Getting Paid in International Trade

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© Copyright 2005 SunTrust Banks, Inc. Global Trade Solutions International Payment Methods August 7, 2008 Fayette County Chamber of Commerce

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Mike Filchock's powerpoint slides from his presentation at Fayette County's Exporting 101 Seminar. Mike is with SunTrust Bank's Global Trade Solutions Department.

Transcript of Getting Paid in International Trade

Page 1: Getting Paid in International Trade

© Copyright 2005 SunTrust Banks, Inc.

Global Trade Solutions

International Payment Methods

August 7, 2008

Fayette County Chamber of Commerce

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Agenda

Why Offer International Banking?

Products and Services for Exporters

Risk Comparison – International Methods of Payment

Letter of Credit

Collections

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Why Offer International Banking?

Statistics show that more and more companies are doing business overseas.

The majority of growth opportunities for many companies are in international sales.

They need a bank that can handle both their domestic and international business.

We pledge to be a

premier global trade

solutions provider −

focused on our

clients and

differentiated by our

exceptional sales and

service delivered by

our world class team

of professionals.

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Why Offer International Banking?

0100,000200,000300,000400,000500,000600,000700,000800,000900,000

1,000,0001,100,0001,200,0001,300,000

1960 1970 1980 1990 2006

U.S. Exports of Goods & Services$ Millions

Source: U.S. Census Bureau, Foreign Trade Division

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Source: International TradeAdministration – NationalTrade Data

Why Offer International Banking?

Export Volume By State

State 2004 2005 2006

U.S. Total $817,935,848,814 $904,379,818,171 $1,037,142,972,794

1 Texas $117,244,970,494 $128,761,036,151 $150,888,054,964

2 California $109,967,840,247 $116,818,585,165 $127,746,135,340

3 New York $44,400,728,905 $50,492,176,404 $57,369,299,166

4 Washington $33,792,503,705 $37,948,360,874 $53,074,909,007

5 Illinois $30,213,626,405 $35,868,406,183 $42,084,595,133

14 Tennessee $16,122,874,281 $19,069,849,639 $22,019,725,551

15 North Carolina $18,114,767,389 $19,463,348,583 $21,218,226,522

16 Georgia $19,632,738,011 $20,576,630,980 $20,073,302,703

24 Alabama $9,036,640,599 $10,795,768,491 $13,877,619,708

25 South Carolina $13,375,889,564 $13,943,964,664 $13,615,040,574

2007 Total

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Why Offer International Banking?

U.S. Exports To World

Country 2004 2005 2006

1 Canada $4,265,235,922 $4,836,478,593 $4,706,549,260

2 Mexico $1,495,069,577 $1,410,939,190 $1,440,521,932

3 China $801,369,605 $978,733,120 $1,084,126,434

4 United Kingdom $1,111,231,073 $1,176,059,116 $1,081,774,436

5 Japan $1,545,584,537 $1,289,925,477 $1,053,120,825

6 Germany $709,711,337 $836,582,038 $841,937,705

7 Netherlands $832,933,353 $761,162,512 $685,783,325

8 Singapore $661,188,662 $999,885,781 $660,952,830

9 Italy $696,895,563 $555,158,870 $489,180,769

10 Brazil $380,900,446 $362,128,377 $430,488,183

2007 In Thousands $ USD

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Why Offer International Banking?

Last 3 decades – export volume at least double of previous decade. Small to Medium size enterprise (SMEs) exporters grew 99.7% between 1996 and

2006 (double the growth of large exporters) More than 2/3 of U.S. exporters have fewer than 20 employees. More than 2/3 of SME exporters are non-manufacturers. In 92 markets SMEs responsible for at least ½ of all U.S. exports.

Consider the following information from the International Trade Administration:

The total number of SMEs exporting < 10% of all SMEs in U.S.

Globalization affects nearly every business and every business professional in the world.

70 to 90% of U.S. corporations face foreign competition in their U.S. markets.

Why aren’t more SMEs exporting?

Payment Risk

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Why Offer International Banking?

Four Common Misconceptions about Exporting

You have to be Big to Export – While large companies do the greatest volume of international trade, smaller companies are also taking advantage of opportunities in foreign markets. Surveys show that 60% of US firms now exporting successfully have fewer than 100 employees.

To Export You Must Have a Big Export Department – The size of the company’s export department depends upon the method by which the products are marketed.

Direct Exporter – sells to a company or agency in a foreign country and ships the product to the overseas destination.

Indirect Exporter – sells through an intermediary company in the US., and requires no more specialized staff than is necessary for domestic sales.

