Daniel W. Holt Small Business Administration 704-333-4886 [email protected].
Dec 25, 2015
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On Your Mark….Every morning in Africa, a gazelle wakes up.It knows it must run faster than the lion or it will be killed.Every morning a lion wakes up.It knows it must outrun the gazelle or starve.It doesn’t matter if you’re a gazelle or lion.When the sun comes up, you better start running!
Building a Global Reach to Run a Global Race
The Intermodal Global Supply Chain
1970 – 1 million containers2000 – 20 million containers2020 – 50 million containers2050 – 100 million containers
The Pace QuickensChanging U.S. Economy1970…International trade is 7%2000…International trade is 27%
2050…International trade up to 50%
Changing U.S. Life StylesLocal Economy of 19th Century—93% of Work Force
Employed in AgricultureGlobal Economy of 21st Century—3% of Work Force
Employed in Agriculture
The Global Marketplace of the 21st Century – Looking Ahead
(% of World GDP)
EU 34%
Japan 12%
China 4%
India 2%
US 28%
Other 20%
EU 15%
Japan 4%
China 28%
India 17%
US 26%
Other 10%
2004 2050
Countries Ranked by Population: 2000Country Population• 1 China 1,262,474,301• 2 India 1,002,708,291• 3 United States 282,338,631 • 4 Indonesia 224,138,438 • 5 Brazil 175,552,771• 6 Russia 146,001,176• 7 Pakistan 141,553,775• 8 Bangladesh 130,406,594 • 9 Japan 126,699,784• 10 Nigeria 123,749,589
Four Common Misconceptions about Exporting
– You have to be Big to Export – While large companies do the greatest volume of international trade, smaller companies are also taking advantage of opportunities in foreign markets. Surveys show that 60% of US firms now exporting successfully have fewer than 100 employees.
– To Export You Must Have a Big Export Department – The size of the company’s export department depends upon the method by which the products are marketed.
• Direct Exporter – sells to a company or agency in a foreign country and ships the product to the overseas destination.
• Sporadic Exporter – sells in small quantities, and marketing and shipping responsibilities can be handled by one employee in addition to his regular duties.
• Indirect Exporter – sells through an intermediary company in the US., and requires no more specialized staff than is necessary for domestic sales.
– To Export You Must Have Substantial Volume – Due to many smaller companies actively involved in international trade is a testament to the fact that large volume is not a necessity for exporting. If a US company devotes even 10% of its production capacity to foreign markets then it can expect to build substantial and permanent trade in foreign markets.
– You Must be Fluent in Foreign Languages to Export – Knowledge of a foreign language is not essential to exporting. On the few occasions when correspondence and documents are not in English, many translation sources are available.
DOMESTIC RISK
• BANKRUPT
• DOES NOT WANT TO PAY
• CAN NOT PAY
• PRODUCT DISPUTE
• WENT OUT OF BUSINESS
International Trade
ExporterExporter(Seller)(Seller)
ImporterImporter(Buyer)(Buyer)
I want to sell.
I want to buy.
Country Border
International TradeSome Things are Different
• Language
• Currency
• Banking
• Credit Terms & Risk
• Transportation / Packaging
• Insurance - Shipping - War
• Government Requirements - Each Country
International TradeSome Things are Different
• Language
• Currency
• Banking
• Credit Terms & Risk
• Transportation / Packaging
• Insurance - Shipping - War
• Government Requirements - Each Country
Risk
• Risk is a neutral term. It does not mean you will win or lose.
• High risk - small margin = bad
• High risk - good return= maybe
AT _SIGHT_____________
ABC CO.
XYZ CO.ABC CO.
AMOUNT
APRIL 24, 1996
ALL EXPORTS
ImporterImporter(Buyer)(Buyer)(Seller)(Seller)
(6)(6)
Documents (4)Documents (4)
There are risks!
INSURANCE
Merchandise
Merchandise
Freight Insurance Why insure ?
• Carrier’s limit of liability (COGSA & Warsaw Convention)
• Filing Claims is problematic and complicated– Insurance pays the claim and then files with the Carrier
– You may have to file suit against the Carrier to get his attention
– Carrier will try to keep you talking until claim is “Time Barred”.
– Irritation
• Use “declared value” to increase carrier liability ? Expensive & Insurance is cheaper and easier to use…..
• Usually required with Letters of Credit
• Cost is usually less than 2% of value of shipment……..(1.25% is average)
CARGO INSURANCEInternational transportation is risky! $30 - $50 billion in worldwide lossesOcean carriers only cover up to $500 per
package, Airlines $20/kilo.General average can put a lien on
your cargo!
Buying insurance is a simple, straight-forward process, about $0.40/$100 of value.
I don’t need no stinking marine insurance
FOREIGN RISK
• THE MONEY IS NO GOOD
• THERE WAS A COUP
• A BRIBE IS NEEDED FOR CUSTOMS
• DOCUMENTS ARE NOT CLEAN
• FOREIGN BANK HOLDS MONEY
COUNTRY RISK
• The first consideration will ALWAYSALWAYS be country risk.
