Financing Tools to Help You Increase Exports and Avoid Pitfalls Lansing, Michigan March 24, 2009 Bill Richeson, SVP Global Trade & Supply Chain Solutions.

“Financing Tools to Help You Increase Exports and Avoid

Pitfalls”Lansing, Michigan

March 24, 2009

Bill Richeson, SVP

Global Trade & Supply Chain Solutions

International Division

National City Bank

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

IndustrializedCountries

30 Countries

EmergingCountries200 Countries

Definitional DifferencesIndustrialized Countries Mature Economies

Emerging Countries 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

Low Perceived Political and Economic Risks

High Perceived Political and Economic Risk

Looking for Expanded Markets

Provider of Investment Capital

Capital Shortage - Reliance on Foreign Investments

General Patterns of TradeIndustrialized Countries Market Determines

Exchange Rates

Emerging Countries Fixed 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

– Buyer Credit Limits– Payment Terms Relaxed

Country Creditworthiness is Key– Country Limits– 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 Corporation156 Fifth AvenueNew 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 riskYou must quantify and manage this riskBanks 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

When do you want to get paid?When do buyers want to pay?

There is a mismatch between Buyer and Seller Goals

Now!

Later!

Payment Methods: 4 Methods

Buyer (Importer) Perspective• Open Account• Documentary Collection• Letter of Credit• Cash In Advance

Seller (Exporter) Perspective• Cash In Advance• Letter of Credit• Documentary Collection• Open Account

Buyer & Seller have Reversed Priorities!

LowestRisk

HighestRisk

BestCashFlow

WorstCashFlow

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

• Documentary Collection

TermsFavorSeller

TermsFavorBuyer

• Letter of Credit

• 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

Importer (Buyer)Buyer has an obligation to the

Issuing Bank to pay upon claim for

payment

Issuing Bank has the obligation to the Exporter to pay if he has complied with all the terms and

conditions in the L/C

Exporter and Importer have a sales contract between them which

supports the underlying transaction

Issuing Bank Exporter (Seller)

Separate Contracts

Advising/Confirming bank

Sales Contract

(Issuing Bank) (Advising Bank)

Sight LC Transaction FlowBuyer (Applicant) Seller (Beneficiary)

22

Application

Foreign BANK

44

LC Advised

33

LC Issued

11

Importer (Buyer)

Issuing Bank

Exporter (Seller)

Advising/Confirming bank

Shipment

Documents

Payment Claim

Buyer pays BEFORE receipt

of goods

Sight LC Transaction Flow

5

$

Buyer Seller

(Applicant)

Foreign BANK

8

7

$

8

6$8

Time LC Transaction Flow

Shipment

Payment Documents

Payment At Maturity

5

$

Buyer Seller

(Applicant)

Foreign BANK

8

$

8

6$8 Documents6 Documents

Acceptance7

6

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 CreditSet it up right!

1. Irrevocable2. Issue Date, Expiry Date &

Location3. Issuing Bank/Advising Bank4. Importer/Exporter5. Value & Currency6. Description of

Goods/Services7. Required Documents8. Payment Terms9. Incoterms10. Port-To-Port Info

11. UCP 60012. LC Fees - Who Pays?13. Latest Ship Date14. Presentation Date15. Partial Shipments (Y/N)16. Transshipments (Y/N)17. Paying Bank18. Drawee Bank19. Reimbursing Bank20. Confirming Bank

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

Shipment

Buyer pays BEFORE receipt of goods

Sight Collection (D/P)

2

Documents2

Documents3

4

$

4 $4$

Documents4

Foreign BANK

Buyer SellerBuy/Sell Agreement

1

Buyer pays AFTER receipt of goods

Time Collection (D/A)

Documents2

Documents3

6

$

6 $6$

Documents5

Foreign BANK

Payment at Maturity

5 Acceptance

Buyer Seller

Shipment2

Buy/Sell Agreement

1

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. Exporters Banks:

– 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: [email protected]

Global Client Care Center: 800-622-4685