“Financing Tools to Help You

Increase Exports and Avoid

Pitfalls”
Lansing, Michigan

Bill Richeson, SVP

Global Trade & Supply Chain Solutions
International Division
National City Bank
March 24, 2009
 Agenda
 Global Trade Overview
 Trade Concepts, Payment Procedures and Risks
 Pricing Terms
 Foreign Exchange
 Payment Methods
 Letters of Credit
 A Fundamental Reality
 Using the Letter of Credit as a Financing Tool
 Documentary Collections
 Export Credit Insurance & Other Financing Options
 Examples and “War” Stories
 Questions & Answers
Global Trade Overview
 Classification of Countries

Industrialized Emerging
Countries Countries
30 Countries 200 Countries
 Definitional Differences
Industrialized Countries Emerging Countries
 Mature Economies  Newer Economic Systems

 Convertible Currencies  Non-convertible Currencies

 Stable Political Systems  Political Uncertainties
 Higher Per Capita Standard of Living  Lower Per Capita Standard of Living

 High Perceived Political and Economic Risk

 Low Perceived Political and
Economic Risks
 Capital Shortage - Reliance on Foreign Investments
 Looking for Expanded Markets

 Provider of Investment Capital

 General Patterns of Trade
Industrialized Countries Emerging Countries
 Market Determines  Fixed Exchange Rates
Exchange Rates
 Invoice in Local Currencies  Invoice in Dollars
 Open Account Terms Prevalent  Letters of Credit or Collections

 Inter-company Shipment  Direct Sales to Buyer

 General Feeling of Low Risk  External Credit Guarantee

 Insurance is Nice to Have  Insurance Prevents Baldness

 Buyer Creditworthiness is Key  Country Creditworthiness is Key
– Buyer Credit Limits
– Country Limits
– Payment Terms Relaxed
– Payment Terms Tight
 Trade Concepts,
Payment Procedures
and Risks
 General Trade Concepts: Starting
Right!
 Know your customer
 Know their country
 Know their “credit” bank
 Understand the Trade Cycle
 Understand Terminology
 Understand Transaction Risks
 Understand Ground Rules
 Work with your bank
 Terminology
 Transaction Parties
– Seller – Exporter – Shipper – Beneficiary (Bene)
– Buyer – Importer – Account Party – Applicant
– Issuing Bank – Opening Bank
– Advising – Confirming Bank
– Negotiating – Paying – Reimbursing Bank
 Supporting Parties
– Carrier
– Freight Forwarder
– Customs House Broker
– Insurer
– Attorney
 Risk Awareness
 Credit Risk
 Performance Risk
 Country Risk
 Currency Risk
 Transportation Risk
 Regulatory Risk
 Transaction Structure Risk
 Fraud
Identify & Understand the Risks
 Risk Evaluation
Sources of Information:
 Your bank – Bank credit reference
 Export Import Bank – Country Limitation Schedule
 Credit Agencies (D&B, Veritas, etc.)
 Internet
 U.S. Dept. of Commerce
 Trade references

Measure the Risks

 Pricing/Shipping Terms
 Known as Incoterms 2000
– Published by:
ICC Publishing Corporation
156 Fifth Avenue
New York, New York 10010
(212) 206-1150
Website: http://www.iccwbo.org
 A set of international rules, initially formulated in 1936
by the International Chamber of Commerce (ICC) to
define & interpret a standard set of pricing/shipping
terms for international trade.
Know the Rules
 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 by
reference.
 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
Know the Rules
 Export Regulations
 Shippers 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 Individuals
 RESOURCE: Office of Foreign Asset Control (
www.treas.gov/ofac)
Know the Rules
 Logistics
 Talk 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)

Know Whom to Ask

 Role of the Freight Forwarder
 Pre-Shipment
– Packaging
– Freight quotes
– Import documentation requirements
– Export documentation
 Shipment
– Transportation
– Document handling
– Insurance
 Post-Shipment
– Tracking
– Arrival handling
Pricing Terms
 Incoterms 2000
 Departure Group
– Ex Works = Warehouse/Factory
 Main Carriage Unpaid Group
– FCA = Free Carrier
– FAS = Free Along Side Vessel
– FOB = Free On Board Vessel
 Main 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
 Foreign Exchange
 There is foreign exchange risk to someone in every
international transaction – even those payable in U.S.
dollars
 Four Basic Risks
- Fluctuation risk
- Transaction risk – cash flow risk
- Economic risk – operating risk vs. competitors
- Translation risk – accounting risk
You must quantify and manage this risk
Banks have tools and expertise to help you mitigate
these risks
 Foreign Exchange
Common Uses of Foreign Exchange
 Transactions – used to make or receive payments in
another currency
 Precautionary hedges – to protect against unexpected
changes in exchange rates
 Speculative positions – to profit from expected
changes in exchange rates
 Foreign investments – to buy and sell foreign assets
Payment Methods
There is a mismatch between
Buyer and Seller Goals
When do you want to get paid?
When do buyers want to pay?

