nternationalTradeFinanceandPayments_Seminar2C_NM20072E___ppt.ppt

International Methods of Payments and

U.S. Government Int’l Finance ProgramsDennis R. Chrisbaum

Regional Manager, International Trade ProgramU.S. Small Business Administration

U.S. Export Assistance Center1625 Broadway, Suite 680Denver, Colorado 80202

Tel: 303.844.6623 x 18; Fax: [email protected]

Overview of PresentationWhat risks are inherent to international business?How do I get paid for international transactions? What are the risks related to each method of payment? How do I evaluate and mitigate those risks?What financial support is available for exporters, including U.S. government programs?

Risks Associated with Global Trade1. Political

2. Economic

3. Cultural

4. Regulatory/legal

5. Commercial

6. Logistical

7. Financial

International Risks1. & 2. Political & Economic

risks—research and insurance.• Country Watch:

www.countrywatch.com• Economist Intelligence Unit:

www.economist.com/countries

• Political Risk Services: www.prsgroup.com

• AIG—http://home.aigonline.com

International Risks3. Cultural--education and training

• Local training programs, colleges, etc.• Does and Taboos Around the World—

by Roger Axtell• www.culturegrams.com;• www.executiveplanet.netwww.executi

rveplanet.net4. Regulatory and legal

• research and legal advice—ELAN program--www.fita.org/elan

• www.buyusa.gov/europeanunion

International Risks5. Commercial Risks--credit

checks and credit insuranceA. Credit agencies• Dun & Bradstreet:

www.dunandbradstreet.com• Graydon America:

www.graydonamerica.com• Credit Risk Monitor:

www.crmz.comw.owens.com• Coface USA

• www.coface-usa.com

International RisksB. Credit Insurance on Open

Account Sales• Export-Import Bank:

www.exim.gov• FCIA Management:

www.fcia.com• Euler Hermes www.eurlerhermes.com• Coface:

www.coface-usa.com

International Risks

6. Logistics/geographic—research, a good freight forwarder, and insurance

7. Financial• international banking (methods

of payments, foreign exchange, wires)

• government financing and insurance programs can help

International Methods of Payment1. Cash in Advance—wire

transfer/credit cards

2. Documentary Letters

of Credit

3. Documentary Collections

--documents against cash

--documents against acceptance

4. (Insured) Accounts Receivable

Payment Method and Risk

• Cash in Advance

• Letter of Credit

• Doc Collections

• Open Account

HIGH RISK

Risk to

Buyer

LOW RISK HIGH RISK

LOW RISK

RiskToSeller

Cash In Advance

Importer

Importer’s Bank2. Wire Transfer

Exporter1.Purchase Order/Contract

4. Ships goods

3. PaymentExporter’s Bank

5. Goods Received

Letter of Credit Flow

Importer

Importer’s Bank2. Opens Letter of Credit

Exporter’ Bank

Exporter1.Purchase Order/Contract

3. Transmits L/C

4. Advises, may confirm, L/C

5. Ships goods6. Presents documents

7. Presents docs

8. Payment 9. Payment

10. Goods Received

Documentary Collections

Importer

5. Delivers Documents for Cash or Agreement to Pay Importer’s Bank Exporter’ Bank

Exporter1.Purchase Order/Contract

2. Ships goods3. Delivers documents

4. Delivers docs

7. Payment

8. Payment

6. Provides Cash orAgreed to Pay for docs9. Receives goods

Open Account

Importer

5. Wire transfer

Importer’s Bank Exporter’ Bank

Exporter1.Purchase Order/Contract

2. Ships goods

6. Payment

3. Receives goods

4. Provides cash on a later date

International Methods of Payment1. Who sets the method of

payment?

2. Competitive pressures, customer relations, regional preferences and, sometimes, regulations

3. Method of payment will determine the financing needed for the transaction

Trade & Investment FinancingA. International division of banks

- Letters of credit; documentary collections - Foreign exchange; wire transfers

B. U.S. Small Business Administration, www.sba.gov/oit.sa.go i. Export Express--to $150,000 with 85% guaranty; to $250,000 with a 75% guarantyii. Regular 7(a) loans--up to $2 million for fixed assets and working capital, with 75% SBA guarantyiii. Export Working Capital Program--up to $2.0 million loan amount, 90% guaranty

C. Export-Import Bank of the United States (Eximbank)D. Overseas Private Investment Corporation (OPIC)

Transactional FinancingPre-shipment Shipment Post-ShipmentPERFORMANCE RISK FINANCIAL RISKProduction costs Receivables financingMaterial Buyer financingLabor SBA/EximbankInventoryPerformance or Bid BondsSBA/Eximbank

Sources of Pre-shipment Working CapitalPre-Shipment

1. Buyer - cash in advance2. Supplier - supplier credit or terms3. Bank loan secured by collateral and/or a government guaranty**A Letter of Credit is not collateral until its terms and conditions have been performed 4. Export Finance Companies and Export Trading Companies

Sources of Pre-shipment Working CapitalPost-Shipment

1. Commercial bank – discounteddraft or letter of credit

2. Factoring or forfaiting of Accounts Receivable

3. Bank loan secured by: - collateral

- assignment of proceeds under a letter of credit

- assignment of proceeds under a credit insurance policy; and/ or

- a government guaranty

Use of Proceeds: EWCP LoanPre-Shipment

1. Labor, inventory, materials --disbursements made against

a letter of credit, contract, purchase order, invoice, etc.

