Agenda

1
Show Me The Money Getting Paid for your Export
Sales

ISRI National Convention April 6th, 2006
Presented by Jane Hay, VP International
Banking, U.S. Bank
2
U.S. Bank

• 6th largest bank in the U.S.
• 2009 Billion in assets
• International Banking offices in 17 cities from
  Ohio to California
• Full Operations staff in 7 locations - Seattle,
  Milwaukee, Minneapolis, St. Louis, Portland, Los
  Angeles, Hong Kong
• Extensive Trade Finance experience in the Scrap
  Industry

3
Discussion Points

• Options for Export Finance
• Decision Making Factors
• Exporter and Importer Perspectives
• Transaction Overviews
• L/Cs easy as 1,2,3!

4
Standard International Payment Methods

• Cash
• Documentary LC, Confirmed or Unconfirmed
• Documentary Collections
• O/A Credit Line

5
Methods of PaymentRisk Assessment

• Open Account
• Documentary Collections
• Time Drafts (D/A)
• Sight Drafts (D/P)
• Letters of Credit
• Cash in Advance

6
Methods of PaymentDecision Factors Which
Method to Chose??

• Amount of Order
• How much can you afford to loose?
• Is this an unusually large order?
• Your Companys Tolerance for Foreign Risk
• Type of Product
• Off the shelf versus customized
• Competitors Terms
• Are they offering terms?
• What is the industry standard?

7
Methods of PaymentDecision Factors Which
Method to Chose??

• Cash Flow Needs
• Do you need fast payment?
• Can you afford to offer terms?
• Relationship with Buyer
• New versus Long Term
• Unreliable Financials?
• Costs/Margins
• Financing cost vary substantially
• The longer the financing period the higher the
  cost
• General International Experience
• Are you new to the market?
• Do you have an experienced Intl Credit Staff?

8
Cash in Advance

• Benefits
• Lowest Risk for Exporter
• Little or no cost for either party
• No risk of order cancellation
• Potential Stumbling Blocks
• All risk born by buyer
• No way for buyer to ensure proper docs arrive
  with shipment
• Loss of orders to the competition?

9
Letters of Credit Exporters Perspective

• Pre-export guarantee
• Ability to sell in higher risk markets
• Protection from order cancellation
• Reliance on issuing banks credit standing
  instead of buyers credit standing
• Ability to offer extended terms as a selling tool
  and still get paid upon shipment through
  discounting
• Cost
• Perceived hassle factor or unfamiliarity

10
Letter of Credit Importer's Perspective

• Documentary evidence that the goods have shipped
• Assurance that the goods will be shipped on time
• Assurance that documents needed for customs
  clearance will be provided
• At a minimum, payment is deferred until the goods
  are shipped and the documents are presented
• Ability to request deferred payment while still
  allowing shipper to be paid on sight basis
• Cost
• Credit Line Availability for Importer

11
Playing by the Rules

• International Chamber of Commerce
• The ICC produces and revises
• Incoterms
• Uniform Customs and Practice for Documentary
  Credit (UCP 500)
• standard list of guidelines governing LC
  processing and interpretation
• recognized by banks in most countries

http//www.iccbooks.com/
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Incoterms 2000 and Modes of Transportation

• Departure
• EXW Ex Works
• Main Carriage Unpaid
• FCA Free Carrier
• FAS Free Alongside Ship
• FOB Free On Board
• Main Carriage Paid
• CFR Cost and Freight
• CIF Cost, Insurance and Freight
• CPT Carriage Paid To
• CIP Carriage and Insurance Paid To
• Arrival
• DAF Delivered At Frontier
• DES Delivered Ex Ship
• DEQ Delivered Ex Quay
• DDU Delivery Duty Unpaid
• DDP Delivery Duty Paid

13
Incoterms

• Incoterms affect
• costs
• type of transport document
• control of transport document and timing of title
  transfer
• insurance provisions

14
Negotiating Terms in the Letter of Credit

• Always negotiate the contents of a letter of
  credit with your trading partner BEFORE it is
  issued. Amendments can be costly and delay sales.
• Your bank should work with you from the initial
  stages of a transaction to ensure that the letter
  of credit is structured to meet your needs and
  lower your risks.

15
Confirmations ofExport Letters of Credit

• What??
• A second bank, usually in the exporters country,
  guarantees the obligation of the issuing bank,
  providing an extra layer of protection
• Chinese Banks do not allow confirmations -
  Document Purchase Program
• When??
• If your company is financially conservative as a
  policy
• If the country or the issuing bank is considered
  risky
• If the dollar amount is unusually large
• Contact your intl banker first!