Now!

Later!
 Payment Methods: 4 Methods
Best
Lowest Cash
Risk Flow
Buyer (Importer) Perspective Seller (Exporter) Perspective
• Open Account • Cash In Advance
• Documentary Collection • Letter of Credit
• Letter of Credit • Documentary Collection
Highest • Cash In Advance • Open Account Worst
Risk Cash
Flow

Buyer & Seller have Reversed Priorities!

 Choice of Methods
(What Determines?)
 Buyer-Seller Relationship
 Buyer’s credit standing
 Competition
 Uniqueness of the product (custom made?)
 Country conditions (political, economic)
 Cash flow considerations
 Transaction costs
 Other
 Payment Methods: 4 Methods

• Cash in Advance Terms

Favor
Seller
• Letter of Credit

• Documentary Collection Terms

Favor
Buyer
• Open Account
 Risk Evaluation and Mitigation
 High Risk – Cash-in-Advance or Confirmed LC
 Moderate Risk – Advised or Confirmed LC
 Low 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

Make Decisions to Mitigate the Risks

Consider ALL risks, not just credit risks
 Cash In Advance
 Buyer Pays
– Wire Transfer
– Check
– Draft
– Credit Card
 Seller Ships
– No risk for seller except order cancellation
– Foreign Import Regulations may prohibit
– Hard sell to buyer
– Consider the type of payment (Wire Transfer Best)
– Requires little to no credit understanding of the buyer
– KYC (Important)
 Open Account
 Seller Ships
 Buyer Pays
– Wire Transfer
– Check
– Draft
– Credit Card
 Ship it and hope you get paid
 Foreign import regulations may prohibit
 Full Country & Buyer Credit Risk
 Consider payment type (wire transfer best)
 Requires extensive knowledge of the buyer
(underwriting, trade references, excellent reputation)
 Letters of Credit

A versatile tool for closing the gap

that exists between buyers and
sellers.
 Letters of Credit
 Definition:
- An undertaking issued by a bank for the account of
the applicant (buyer) to pay to the beneficiary (seller)
the value of the letter of credit, provided that the terms
and conditions evidenced by documents presented,
are complied with

In other words:
- A letter of credit substitutes a bank’s
creditworthiness, which is generally well known or
easily ascertainable for that of its customer, which
may not be as well known
 Letters of Credit
 Two Common Types
– Documentary / Commercial
• Active payment instrument
• Active financing tool
– Standby
• Passive payment instrument
• Passive financing tool
– Performance
– Financial
– Trade-Related
 Independence Principle

Buyer has an Importer (Buyer) Exporter and Importer

obligation to the have a sales contract
Issuing Bank to pay between them which
upon claim for supports the
payment underlying transaction
Separate
Contracts

Advising/
Issuing Bank Exporter (Seller)
Confirming bank

Issuing Bank has the obligation to the Exporter

to pay if he has complied with all the terms and
conditions in the L/C
 Sight LC Transaction Flow
Buyer (Applicant) Seller (Beneficiary)

11

Sales Contract
Importer
(Buyer)

22 44
Issuing Advising/ Exporter
Bank Confirming bank (Seller)
Applicatio LC Advised
n

33
Foreign BANK
LC Issued
(Issuing Bank) (Advising Bank)
 Sight LC Transaction Flow
Buyer Seller

5
(Applicant)
Shipment

Buyer pays
BEFORE receipt
8 $ 6 Documents
of goods $ 8

$
Foreign BANK
Payment Claim
7
 Time LC Transaction Flow
Buyer Seller

5
(Applicant)
Shipment

Payment
At
Maturity 8 $ 6 Documents
$ 8 6 Documents
8

$
Payment Documents
Foreign BANK 6
7 Acceptance
 Advised Letters of Credit
Beneficiary:
 Bears credit risk of the issuing bank
 Bears full country risk of the transaction
 Responsible for ensuring compliance with Pro Forma

Advising Bank:
 Responsibility limited to authentication
 Has no payment obligation
 Advocate for beneficiary
 Role of the Advising Bank
 Verify the authenticity of the Letter of Credit, thereby
protecting the beneficiary from fraud
 Advocate for the beneficiary
– No conflict of interest
 Other benefits of using your bank
– Commitment to Customer Service
– Relationship Pricing
– Consistency in Processing