2. Stand-by letters of credit --serving as performance or

bid bond

Post-Shipment1. Accounts receivable --insured, or a strong buyer

Eligibility Requirements: EWCP Loan•SBA’s 7(a) size and ownership standards apply•12 months of operating history•Transaction-based; no development expenses•Disbursed against specific transactions and/or resulting (insured) receivables•Eximbank’s country limitation schedule (CLS) applies,see: www.exim.gov

Analysis: 1) is the deal structured correctly, 2) can the borrower perform as agreed, 3) can we get paid/how secure is the method of payment?

Typical Advance Rates, Collateral & FeesTypical Advance Rates:

• 75% against inventory, WIP• 85% against insured, foreign A/R• 90% against Letter of Credit

Collateral1. Inventory and work-in-process2. Resulting foreign accounts receivable3. Assignment of proceeds under: --documentary letters of credit --credit insurance policies4. Other assets as required by the lender5. Personal guarantees of 20% or more owners

Guaranty Fee: * .25% of guaranteed amount, if 12 months or less

SBA’s Export Working Capital ProgramParameters

up to $1.66 million with 90% SBA guaranty up to $2.0 million with 90% SBA/Eximbank

co-guaranty single transaction or revolving line of credit pre-shipment, post-shipment or combination manufacturers, service providers, wholesales

or brokers are all eligible, even if an indirect export (through another exporter of record)

51% U.S. content only if Eximbank is involved

no military sales only if Eximbank is involved

Case Study: Pre-shipment WCOrder:• 25 units, digitizing equipment• Production cycle: 2 units/wkTransaction:• $205k L/C payable at sight• Partial shipments allowed• Expiry, four monthsWorking Capital Need:• $150k to produce orderCompany: 2 years in R&D

Case Study: Post-Shipment WCOrder: $300k• Install closed-circuit TV system• Mexico, March 1995Transaction:• From COD to 12-month open

account • 20% down ($60k); $240k AR• 12 monthly payments, principal

($20k) + 10% (US) interest• Exim Single Buyer Policy~3.5%Working Capital Need:• $180k; down: $60k; profit: $60k

Case Study: Performance GuarantyOrder • $660K for 9 modular pumping

units for a mine in ChileTransaction:• 50% ($330k) advance payment• 20%, final shipment; 20%

delivery to mine site; 10% held back as 12-month warranty

Working Capital Need• $330k to support Standby LC

for advance payment, 3 months

Export-Import Bank

1. Export Working Capital -- www.exim.gov

• loans over $2.0 million• large businesses, or small

business at SBA’s $1.5 million guaranty cap

• special coverage for rural & environmental firms

2. Export Credit Insurance• protects against commercial

and political risk* allows exporter to offer competitive payment terms—marketing tool* allows exporter to borrow against A/R—finance tool* allows the exporter to sleep at night—health tool

Export-Import Bank

2. Export Credit Insurancea. multi-buyer policy (on worldwide buyers)

*small business policy: SB with $5 million or less in export credit sales average prior 2 years—95% commercial/political risk

* small business policy cost: $.65/$100 invoice

--25% discount if paired with Export Working Capital Loan=49cents/$100

b. single buyer policy—90% commercial risk

c. medium term policy, up to 5 years—for either exporter or lender

d. leasing-- operating & financing policies

Export-Import Bank3. Loan Guarantees for Buyers

--for capital goods and services--for project financing--15% down-payment required--100% guaranty on the

85% financed portion--generally 3-10 years--OECD rate limits apply

Special Conditions- 50% U.S. content- non-military goods/sales only- reasonable assurance of repayment- not in competition with private sectorEximbank: 1-800-565-EXIM

- Long Beach: (562)982-4580--WY- Long Beach: (562) 980-4585 –AZ- San Francisco: (415) 705-2285-UT - Houston: (281) 721-0467—NM/CO- Washington, DC: (202) 565-3946- Internet: http://www.exim.gov

Case Study: Pre-Shipment Working Capital & Foreign Buyer Financing

Order from Cameroon• $500k ice-making plantTransaction:• 15% down payment• 5-Year loan from Texas bank for

85%, triggered by final shipment• 100% Exim cover to lender under

medium-term insurance policyWorking Capital Need• $250K to complete order, 3

months

Who Can Assist with Investment Finance? Active in 150 developing countries1. Investment financing

a) Loans:• typically up to 50% of project;

min. 25% U.S. equity• direct loans from $100k to $10

million for SMEs through the Small Business Center: 800-225-5722

• Loan guarantees up to $250 million (exceptions to $400 million in oil and gas sectors)

Who Can Assist With Investment Risk?

b) OPIC-supported investment funds- regionally focused- industry sector focused2. Political Risk/Investment insurancea) Currency inconvertibility, b) Expropriation,c) Political violence, war, riot,

revolution3. Investment Missions• OPIC InfoLine: (202) 336- 8799; • www.opic.govhtp://www.opic.gov

Trade & Investment Financing SummaryTrade Financinga. Export Working Capital

Programs—Pre-Shipment & Post-Shipment--SBA & Export-Import Bank

b. Foreign Accounts Receivable Financing—Post-Shipment--eligible for borrowing base, if insured--factoring or forfaitingSources: banks, factors, forfaiters, SBA/Eximbank

c. Buyer Financing and Project FinancingSources: Banks, Export-Import Bank, forfaiters

Investment Financing--direct foreign investment by U.S. company

Sources: Overseas Private Investment Corporation (OPIC)—in 150 developing countries--World Bank & MIGA