16

17
Application Process

• Buyer requests a line of credit from his bank (or
  utilizes an existing line)
• LC is initiated / authorized only by Buyer
• The LC is a legal contract between the Buyer and
  the Issuing Bank
• The application for the LC is an extension of the
  purchase order
• Application can be filled out on paper or
  electronically
• LC is issued by the Issuing Bank, usually via
  SWIFT

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19

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Sellers review of the LC

• Review Procedures
• Review application or a draft of the LC before
  issuance, if possible
• When LC is advised, review against Instructions
  to Buyer, P.O. or other docs
• Ask intl banker and forwarder to review
• Route internally
• Use a checklist
• Amendment Procedures
• Contact Buyer with instructions

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LC Checklist Customer Name ______________________
______________ LC ____________________________ Ad
vising Banks Ref ______________________________
_ Advising Bank Contact/Phone ____________________
___________________________ PO
___________________________ THE LC TERMS 1.
What is the full amount of the LC? _______________
______________ 2. Does the LC request
confirmation? _____________________________ 3.
What is the tenor of the LC? ____________________
_________ (Period from issuance to
expiration) 4. What is the tenor of the
draft? _____________________________
(Payment terms - i.e. sight, 30 days from B/L,
etc.) 5. What are the relevant dates? Are they
all acceptable? issuance __________ latest
ship date __________ presentation
period __________ expiration __________ 7.
What is the Incoterm? _____________ named
place ______________ Does it agree
with Transport document? ____________________
____ Freight charges collect or prepaid?
________________________ Ports of loading and
discharge? ________________________ Insurance
requirements? ________________________ 8. Are
the other docs acceptable/appropriate?
________________________ 9. For what charges
are we responsible? ________________________ 10.
Has the LC been circulated through sales,
treasury / credit, production, traffic, etc. and
to your forwarder? 11. Comments / issues /
amendments req'd? _______________________________
__________________________________________________
___________________________________________ Check
ed by __________________________ Date
___________________
22
Amendment Procedures

• Requires the agreement of the applicant,
  beneficiary, issuing and advising banks
• Buyer must request
• Authorized signer at Buyers company must approve
  (sign for) an amendment

23
Presenting Documents

• Can be done by exporter or forwarder or trade
  documentation firm
• Do not automatically send documents back to the
  advising bank
• Present documents to your preferred Export L/C
  Bank whenever possible. This bank will provide
  better service and usually better rates.
• Field 41D What does Available With mean??
• Any Bank vs restricted

24
LC Examination Process

• The Examining Bank, on behalf of the exporter,
  examines documents, corrects documents or assists
  with discrepancies
• WHY??
• The job of the examining bank (and a forwarder
  who presents documents) is to protect their
  client - the exporter - by finding and correcting
  any discrepancies to make a clean presentation to
  the Issuing Bank, thus ensuring prompt payment
• Same Day versus 7 day document examination

25
Common Discrepancies in Documents

• General (Hard) Discrepancies
• LC expired
• Late presentation
• Late shipment
• Missing documents
• Specific Documentary Discrepancies
• Document language not per LC
• Number of originals/copies not per LC
• Documents not signed, if necessary
• Mathematical errors or inconsistencies
• Quantities, dollar amounts, weights, etc.,
  incorrect
• Tip of the Day Use a Bank that corrects
  documents in-house
• whenever possible and teaches you to avoid
  future discrepancies

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LC Payment Process

• Sellers bank makes claim for payment when
  documents are clean
• Sellers bank waits for Issuing Banks agreement
  to pay on discrepant (uncorrectable) documents
• Timing of payment based on
• Tenor of draft
• Sight
• Time
• Number of days, sight
• Number of days, date
• Reimbursement Instructions
• Payable in the U.S.
• Payable only at the counters of the issuing bank
• Seller instructs paying bank where to deposit
  funds

27
Bankers Acceptances

• With a time draft, the drawer bank creates a
  BA
• Accepting bank may agree to discount the BA and
  pay the seller immediately
• Ask the accepting bank for a quote on the BA
  rate prior to discounting
• Who should pay for acceptance and discount??
• Amt of draft X disct rate X days / 360
• Example 77k draft, 90 day BL terms, disct
  rate estimated by bank at 6.5
• 77,000 x 6.5 x 80/ 360 1,101

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Typical LC fees

• Importer typically pays for
• issuance (credit line fees)
• amendments
• exam. of docs by their bank
• misc. courier/cable fees
• Exporter typically pays for
• advising
• amendments
• exam. of docs by their bank
• any acceptance or discount fees if on time draft
• Who pays fees is stipulated in LC
• Consequences of applicant paying all fees
• Save money!
• Understand/agree on all LC terms in advance
  understand your banks pricing present clean
  documents understand time draft benefits for
  both parties reduce time spent working on LCs.
• 
  
  

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1. Buyer and Seller enter into a sales agreement

Agreement
Seller
Buyer
30

2. Buyer applies for a letter of credit with the
Issuing Bank

Buyer
Application
Issuing Bank
31

3. Issuing Bank sends the LC to Advising Bank,
usually via SWIFT. After authenticating the
LC, the LC is sent to beneficiary.

32

4. Seller prepares documents and ships the goods

Goods
Buyer
Seller
33

5. Seller (or forwarder) sends documents to a
Bank for examination

Seller
Documents
Buyer
34

6. If documents comply w/ LC terms, Examining
Bank claims reimbursement from Issuing Bank. If
they confirmed the LC, the Examining/Confirming
Bank pays the Exporter.