If you want more protection the next step is to consider

having the letter of credit confirmed
 Confirmed Letters of Credit
 Eliminates issuing bank country and commercial risk
 If the issuing bank’s letter of credit is confirmed, the
confirming bank substitutes its own creditworthiness
for that of the issuing bank’s and takes on all duties
and responsibilities of an issuing bank
 Must be requested by issuing bank to confirm credit
 If the issuing bank is not deemed creditworthy, or if
there are country risk issues a bank may refuse to
add confirmation
 Confirmed Letters of Credit
 Confirmation eliminates:
– Commercial credit risk of issuing bank
– Country risk of issuing bank
 Confirmed credit means payment obligation moves to
the confirming bank and its country
However:
 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
 Payment Method: Letter of Credit
Set it up right!
1. Irrevocable 11. UCP 600
2. Issue Date, Expiry Date & 12. LC Fees - Who Pays?
Location 13. Latest Ship Date
3. Issuing Bank/Advising Bank 14. Presentation Date
4. Importer/Exporter 15. Partial Shipments (Y/N)
5. Value & Currency 16. Transshipments (Y/N)
6. Description of 17. Paying Bank
Goods/Services 18. Drawee Bank
7. Required Documents 19. Reimbursing Bank
8. Payment Terms 20. Confirming Bank
9. Incoterms
10. Port-To-Port Info
20 Points of Negotiation in Structuring your LC
 Documents often requested
 Draft
 Transportation documents
 Commercial Invoice
 Insurance Policy or Certificate
 Packing List
 Invoice / Consular Invoice / Customs Invoice
 Certificate of Origin
 Weight Certificate
 Inspection Certificate
Your Freight Forwarder Can Provide Guidance On
Which Documents Are Required – By Country
A Fundamental Reality…

When dealing with letters of

credit, the only things that
count are the documents
 Reducing Cost and Accelerating
Payment
 Set up the LC correctly – negotiating all points
 Check 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 National City Bank
 In some cases, discount
 Consult with National City
 Letter of Credit Fees
 Standard Fees:
– Advising fee
– Negotiation (Examination)
– Courier
 Optional Fees:
– Confirmation
– Acceptance
– Discount
– Transfer
– Assignment of proceeds
– Steamship guarantee or air release
 Letter of Credit Fees
 Fees to Avoid:
– Amendment Fees
– Discrepancy Fees
– Reimbursing bank fees
– Copy Fees
 Ancillary Fees:
– Faxes
– Communication charges
– Special processing
 What to do When the LC Arrives
 Read the letter of credit very carefully
 Ensure you can comply with the terms (all 20+ points)
 Send copy of LC to freight forwarder
 Ask about anything you don’t understand
 If incorrect, reject the LC immediately
 If necessary, request the buyer amend the Letter of
Credit
 The Letter of Credit as a Financing
Tool
 The protections afforded both parties in a letter of
credit transaction provide each additional benefits
as well

 One of these is the ability to use the credit already

evidenced by the letter of credit itself to lower
Trade Cycle cash flow financing costs for both
Buyer and Seller
 Documentary Collections
 Disguised open account transactions
 Less secure than letters of credit
 More secure than open account
 Benefits
– Don’t encumber buyer’s line of credit
– Very inexpensive
– Effective if properly structured
• Use of correct Incoterms
• Role of banks and freight forwarders
 Sight Collection (D/P)
Buyer Seller
Buy/Sell
1
Agreement

2 Shipment

4 $ 4 4 $ 2 Documents
Documents 4

$
Foreign BANK
3 Documents

Buyer pays BEFORE receipt of goods

 Time Collection (D/A)
Buyer Seller
Buy/Sell
1
Agreement

2 Shipment

5 $ 6 Payment at Maturity 6 $ 2 Documents

Documents 5 Acceptance 6

$
Foreign BANK
3 Documents

Buyer pays AFTER receipt of goods

 Documentary Collection
Transaction Flow
 Seller ships
 Seller presents documents to National City
 National City sends documents to a correspondent
 Correspondent 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 the seller.
 Correspondent wires funds to National City
 National City pays seller
 Payment Method Variations
 CIA Variation
– 50% in advance, balance with order
– 100% upon shipment
 LC Variation
– Transfer
– Assignment
– Financing
 Open Account Variation
– Insured
– Performance guaranty (Standby LC)
Export Credit Insurance
&
Financing Options
 Financing Options for U.S.
 Banks: Exporters
– Letters of Credit
– Documentary Collections
– Avals
 Other Private Sources:
– Accounts receivable financing
– Factoring
– Forfaiting
– Credit Insurance
– Countertrade
 Government:
– Eximbank
– CCC / TDA / USAID
– OPIC
 Trade Finance Products
 Export working capital loans
– Loans to provide working capital during production cycle
 Foreign receivable financing
– Loans and financial structures to finance export sales
 Financial 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
 Eximbank Programs
 Pre-Shipment
- Working capital guarantee
 Post-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
 Working Capital Guarantee
 Needed for:
- Pre-shipment financing
 To 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 flow
 Benefits:
- 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
 Examples and “War” Stories
 Cattle Triangle
 Poultry Equipment to Asia
 Cotton, Corn Germ
 Logs, Lumber, Veneer
 Meat
 “Know your Incoterms!”
 Understand bills of lading and consignee
 Be careful with acceptance certificate requirement
 Contact Information
 Bill Richeson
Senior Vice President
Global Trade & Supply Chain Solutions
National City Bank
Phone: (616)771-8849
e-mail: william.richeson@nationalcity.com

Global Client Care Center: 800-622-4685