Mitigating Risk Inherent in International Trade AMCHAM: Doing business with Colombia Wednesday 6 th April & Tuesday 12 th April, 2011
Jan 12, 2016
Mitigating Risk Inherent in International Trade
AMCHAM: Doing business with Colombia
Wednesday 6th April & Tuesday 12th April, 2011
What type of issues are What type of issues are businesses facing in today’s businesses facing in today’s
environment? environment?
Today’s EnvironmentToday’s Environment
Reduced demand for products and services
Heightened risk in international trade as uncertainty of the credit risk of buyersAccounts Receivables
days on hand increasing as buyers try to stretch their credit limits
Why Trade Finance?Why Trade Finance?
Issue Consequences TF SolutionReduced demand
for products and
services
Need to look for new markets – overseas
Uncertainty involved in new trade relationships
*Use TF as a marketing tool
Eg Use LC to offer attractive terms
*Internet Merchant Services
Heightened risk of international trade in current climate
Even trade relationships that have been longstanding are more risky in current environment
*Trade in Goods: Letters of Credit
Documentary Collections
*Trade in Services:
Letters of Guarantee (Bonds), Standby Letters of Credit
Why Trade Finance?Why Trade Finance?
Issue Consequences TF Solution
Increasing Account Receivables days on hand
Lengthening operating cycle can cause strain on cash flow
*Pre/post Shipment Financing eg Discounting Receivables
*Discounting of Bankers Acceptance under Export LC
Risk profile of Methods of Risk profile of Methods of PaymentPayment
Open AccountDocumentary CollectionsLetters of CreditAdvance Payment
Advance PaymentDocumentary CollectionsLetters of CreditOpen Account
For the Exporter For the ImporterHIGH
LOW
Documentary CollectionsDocumentary Collections
• A method of payment used in international trade whereby the Exporter entrusts the handling of commercial and often financial documents to banks and gives the banks instructions concerning the release of these documents to the Importer.
• Banks involved do not provide any guarantee of payment.
Documentary CollectionsDocumentary Collections
Documentary Collections may be carried out in two different ways:
1. Documents Against Payment: Documents are released to the Importer only against payment. Also known as a Sight Collection or Cash Against Documents (CAD).
2. Documents Against Acceptance: Documents are released to the Importer only against acceptance of a draft. Also known as a Term Collection. (30, 60, 90 days)
Documentary CollectionsDocumentary Collections
Collecting/ Presenting Bank
Importer/
Drawee
Remitting BankExporter/
Drawer
GOODS
Exporter submits documents such as invoice & B/L
Sends documents together with collection instructions
Acts in accordance with collection instructions and releases documents
Letters of CreditLetters of Credit
Letters ofLetters of
CreditCredit
DocumentaryDocumentary
• Primary Source of Primary Source of PaymentPayment
• Meant to be Meant to be drawn/exerciseddrawn/exercised
StandbyStandby
• Secondary source of Secondary source of payment (in the event of payment (in the event of defaultdefault
• Not meant to be Not meant to be drawn/exerciseddrawn/exercised
Letters of Credit- DocumentaryLetters of Credit- Documentary
• a payment undertaking given by a bank (Issuing Bank/Drawee),
on behalf of a buyer (Applicant),
• to pay a seller (Beneficiary/Drawer) a given amount of money,
on presentation of specific documents representing the supply of goods,
• within specific time limits,
• documents must conform to terms and conditions set out in L/C (Banks obligation to ensure)
• and documents must be presented at a specific place.
Banks deal only in documents and not in goods
Letters of CreditLetters of Credit
Letters of Credit may be:
1. Sight : If payment is to be made at the time that documents are presented and there are no discrepancies
2. Term: If payment is to be made at a future fixed time from shipping date/invoice date
Confirmed Letters of CreditLetters of Credit
• Under a Confirmed Letter of Credit, a bank, called the Confirming Bank, adds its commitment to that of the Issuing Bank to pay the Exporter under the Letter of Credit provided all terms and conditions of the Letter of Credit are met. The Confirming Bank is usually located in the same country as the Exporter.
Letters of Credit: Issuanceetters of Credit: Issuance
Importer applies for Letter of Credit.
Request to advise & possibly confirm the Letter of Credit
Advise /Confirmation of the Letter of Credit.
Advising/ Confirming Bank
Issuing Bank
Exporter/ Beneficiary
Importer/Applicant
ContractNegotiations
Letters of Credit: Flow of etters of Credit: Flow of Documents & PaymentsDocuments & Payments
Issuing Bank
Exporter/ Beneficiary
Importer/Applicant
Doc
umen
ts
Advising/ Confirming Bank
GOODS
Documents
Documents
Standby Letter of CreditStandby Letter of Credit
• Form of guarantee / secondary source of payment• Default instrument issued to cover the non-
fulfillment of a customer’s obligation under an underlying contract or agreement relating to a trade related or financial transaction
• Banks in the US are not empowered to issue guarantees so they developed the SBLC to get around this
Bonds & GuaranteesBonds & Guarantees
– Bid/Tender– Performance– Advance payment– Customs– Immigration
Pre-Shipment FinancingPre-Shipment Financing
Advances made to a client based on export
orders (raw material financing)
- With recourse financing
- ECA supported (without recourse)
- LIBOR-based pricing for eligible borrowers
Post- Shipment FinancingPost- Shipment Financing
Advances made to an exporter after the shipment has been made based on satisfactory evidence of debt (foreign open a/c receivable financing)
- Buyer Credit or Supplier Credit
- ECA supported
- Int’l trade lines, LIBOR based pricing for eligible borrowers
Why Scotiabank Trade Finance?Why Scotiabank Trade Finance?
• International Bank – global reach into target markets (lower transaction costs across network)
• Network of correspondent banks
• 175 years in existence, presence in 50 countries
• Among Top 10 performing banks in the world- 2009
• Global Finance Magazine awarded Scotiabank “Best Trade Finance Bank –Canada” 2006, 2008, 2009 , 2010
Why Scotiabank Trade Finance?Why Scotiabank Trade Finance?
• Can leverage technology and expertise (Tradexpress Elite)
• Can offer a full range of services/creative tailored solutions
• Has access to cheaper international funding (high credit rating)
• Can offer training & support to its clients
For More Information: Joanna del Pino, Snr Manager, Trade Finance
625-3566 Ext 2050
THANK YOU