COUNTRY RISK
• If the deal is in a country that is too risky, the customer can never be good.
Political Risk
• Transfer risk- shortage of foreign exchange
• Political risk- events that prevent payment– moratorium on external debt– legal discharge of debt– war– cancellation of import license
Customer Risk
• Is the customer about to go bust?
• Can the customer pay on our credit terms?
• Is our goods “special”?
• Is this the first sale?
• Is the order more that the last order?
• Do we have a credit application?
CONTROLS
• BANK
• CREDIT REPORTING AGENCIES
• INSURANCE
• RESEARCH
• LETTER OF CREDIT
CONTROLS
• CASH IN ADVANCE
• FREIGHT FORWARDER
• GOOD BUSINESS CONTROLS
Risk Comparison
INTERNATIONAL METHODS OF PAYMENT
Exporter Risk
High
Importer Risk
Low
Trade Terms
Open Account
Documentary Collection(Time)
Documentary Collection (Sight)
Letters of Credit (Time)
Letters of Credit (Sight)
Payment in Advance
INTERNATIONAL METHODS OF PAYMENT
Risk Comparison• Can your business afford the loss if it is not paid?
• Will extending credit and the possibility of waiting several months for payment still make the sale profitable?
• Can the sale be made only by extending credit?
• How long have the buyers been operating, and what is their credit history?
• Has your business sold successfully to the buyer before?
• Are there reasonable alternatives for collecting if the buyer does not pay? (Does the buyer’s country have the legal and business infrastructure for settling disputes fairly and swiftly?)
• If shipment is made but not accepted, can alternative buyers be found?
Questions to Ask Before Selecting the Payment Method
Basic collection terms or Accounts Receivable methods
Cash in AdvanceOpen AccountDocumentary CollectionLetter of Credit
International Methods of Payment
• Time of Payment: prior to shipment.• Buyer Pays
– Wire Transfer– Check– Draft– Credit Card
• Goods available to Buyer: upon delivery• Risk to Seller: no risks• Risks to Buyer: loses use of funds until goods arrive. Seller may
not ship goods as ordered or at all.• No Credit Approval Required
Cash In Advance
International Methods of Payment
• Time of Payment: upon payment of invoice.
• Goods available to Buyer: upon delivery.
• Risk to Seller: completely relies on Buyer to pay invoice when due.
• Risks to Buyer: no risks.
• Recommended for sales to long-standing customers with satisfactory payment history
Open Account
AT _SIGHT_____________
ABC CO.
XYZ CO.ABC CO.
AMOUNT
APRIL 24, 1996(Seller)(Seller)
ImporterImporter(Buyer)(Buyer)
Agreement (1)Agreement (1)
B/L (3)B/L (3)
MerchandiseMerchandise
(2)(2)(5)(5)
(6)(6)
Documents (4)Documents (4)
Open Account
MerchandiseMerchandise
• Time of Payment: upon presentation of the draft
• Goods available to Buyer: after payment if ALL Ocean Bills of Lading are included with the documents and after the cargo has arrived.
• Risk to Seller: possible non-payment of the draft.
• Risk to Buyer: has assurance of shipment, but Seller may not ship goods as ordered. Must pay to get title to goods.
• Not recommended for sales on extended terms
Documentary Collections
Sight Draft or Documents Against Payment
• Time of Payment: at maturity of draft.
• Goods available to Buyer: upon acceptance of the draft by the Buyer and after the cargo has arrived.
• Risk to Seller: possible non-payment of the draft AND Buyer has the cargo.
• Risk to Buyer: accepts draft before getting title to goods. Seller may not ship goods as ordered.
Documentary Collections
Time Draft or Documents Against Acceptance payable at XX days(i.e., 30/45/60 – per sales agreement) after sight, after bill of ladingDate, or after invoice date.
AT _SIGHT_____________
ABC CO.
XYZ CO.ABC CO.
AMOUNT
APRIL 24, 1996
Documentary Collection Export
Foreign Collecting BankForeign Collecting BankU.S. BankU.S. Bank
ImporterImporter(Buyer)(Buyer)(Seller)(Seller)
B/L (3)B/L (3)
Merchandise (2)Merchandise (2)
(8)(8)
(6)(6)
(7)(7)
(5)(5)
AT _SIGHT_____________
ABC CO.
XYZ CO.ABC CO.
AMOUNT
APRIL 24, 1996
Documentary Collection ExportDIRECT COLLECTION OPTION
U.S. Bank U.S. Bank
ImporterImporter(Buyer)(Buyer)(Seller)(Seller)
B/L (3)B/L (3)
Merchandise (2)Merchandise (2)
Direct presentation (4)
Direct presentation (4)
COPY OFTRANSMITTAL LETTER
Commercial Letter of Credit
THE PURPOSE OF A LETTER OF CREDIT IS TO ALLOW STRANGERS TO DO
BUSINESS.