To Export You Must Have Substantial Volume – Due to many smaller companies actively involved in international trade is a testament to the fact that large volume is not a necessity for exporting. If a US company devotes even 10% of its production capacity to foreign markets then it can expect to build substantial and permanent trade in foreign markets.

You Must be Fluent in Foreign Languages to Export – Knowledge of a foreign language is not essential to exporting. On the few occasions when correspondence and documents are not in English, many translation sources are available. SunTrust’s global trade solutions can help.

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Why Offer International Banking?

You’ve Made the Decision to Export Overseas…

Order from overseas buyer?

Made decision to diversify your business?

Whichever the case, you’ll treat this transaction the same as a U.S. sale….hmmm….

You have additional risks….

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Why Offer International Banking?

Commercial

- Any event that prevents the buyer from paying or prevents the seller from delivering the product or service.

- Problems with payment arrangements on behalf of the exporter and/or importer

- Problems with the merchandise on behalf of the exporter and/or importer

- Additional costs for financing, insurance, and shipping

- Protracted default

- Bankruptcy or insolvency by the buyer

Political

- Any event or unforeseen factor not necessarily within control of the buyer and/or exporter

- Problems with currency exchange

- Government or political intervention

- Problems with the movement of merchandise

- Natural Disasters

A variety of financing options are available when negotiating payment terms…

RISKS

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© Copyright 2005 SunTrust Banks, Inc.

Products and Services

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International Trade Products

Products and Services

Trade Services Commercial Letters of

Credit - Import & Export Standby Letters of Credit Documentary Collections Export Credit Insurance International

Correspondent Banking

Trade Finance Working Capital Loans

for exports Foreign Receivable

Financing Foreign Buyer Financing Overseas Investment

Financing

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© Copyright 2005 SunTrust Banks, Inc.

Risk Comparison

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Risk Comparison

INTERNATIONAL METHODS OF PAYMENT

Exporter Risk

High

Importer Risk

Low

Trade Terms

Open Account

Documentary Collection(Time)

Documentary Collection (Sight)

Letters of Credit (Time)

Letters of Credit (Sight)

Cash in Advance

INTERNATIONAL METHODS OF PAYMENT

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Risk Comparison

Can your business afford the loss if it is not paid? Will extending credit and the possibility of waiting several

months for payment still make the sale profitable? Can the sale be made only by extending credit? How long have the buyers been operating, and what is their

credit history? Has your business sold successfully to the buyer before? Are there reasonable alternatives for collecting if the buyer

does not pay? (Does the buyer’s country have the legal and business infrastructure for settling disputes fairly and swiftly?)

If shipment is made but not accepted, can alternative buyers be found?

Questions to Ask Before Selecting the Payment Method

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© Copyright 2005 SunTrust Banks, Inc.

International Methods of Payment

Getting Paid and Managing Risk

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Risk Comparison

INTERNATIONAL METHODS OF PAYMENT

Exporter Risk

High

Importer Risk

Low

Trade Terms

Open Account

Documentary Collection(Time)

Documentary Collection (Sight)

Letters of Credit (Time)

Letters of Credit (Sight)

Cash in Advance

INTERNATIONAL METHODS OF PAYMENT

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International Methods of Payment

Time of Payment: prior to shipment. Buyer Pays

Wire Transfer Check Draft Credit Card

Goods available to Buyer: upon delivery Risk to Seller: no risks Risks to Buyer: loses use of funds until goods arrive. Seller

may not ship goods as ordered or at all. No Credit Approval Required

Cash In Advance

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International Methods of Payment

Time of Payment: upon payment of invoice. Goods available to Buyer: upon delivery. Risk to Seller: completely relies on Buyer to pay

invoice when due. Risks to Buyer: no risks. Recommended for sales to long-standing customers

with satisfactory payment history

Open Account

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International Methods of Payment

Time of Payment: at time of presentation of the draft Goods available to Buyer: after payment if ALL Ocean

Bills of Lading are included with the documents and after the cargo has arrived.

Risk to Seller: possible non-payment of the draft. Risk to Buyer: has assurance of shipment, but Seller

may not ship goods as ordered. Must pay to get title to goods.

Not recommended for sales on extended terms

Documentary Collections

Sight Draft or Documents Against Payment

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International Methods of Payment

Time of Payment: at a future date. Goods available to Buyer: upon acceptance of the draft

by the Buyer and after the cargo has arrived. Risk to Seller: possible non-payment of the draft AND

Buyer has the cargo. Risk to Buyer: accepts draft before getting title to

goods. Seller may not ship goods as ordered.

