Post on 25-Dec-2015
1
“Getting Paid for Your Exports in a
Challenging Global Economy”
Lansing, MI
November 17, 2011
Bill Richeson, CTP
Senior Vice President
International Division
PNC Bank
Ph: (616)771-8849
2
AGENDA
• Incoterms 2010• Foreign Exchange• Payment Methods• Letters of Credit at Financing Tools• Medium-Term Financing for Foreign Buyers• Export Credit Insurance• Examples and “War Stories”• Q & A
3
Pricing/Shipping Terms
• Known as Incoterms 2010– 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
4
Incoterms 2010
Rules for Any Mode or Modes of TransportEXW = Ex WorksFCA = Free CarrierCPT = Carriage Paid ToCIP = Carriage & Insurance Paid ToDAT = Delivered At TerminalDAP = Delivered At PlaceDDP = Delivered Duty Paid
Rules for Sea and Inland Waterway TransportFAS = Free Alongside ShipFOB = Free On BoardCFR = Cost & FreightCIF = Cost, Insurance & Freight
5
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
6
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
8
There is a mismatch between Buyer and Seller Goals
When do YOU want to get paid?When do Buyers want to pay?
Now!
Later!
9
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
10
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
11
Payment Methods: 4 Methods
• Cash in Advance
• Documentary Collection
TermsFavorSeller
TermsFavorBuyer
• Letter of Credit
• Open Account
12
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
13
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)
14
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)
16
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
17
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
18
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
19
Sales Contract
(Issuing Bank) (Advising Bank)
Sight LC Transaction FlowBuyer (Applicant) Seller (Beneficiary)
22
Application
Foreign BANK PNC Bank
44
LC Advised
33
LC Issued
11
Importer (Buyer)
Issuing Bank
Exporter (Seller)
Advising/Confirming bank
20
Shipment
Documents
Payment Claim
Buyer pays BEFORE receipt
of goods
Sight LC Transaction Flow
5
$
Buyer Seller
(Applicant)
Foreign BANK PNC Bank
8
7
$
8
6$8
21
Time LC Transaction Flow
Shipment
Payment Documents
Payment At Maturity
5
$
Buyer Seller
(Applicant)
Foreign BANK PNC 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
23
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
26
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. Incoterms
10.Port-To-Port Info
11.UCP 600
12.LC Fees - Who Pays?
13.Latest Ship Date
14.Presentation Date
15.Partial Shipments (Y/N)
16.Transshipments (Y/N)
17.Paying Bank
18.Drawee Bank
19.Reimbursing Bank
20.Confirming Bank
20 Points of Negotiation in Structuring your LC
27
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 PNC Bank• In some cases, discount• Consult with PNC Bank
28
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
29
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
30
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
31
Shipment
Buyer pays BEFORE receipt of goods
Sight Collection (D/P)
2
Documents2
Documents3
4
$
4 $4$
Documents4
Foreign BANK PNC Bank
Buyer SellerBuy/Sell Agreement
1
32Buyer pays AFTER receipt of goods
Time Collection (D/A)
Documents2
Documents3
6
$
6 $6$
Documents5
Foreign BANK PNC Bank
Payment at Maturity
5 Acceptance
Buyer Seller
Shipment2
Buy/Sell Agreement
1
33
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
34
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)
35
Medium-Term Financing
• PNC is largest provider of Medium-term (typically up to 5 years) Financing to Foreign Buyers of Capital Goods under Eximbank’s Buyer Finance Program
• Financed amount is the lesser of 85% of the sales contract or 100% of the U.S. content of the sales contract
• Up to 30% of related local costs in the foreign country may be eligible for financing
• Repayment is through semi-annual installments of P & I• Interest – floating or fixed each six months• Eximbank fees may be financed as part of the credit• Seller is paid out when shipment documentation is presented to
PNC Bank; PNC receives payment directly from foreign buyer• Program is at no cost to Seller; PNC needs introduction to Foreign
Buyer from Seller
36
Export Credit Insurance
• Covers the risk of buyer nonpayment for commercial risks (e.g. bankruptcy) and certain political risks (e.g. war or the inconvertibility of currency) from qualified foreign buyers
• Does NOT cover product quality/service disputes• Provides 90-95% commercial, 95-100% political coverage against
buyer payment defaults• Premiums are only paid on actual shipments• Available through the U.S. Eximbank and other private insurers• Can improve cash flow by allowing you to include insured foreign
receivables in your borrowing base by assigning the policy to a commercial bank
• For Eximbank coverage, minimum 50% U.S. content required• Use an insurance broker!!!!
37
“Examples and War Stories”
• Trust Gone Awry on a Documentary Collection• When the credit markets freezed up• “If it sounds too good to be true, it probably is…”• In general, “Possibly trust, but verify…”
38
Contact Information
• Bill Richeson, CTP
Senior Vice President
International Division
PNC Bank
Phone: (616)771-8849
e-mail: william.richeson@pnc.com
SWIFT: PNCCUS33ENJ
Global Client Care Center: 800-682-4689