Issuing Bank
Documents
Examining Bank
35

7. Issuing Bank examines documents, finds them in
compliance and reimburses the Examining Bank.
They debit the Importers account for payment and
then deliver the docs to importer.

Documents
Issuing Bank
36

8. The exporter has been paid, the importer has
their goods, the banks have been reimbursed, and
the cycle is complete!

37
Special Types of LCs

• Transferable LCs
• First beneficiary (often, not always, an agent)
  transfers all, or a portion, of the LC to another
  party- usually a vendor
• Why?? Provide a guarantee to the second vendor
  without using first beneficiarys credit line
• Both first and second beneficiaries present their
  own documents for payment
• Typically, second beneficiary pays for any fees
  related to their draw(s)

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Special Types of LCs

• Assignments of Proceeds
• Beneficiary has advising bank assign proceeds
  from the LC to a second party - usually another
  vendor.
• Why?? Provide a guarantee to the second vendor
  without using credit line.
• Only the beneficiary draws on the LC. When the
  LC is paid, the bank automatically pays the
  assignee.
• Assignee relies on ability of beneficiary to draw
  on the LC successfully.
• Typically no cost to assignee.

39
Documentary Collection

• Exporter ships goods and routes documents through
  banks
• Seller retains title until payment or acceptance.
  
• Buyer must agree to allow bank to pay seller on a
  sight draft, or accept a time draft prior to
  receiving title docs for Customs.
• Used for customers with fair to good credit low
  risk country competitive sales reasons

Seller
Buyer
40
Documentary CollectionsThe Sellers Perspective

• As a selling term
• Fairly competitive payment term relative to cash
  in advance or LC
• Benefits / Risks
• Buyer could refuse the shipment
• Incoterm Issues
• Air shipment v. Ocean shipment
• Time draft v. Sight draft
• Stock item v. Custom manufactured
• Cost / Convenience
• Low cost
• Easy documentation (often done by forwarder) by
  web software or paper
• No examination of docs
• Best Bet (lowest risk)
• Sight drafts, ocean shipments

41
Documentary CollectionsThe Buyers Perspective

• As a purchasing term
• Strongly preferable to having to issue an import
  LC or provide cash in advance.
• Benefits / Risks
• Retain ability to refuse shipment
• If a sight draft, no inspection of goods prior to
  payment
• Control when and if payment is made, even on an
  accepted time draft
• No meaningful examination of docs
• Cost / Convenience
• No credit line usage
• Low processing costs
• Can defer payment on sight drafts until ship
  arrives

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Documentary Collections
43
(No Transcript)
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Open Account

• Standard payment method for many industries
• Reduced bank fees
• Reduced paperwork / hassle
• Intl customer do not tie up their credit lines
• U.S. exporter has a long and satisfactory
  relationship with the buyer
• Export Credit Insurance possible
• Potential Stumbling Blocks
• Lack of reliable, verifiable credit information
• Longer DSO for most exporters
• Credit risk
• Less control over payment amounts
• Order cancellation risk
• Communication issues

45
L/C Best Practices - Use the Internet!

• Bank Web-based Tools
• Same Day Electronic Advising of L/Cs and
  Amendments
• Email Notification of all activity
• Initiate Export Documentary Collections
• Full Reporting Capability
• -Outstanding balances on your LCs/Collections
• -Transaction detail and history
• -Monitor ship dates, expiration dates, fees, etc.
  
• -Track and store information on payments,
  debits/credits
• Outsourcing Electronic Documentation Services
  and/or Software
• Interfaces with banks on-line system Export
  Letters of Credit
• Can use l/c to populate all required documents
• Can present documents electronically to bank

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Make your life easier...Use the Internet!

• Why?
• Create visibility throughout your company
• include Credit, Treasury, Logistics, Sales,
  Accounting, etc.
• Reduce time spent making copies, creating
  reports, etc. for several departments
• Increase efficiency, accuracy, speed
• E-mail clean copies of electronic LCs to
  forwarder/steamship line
• Reduce cost related to Doc Prep/Presentation
• Reduce Bank fees and Discrepancies
• GET PAID FASTER!

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Wrap up - Janes Top Ten

• 1. Know your trading partner
• 2. Dont issue an LC or ship under an LC until
  both parties agree on all terms
• 3. Importers, have your intl banker review your
  terms. Ask about other possible options.
• 4. Exporters, make sure you negotiate favorable
  LC terms BEFORE the LC is issued. Ask your intl
  banker and forwarder for their input.
• 5. Dont forget the KISS theory
• 6. Prepare documents carefully
• 7. Keep UCP 500 and Incoterms Guide available
• 8. Get your moneys worth! Select forwarders and
  bankers with solid trade finance experience
• 9. Have your forwarders and bankers keep you up
  to date. Keep them accountable.
• 10. Use a web-based system for efficiency and
  accuracy