Documentary Collections

Time Draft or Documents Against Acceptance payable at XX days(i.e., 30/45/60 – per sales agreement) after sight, after bill of ladingDate, or after invoice date.

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International Methods of Payment

Applicant: Buyer (importer) requesting issuance of letter of credit (LC).

Beneficiary: Seller (exporter) in whose favor the LC is issued.

Issuing Bank: Buyer’s bank who issues the LC. Advising Bank: Seller’s Bank who authenticates the

LC. Negotiating Bank: Seller’s Bank that reviews the LC

documents and forwards them to the Issuing Bank. Confirming Bank: Seller’s Bank that commits payment

to the Seller if the Issuing Bank fails to pay. (Optional)

Letter of Credit – What Is It and Who are the Participants?

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International Methods of Payment

An payment instrument issued by a bank on behalf of its customer. The issuing bank substitutes its own credit standing for that of its

customer. The issuing bank undertakes to pay for the goods or services provided by

the beneficiary of the LC; the beneficiary looks to the bank for payment, instead of the buyer (applicant of the LC).

The LC assures the beneficiary (exporter) of payment when the terms of the credit are met.

The exporter is not obligated to perform if the terms of the LC are not acceptable.

What is a Letter of Credit?

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International Methods of Payment

SWIFT - Society for Worldwide Interbank Financial Telecommunication supplies secure messaging services and interface software to banks worldwide. Banks send letters of credit through the SWIFT network to each other. Banks have to subscribe to SWIFT.

INCOTERMS – (International Commercial Terms) – Thirteen (13) Universally recognized definitions of international trade terms – like FOB, CIF, EXW, etc. – developed by the International Chamber of Commerce (ICC). They define trade contract responsibilities and liabilities between buyer and seller.

Letter of Credit Terms to Know

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Controlling the Letter of Credit Transaction

International Methods of Payment

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International Methods of Payment

Secure vs. total control – Documents – Preparation ?

Steps Exporter Can TakeMaintaining Control

Controlling the Letter of Credit Transaction

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International Methods of Payment

Knowing The Rules

- ICC UCP (Uniform Customs & Practice)

No. 600Rules for Banks Protect Liability

- Banks Service Expect protection from disputes

“Independence Principle”

Use International Banker

Maintaining Control

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International Methods of Payment

Choose Issuing Bank- Buyer use bank of seller’s choice- Talk to International Banker

Confirming the L/CKeep Documents Simple

- Seller negotiate w/Buyer prior to L/C issued- Few documents- Simple description- Ensure ALL documents can be produced

(?) Document -- Certificate -- issued by foreign gov’t

(?) Document requires signature of SOMEONE controlled by buyer

Maintaining Control

Steps Exporter Can Take

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International Methods of Payment

You want these documents in L/C- Commercial Invoice

- Description- Stated SAME WAY as L/C

- “100% Acrylic Yarn” in L/C vs. “Imported Acrylic Yarn” on invoice- Bill of Lading (BOL)- Packing List- Other Possibles: Cargo Insurance, Certificate of Origin, Phytosanitary

Certificate

Maintaining Control

Steps Exporter Can Take

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International Methods of Payment

If Documents discrepant Buyer waive

Advising Bank agrees Payment made

REMEMBER!!!Documents Accurate & Consistent If mistake/problem documents Seller Not Ship Amended

- UCP600 very clear No amendment unless parties agree

- Want written confirmation from exporter’s bank

- L/C Amended- Advising/Confirming Bank accepted(Payment Risk Falls on Exporter)

Maintaining Control

Steps Exporter Can Take

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International Methods of Payment

What is a Discrepancy?

“Documents presented are not in compliance with the terms and conditions of the LC and UCP600.”

Common Discrepancies:- Credit expired- Credit amount exceeded- Documents presented late- Late shipment- Partial shipment when partial shipments prohibited- Shipment made between ports different from those in LC- Description of goods in invoice differs from LC- Absence of documents called for in LC

Discrepancies

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International Methods of Payment

Keep Goods From Buyer How?

- Have BOL Consigned to Order of Issuing Bank- Buyer wants BOL made to “Order And Blank Endorsed” and send

set to buyer after shipment.

Every L/C Has 3 IMPORTANT DATES- Latest Shipment Date- Documentation Presentation Date- Expiry Date

FINAL TIPS

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Letter of Credit Particulars

International Methods of Payment

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International Methods of Payment

Applicant: Buyer (importer) requesting issuance of letter of credit (LC).

Beneficiary: Seller (exporter) in whose favor the LC is issued.

