDDP, DAP, DAT, CIP, CPT, FCA, EXW

/ i iWaterway / Maritime transportFOB, FAS, CFR, CIF



Incoterms® 2010Choosing the Best Incoterm Option

Mode of TransportationAir, Ocean Break Bulk, Containerized, Multimodal

CostsWhat’s included in my price?

Are packaging / packing / stuffing adjustments included

Do the incoterms match the costs and liability conditions?yIdentify the disconnects

Revenue RecognitionWhat effects the recognition date?What effects the recognition date?

How does this relate to payment of goods?• Tenor of payment and transportation documents

Title Transfer


Title TransferWhen will it occur


Incoterms® 2010Minimal obligation means minimal control

Appointed Forwarder

Appointed vessel or aircraftppo ted esse o a c a t

Adequate Insurance coverage

Bill of lading vs. FCR



Incoterms® 2010Using Inco Terms to determine:

Shipping perspective

Risk and insurance perspectives a d su a ce pe spect e

Cost perspective

Control perspective



Incoterms® 2010Common Misconceptions – Incoterms do not:

Transfer legal title or ownership of goods. Transfer, title or ownership process begins with exchange of documents

Exchange of money for documentsExchange of money for documents+

Delivery of goods per Incoterms®=

Title Transfer



Incoterms® 2010:Polling Question

True or False: If the LC does not specifically state the Incoterm to be used it is ok to use the Incoterm stated in your purchase order, proforma or contract.



Incoterms® 2010:Answer


False: Incoterms should always be stated in the LC, never assume that the Incoterm requested is the one applied to the LC documents. Invoices must show Incoterms regardless of whether the Incoterm is included in the LC or not.


Discrepancies – Why they occur and how to avoid them

Clean – the presentation is forwarded pby the negotiating bank onto the issuing bankDiscrepant – the presentation is held until it can be corrected or sent onuntil it can be corrected or sent on approval

Curable – discrepancies that can be corrected. Examples: typos, documents that are able to be reissued, etc.that are able to be reissued, etc.Non Curable – discrepancies that are not correctable. Examples: missed dates, shipped from wrong port, etc.



2014 Most Common Discrepancies Another Way to Look at it

Stale LC/LC expired

Late Shipment20%

Curable22%

Stale LC/LC expired32%

Incorrect details22%

Non Curable

Late Presentation26%

78%

Non Curable = sending documents ahead on approval = nullifying the LC =



Late ShipmentDefinition

Goods shipped after the latest shipment date

CauseDelayed shipment

Not enough time to manufacture, package and ship goods

Date of the AWB, BL, FCR or other transport document MUST be on or before the latest ship date

SolutionDevelop a standard operating procedure

Be mindful of delayed shipments

Ensure the LC’s latest ship date allows adequate time for manufacturing, packaging and transport to vessel.



Late PresentationDefinition

Documents presented after the period of presentation

CauseDelayed shipment

Not enough time to manufacture, package and ship goods

Waiting on third party documents: BLs, Insurance, Legalization

Pitfall in the flow process


Follow up with third parties to ensure documents have a quick turn around

Ensure LC period of presentation and other key dates allow adequate time for manufacturing, packaging, shipping and documentation delivery

Track latest ship, latest presentation & expiry date



Stale LC / Expired LCDefinition

Expired LC: the presentation did not arrive at the expiry location by or before the expiry data.

Stale LC: the presentation arrived at the expiry location before the expiry date, but after the period of presentation has passed

CCauseWaiting on third party documents: BLs, Insurance, Legalization

Whole process was delayed, late shipment

i f ll i h flPitfall in the flow process


Follow up with third parties to ensure documents have a quick turn around

Ensure LC period of presentation and other key dates allow adequate time for manufacturing, packaging, shipping and documentation delivery



Inconsistent Data / Incorrect DetailsDefinition per our platform

Data shown on one or more documents do not match each other, amount in words and figures differs

Goods description not per LC, not issued by beneficiary, beneficiary’s name differs from LC, Cargo Insurance amount incorrect, etc.Cargo Insurance amount incorrect, etc.

CauseHuman error, typos

Miscommunication document template letterhead assorted reasonsMiscommunication, document template, letterhead, assorted reasons

SolutionThe letter of credit is the guideline

Check the doc ments against the LCCheck the documents against the LC

Hire personnel with letter of credit and UCP 600 experience to manage and/or outsource to qualified provider



Polling Question:

What do discrepancies ultimately cost you and your company?

A. Moneyo eyB. TimeC. Risk

ll f h bD. All of the above



Answer:

What do discrepancies ultimately cost you and your company?

A. Moneyo eyB. TimeC. Risk

ll f h bD. All of the above


Solutions

Inconsistent Data / Incorrect DetailsLCs as an effective payment mechanism

Who makes the decision to use LCsEstablish internal policy – who dictates

• Sales, Treasury, Credit Risk, Buyer

LC instructions / applicationDefine what terms are important

• Design template based on those terms that are important

D t i if fi ti i i d t b f / t• Determine if confirmation is required or not – be aware of / costs

• Get advise of outside experts if in doubt

• Educate sales who negotiate terms

LC is your payment contract – get it right!

LC is advisedDetermine who reviews and accepts

• Determine if amendments are required


• Determine how LC is distributed

Credit, Customer Service, Logistics

Solutions


Good ShipGoods should not ship until LC is reviewed and released

Order fulfillment should meet Latest Shipping dates

Determine who is responsible for preparing documents• Documents must comply with LC terms

Third Party CoordinationDetermine who follows up with freight forwarders

• Review shipping documents against LC terms

Coordinate with other third parties• Insurance, Inspection, Otherp

Documents Assembled and Presented for PaymentDetermine who does final assembly of documents

Determine who does final review against LC terms


Determine who does final review against LC terms

Determine who will coordinate with the Bank

Solutions


Follow‐up with bankIf discrepancies are found, determine who resolves

If amendment required, determine who handles

Determine who monitors payment

SOPEstablish internal standard operating procedures

Review with all constituents to the LC• Sales, Treasury, CSR, Logistics, Other

Review performanceTrack LC charges such as discrepancies, amendments

Track DSO (days sales outstanding) from boarding to payment

Make LCs work for you


Solutions

LETTER OF CREDIT DOCUMENT

Internal Process –Best Practices

EXPORTER’S DESIGNATED

TRADE TECHNOLOGIES TRADE TECHNOLOGIES

RECEPIENT

DISTRIBUTE LC AMEND OR RELEASE LC

TREASURY, FINANCE, CREDIT

SALES, MARKETING, CUSTOMER SERVICE

PLANNING & PRODUCTION

PACKING, LOGISTICS


Solutions

Polling Question:

Does your company have an internal policy regarding LC protocol?

A. YesesB. NoC. Not sure


Solutions

Answer:

Does your company have an internal policy regarding LC protocol?

A. Yes. esB. No (can you establish?)C. Not sure (can you find out?)


Minimizing Discrepancies inExport Letters of Credit

Charlie [email protected]+941 351 7847+941.351.7847Sherri [email protected]+678 707 1645+678.707.1645Winney Chow – Director of Sales, [email protected]+604 354 5303

Trade Technologies has offices in Atlanta, Austin, Boston, Chicago, Hong Kong, HoustonIstanbul, London, Los Angeles, New York, San Francisco, Seattle and Singapore.

+604.354.5303

, , g , , , g p

[email protected] | www.tradetechnologies.comTel: 512.327.9996


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