AT _SIGHT_____________
ABC CO.
XYZ CO.ABC CO.
AMOUNT
APRIL 24, 1996
Letter of Credit Exporter
ImporterImporter(Buyer)(Buyer)(Seller)(Seller)
Agreement Agreement (1)(1)
B/L B/L (6)(6)MerchandiseMerchandise
Merchandise Merchandise (5)(5)(13)(13)
(10)(10)
(2)(2)
(9)(9)
Foreign Issuing BankForeign Issuing Bank
(12)(12)
(4)(4)
Docs/Draft Docs/Draft (8)(8)
(3) Letter of Credit(3) Letter of Credit
(11)(11)
Apply Apply for LCfor LC(7)(7)
LC/ LC/ Docs Docs DraftDraft
LC LC AdvisedAdvised
U.S. Bank U.S. Bank
• What is it?– The advising or negotiating bank, or another bank in
the seller’s country, may add its “confirmation.” A confirmation is the bank’s commitment of payment of the transaction in the event that the issuing bank fails to pay on behalf of the applicant.
• When a bank is asked to add their confirmation they undertake a credit decision based on factors such as the time period of the LC, amount, and political, economic and other risks associated with the country of the issuing bank, as well as commercial and credit risks associated with the issuing bank.
• If a letter of credit is not confirmed, it is merely “advised” to the beneficiary without any payment obligation on the part of the advising bank.
Do you need a confirmed export credit?Do you need a confirmed export credit?
• Consider the reputation and financial strength of the issuing bank.
• What about the political and economic environment in the country of issue?
• What about foreign currency controls in the country of issue that might impact the issuing bank’s ability to pay upon receipt of conforming documents?
• Do national laws in the country of issuance prohibit confirmation?
• What is your quality/relationship with the buyer?
Do you need a confirmed credit?Do you need a confirmed credit?
Cash Cycle
Raw material
Inventory
Receivables
Cash
Cash Cycle
Raw material
Inventory
Receivables
Cash
51
Trade Finance Products
• SBA Export Express• Export Working Capital
Program (EWCP)
52
SBAExport Express
SBAExportExpress
53
SBAExport Express
Program minimizes the use of government mandated forms and procedures and streamlines the processing and costs of smaller SBA loans for exporters.
Maximum loan amount limited to $250,000.
Lenders are granted expanded authority and autonomy.
The rate of guaranty is 85% for loans up to $150,000 or 75% for loans between $150,000 and $250,000.
54
SBAExport Express
Use of Proceeds
Finance standby letters of credit used for either bid or performance bonds;
Finance export development activities such as participation in a foreign trade show or the translation of product literature for use in foreign markets;
Provide transaction-specific financing for overseas orders;
Provide revolving lines of credit for export purposes – the term of which may not exceed five years;
55
SBAExport Express Use of Proceeds (cont)
Provide term loans and other financing to enable small business concerns, including small business export trading companies and small business export management companies, to develop foreign markets; andAcquire, construct, renovate, modernize, improve or expand productive facilities or equipment to be used in the United States in the production of goods or services involved in international trade.
Proceeds may not be used to finance overseas operations.
56
SBAExport Express
Eligibility Requirements
An SBA Export Express loan may only be made to a business that has been operating, although not necessarily in exporting, for at least 12 full months.
The applicant must submit to the lender a plan which demonstrates how the loan proceeds will enable it to enter a new export market or expand an existing export market and should include projected export sales for the upcoming year as well as the dollar volume of export sales for the previous year.
SBA Size StandardGENERAL RULESTHERE ARE EXCEPTIONS
• Manufacturing 500 employees
• Wholesale 100 employees
• Retail $6.0m in sales
EWCP
EXPORT WORKING CAPITAL PROGRAM
(EWCP)
59
EWCP
The program covers• Pre-shipment working
capital
• Post-shipment exposure
• Combination of pre- and post-shipment financing
60
EWCP
The program
• Supports single transactions or multiple sales under a revolving line
• Guarantees 90% of a private sector loan up to $1, 500,000 SBA exposure
61
EWCP
PRE-EXPORT Working Capital
• Orders against L/Cs
• Contracts for services
• Open account P.O.s with acceptable insurance or strong buyer
• Finance labor and materials
• Purchase goods and services
62
EWCP
COLLATERAL•1st lien on financed inventory•Assignment of proceeds from:
•Letter of Credit•Documentary collections•Foreign receivables
•Personal guarantees of owners (20% or more) and key principals, if applicable
63
EWCP
FEES and RATES•Guarantee fee:
•maturities of 12 months or less = 1/4%•$500,000 x 90% x .25% = $1,125
•Interest Rates/Lender Fees:•Fully negotiable
64
EWCP
ELIGIBILITYA business must:•Meet SBA’s industry size standards
•Have been in business for at least 12 continuous months
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