1
Financing Tools to Help You Increase Exports and
Avoid PitfallsLansing, Michigan
Bill Richeson, SVP Global Trade Supply Chain
Solutions International Division National City
Bank
March 24, 2009
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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

3
Global Trade Overview
4
Classification of Countries
Industrialized Countries 30 Countries
Emerging Countries 200 Countries
5
Definitional Differences

• Industrialized Countries
• Mature Economies

• Emerging Countries
• Newer Economic Systems

6
General Patterns of Trade

• Industrialized Countries
• Market Determines Exchange Rates

• Emerging Countries
• Fixed Exchange Rates

7
Trade Concepts, Payment Procedures and Risks
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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

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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

10
Risk Awareness

• Credit Risk
• Performance Risk
• Country Risk
• Currency Risk
• Transportation Risk
• Regulatory Risk
• Transaction Structure Risk
• Fraud
• Identify Understand the Risks

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Risk Evaluation

• Sources of Information
• Your bank Bank credit reference
• Export Import Bank Country Limitation Schedule
• Credit Agencies (DB, Veritas, etc.)
• Internet
• U.S. Dept. of Commerce
• Trade references
• Measure the Risks

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Pricing/Shipping Terms

• Known as Incoterms 2000
• Published by
• ICC Publishing Corporation
• 156 Fifth Avenue
• New York, New York 10010
• [phone]
• 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

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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

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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

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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

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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

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Pricing Terms
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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

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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 risk
• You must quantify and manage this risk
• Banks have tools and expertise to help you
  mitigate these risks

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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

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Payment Methods
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There is a mismatch between Buyer and Seller
Goals
When do you want to get paid? When do buyers want
to pay?
Now!
Later!
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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

Best Cash Flow
Lowest Risk
Highest Risk
Worst Cash Flow
Buyer Seller have Reversed Priorities!
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Choice of Methods

• (What Determines?)
• Buyer-Seller Relationship
• Buyers credit standing
• Competition
• Uniqueness of the product (custom made?)
• Country conditions (political, economic)
• Cash flow considerations
• Transaction costs
• Other

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Payment Methods 4 Methods

• Cash in Advance

Terms Favor Seller

• Letter of Credit

• Documentary Collection

Terms Favor Buyer

• Open Account

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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

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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)

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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)

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Letters of Credit

• A versatile tool for closing the gap that exists
  between buyers and sellers.

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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 banks
  creditworthiness, which is generally well known
  or easily ascertainable for that of its customer,
  which may not be as well known

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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

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Independence Principle
Importer (Buyer)
Exporter and Importer have a sales contract
between them which supports the underlying
transaction
Buyer has an obligation to the Issuing Bank to
pay upon claim for payment
Separate Contracts
Issuing Bank
Exporter (Seller)
Advising/Confirming bank
Issuing Bank has the obligation to the Exporter
to pay if he has complied with all the terms and
conditions in the L/C
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Sight LC Transaction Flow
Seller (Beneficiary)
Buyer (Applicant)
1
Sales Contract
2
4
Application
LC Advised
Foreign BANK
3
LC Issued
(Advising Bank)
(Issuing Bank)
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Sight LC Transaction Flow
Seller
Buyer
5
(Applicant)
Shipment
Buyer pays BEFORE receipt of goods
6

8
Documents

8
8
Foreign BANK

Payment Claim
7
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Time LC Transaction Flow
Seller
Buyer
5
(Applicant)
Shipment
Payment At Maturity
6

8
Documents

8
6
Documents
8

Foreign BANK
Payment Documents
6
Acceptance
7
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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

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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

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Confirmed Letters of Credit

• Eliminates issuing bank country and commercial
  risk
• If the issuing banks letter of credit is
  confirmed, the confirming bank substitutes its
  own creditworthiness for that of the issuing
  banks 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

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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

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Payment Method Letter of CreditSet it up right!

1. Irrevocable
2. Issue Date, Expiry Date Location
3. Issuing Bank/Advising Bank
4. Importer/Exporter
5. Value Currency
6. Description of Goods/Services
7. Required Documents
8. Payment Terms
9. Incoterms
10. Port-To-Port Info

1. UCP 600
2. LC Fees - Who Pays?
3. Latest Ship Date
4. Presentation Date
5. Partial Shipments (Y/N)
6. Transshipments (Y/N)
7. Paying Bank
8. Drawee Bank
9. Reimbursing Bank
10. Confirming Bank

20 Points of Negotiation in Structuring your LC
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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

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A Fundamental Reality

• When dealing with letters of credit, the only
  things that count are the documents

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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

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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

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Letter of Credit Fees

• Fees to Avoid
• Amendment Fees
• Discrepancy Fees
• Reimbursing bank fees
• Copy Fees
• Ancillary Fees
• Faxes
• Communication charges
• Special processing

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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 dont understand
• If incorrect, reject the LC immediately
• If necessary, request the buyer amend the Letter
  of Credit

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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

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Documentary Collections

• Disguised open account transactions
• Less secure than letters of credit
• More secure than open account
• Benefits
• Dont encumber buyers line of credit
• Very inexpensive
• Effective if properly structured
• Use of correct Incoterms
• Role of banks and freight forwarders

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Sight Collection (D/P)
Buyer
Seller
Buy/Sell Agreement
1
Shipment
2
Documents
2
4

4

4
4
Documents

Foreign BANK
Documents
3
Buyer pays BEFORE receipt of goods
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Time Collection (D/A)
Buyer
Seller
Buy/Sell Agreement
1
Shipment
2
6

Documents
2
6

5
Payment at Maturity
Documents
5
Acceptance
6

Foreign BANK
Documents
3
Buyer pays AFTER receipt of goods
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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

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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)

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Export Credit Insurance Financing Options
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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

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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

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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

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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

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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

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Contact Information

• Bill Richeson
• Senior Vice President
• Global Trade Supply Chain Solutions
• National City Bank
• Phone [phone]
• e-mail william.richeson_at_nationalcity.com
• Global Client Care Center 800-622-4685

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