Issuing Bank: Buyer’s bank who issues the LC. Advising Bank: Seller’s Bank who authenticates the

LC. Negotiating Bank: Seller’s Bank that reviews the LC

documents and forwards them to the Issuing Bank. Confirming Bank: Seller’s Bank that commits payment

to the Seller if the Issuing Bank fails to pay. (Optional)

Letter of Credit

Roles

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International Methods of Payment

Time of Payment: upon presentation of complying documents within a few days after shipment.

Goods available to Buyer: after payment of the letter of credit and after the cargo has arrived.

Risk to Seller: Minimal. Depends on ability to meet letter of credit deadlines and documentary requirements.

Risk to Buyer: has to pay letter of credit before it can get title to goods. Requires proof of shipment, but relies on Seller to ship goods as ordered.

Letter of Credit

Sight Draft

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International Methods of Payment

Time of Payment: at maturity of the draft, but must be made regardless of the condition or existence of the goods.

Goods available to Buyer: after acceptance of the draft by the Issuing Bank under the letter of credit and after the cargo has arrived.

Risk to Seller: Minimal. Depends on ability to meet letter of credit deadlines and documentary requirements.

Risk to Buyer: bank has to accept time draft and create legal obligation to Seller before Buyer can get title to goods. Relies on Seller to ship goods as ordered.

Letter of Credit

Time Draft payable at XX days (30/45/60 – per sales Agreement) after sight or from Bill of Lading date.

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International Methods of Payment

What is it? The advising or negotiating bank, may add its

“confirmation.” The bank’s commitment of payment of the transaction in the event that the issuing bank fails to pay on behalf of the applicant.

Advising/Negotiating bank - undertakes credit decision based on factors:

- time period of the LC

- amount,

- political, economic and other risks associated with the country of the issuing bank

letter of credit - not confirmed - merely “advised”

Do you need a confirmed export credit?Do you need a confirmed export credit?

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International Methods of Payment

Consider the reputation and financial strength of the issuing bank.

What about the political and economic environment in the country of issue?

What about foreign currency controls in the country of issue that might impact the issuing bank’s ability to pay upon receipt of conforming documents?

Do national laws in the country of issuance prohibit confirmation?

What is your quality/relationship with the buyer?

Do you need a confirmed credit?Do you need a confirmed credit?

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© Copyright 2005 SunTrust Banks, Inc.

Letter of Credit Flow

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International Methods of Payment

Letter of Credit

Importer Exporter

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International Methods of Payment

Letter of CreditImporter Exporter

Letter ofCredit

Issuing Bank

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International Methods of Payment

Letter of CreditImporter Exporter

Advising Bank

Issuing BankLetter ofCredit

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International Methods of Payment

Letter of CreditImporter Exporter

Advising Bank

Issuing Bank

Letter ofCredit

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International Methods of Payment

Letter of CreditImporter Exporter

Advising Bank

Documents

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International Methods of Payment

Letter of CreditImporter Exporter

Advising Bank

Documents

Issuing Bank

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International Methods of Payment

Letter of CreditImporter Exporter

Advising Bank

Documents

Issuing Bank

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International Methods of Payment

Letter of CreditImporter Exporter

Advising Bank

Documents

Issuing Bank

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© Copyright 2005 SunTrust Banks, Inc.

Collection Flow

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International Methods of Payment

Less secure than Letters of Credit More secure than Open Account Goods available to Buyer: after payment if ALL Ocean

Bills of Lading are included with the documents and after the cargo has arrived.

Risk to Seller: possible non-payment of the draft. Risk to Buyer: has assurance of shipment, but Seller may

not ship goods as ordered. Must pay to get title to goods.

Don’t encumber Buyer’s line of credit Inexpensive

Documentary Collections

Reminder…

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International Methods of Payment

International Methods of Payment

CollectionImporter Exporter

Collecting Bank(Exporter’s Bank)

Documents

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International Methods of Payment

International Methods of Payment

CollectionImporter Exporter

Collecting Bank(Exporter’s Bank)

Documents

Collecting Bank(Importer’s Bank)

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International Methods of Payment

International Methods of Payment

CollectionImporter Exporter

Collecting Bank(Exporter’s Bank)

Collecting Bank(Importer’s Bank)

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© Copyright 2005 SunTrust Banks, Inc.

Contact:

Michael FilchockDirector, Global Trade Solutions303 Peachtree Street, NE, 29th FloorSunTrust PlazaAtlanta, GA 30303Tel: 404-588-7507Michael.Filchock @ Suntrust.com

Valerie WargaVice President, Global Trade Solutions303 Peachtree Street, NE, 29th FloorSunTrust PlazaAtlanta, GA 30303Tel: 404-813-0455Valerie.Warga @ Suntrust.com