NACM LC Class Feb2012

Export Letter of Credit Essentials

Presented by: Scott Smithhisler, Global Trade Consultant

Agenda:

  Welcome & Introductions

  Customer Relationships

  High Level Export Process & Owners

  Export Credit Policy

  Standard Operating Procedures

  Trade Risks

  Payment Terms Options

  Letters of Credit – What & How

  Discrepancies and Implications

  Solutions – People, Process & Tools

  Group Activity – LC Scenario & Key Decision

  Q & A

Today we’ll strive to make Export L/Cs more about people, processes and tools, and less about chance.

Customer Relationships

Strong relationships and underlying agreements are vital to successfully doing business in international markets and long term growth.

What do your customer relationships look like?

  Distributor: Has exclusive rights to sell your product in one or more countries

  Dealer: Similar arrangement but sells other competing brands

  Licensee: Has the right to use your trademark and manufacture products under certain restrictions

  Retailer: Buys directly from you and sells to consumers

  Affiliate: An operation fully owned by your company

High Level Export Process & Team

1. Customer Relationship Sales / Legal

•  Customer selection •  Legal agreement •  Credit terms according to risks & policy

4. L/C Receipt Credit •  Review •  Request amendments •  Release product for shipment

2. Pricing Merchandising / Finance

•  Product offering •  Prices consider INCO terms •  Quote to Customers

5. Shipping Customer Service / Logistics •  Shipment Planning •  Shipment •  Transport & other documents

6. Payment & Delivery Credit / Finance / Customer

•  Draw on LC & monitor •  Documents to Customer •  Payment to seller •  Customs clearance at destination •  Happiness! Let’s do more of this!

3. Order Fulfillment Customer Service / Credit •  Customer purchase order •  Collaboration & changes •  Credit check •  Proforma Invoice (includes required LC specifics)

Export Credit Policy

  Approval by Sr. Leadership in Finance, Sales & Operations

  Customer selection criteria and credit application approval process

  Credit limits and terms to be assigned against criteria   Customer credit strength   Customer history & performance   Geopolitical risk rating   Order value

  Override approvers & limits

Competing in international markets requires companies to take “smart risks.” Having a sound export credit policy that enables sustainable growth while ensuring receivables are managed effectively is critical for success.

Policy Main Elements:

Standard Operating Procedures

  Approval by Sr. Leadership in Finance, Sales & Operations

  Clear description of the end-to-end process and supporting job functions

  Delineation of roles and responsibilities and communication required

  Metrics and reporting

  Guidelines for on-going training

Conducting any business requires creating and maintaining standard operating procedures (SOP). This is especially important when a business model, such as Export Sales, involves a cross functional team.

SOP Main Elements:

Key SOP Topics – Title Passage & Consignment of Goods

1. How legal title passes from seller to buyer   Physical movement of goods   Transport documents (e.g. cargo

receipt, waybill, bill of lading)

2. Transport Documents   Bill of Lading (B/L) = Negotiable Title

  Cargo Receipts, Truck Bills & Waybills = Non-Negotiable Receipts

3. Consignment of the Goods   Open Consignment = “To Order” Title passes via endorsement

  Straight Consignment = “To” No endorsement required; can help expedite delivery

Certain elements of the SOP are tied to managing export risks & product flow.

As such, they should be considered in the export credit policy and decision making.

International Commercial (INCO) Terms

INCO terms:   Define Buyer & Seller’s liabilities & responsibilities

  Indicate a named place

  Depict what the selling price includes

  Are specific to either sea/ inland waterway transport or other modes

Examples:

Any Mode of Transport EXW, Named Place of Delivery (EXW = Ex Works)   Seller is responsible for warehouse

services and export packing   Buyer arranges for loading at point of

origin through delivery to final destination

Ocean Transport CIF, Port of Destination CIF = Cost, Insurance & Freight   Seller is responsible for transport to destination port and insurance   Buyer arranges for pick up at local dock, arranges clearance and pays duty

International Trade Risks

Commercial   Buyer history   Credit reporting limited   Financial standards may differ   Potential for loss during transit

Geopolitical   Government stability and consistency

Economic   Foreign exchange rate fluctuations   Foreign Bank solvency   Sovereign risk

Legal   Contract enforceability   Goods recoverable   Customs & Tax regulations change

Terms Options - Balancing Risk, Cost & Timing

OPEN ACCOUNT

DOCUMENTARY COLLECTION

LETTER OF CREDIT

CASH IN ADVANCE

Cash in Advance, Open Account & Documentary Collections

CIA / Open Account

  Checks, wire transfers, automated clearing house, credit cards, drafts, money orders, cash

  One party has all the leverage

  Mitigate risk using a combination of steps and/or timing

•  Down payment and open account for the balance

•  Down payment to secure order with remainder due at shipment time

•  Full payment due at shipment time

Documentary Collections

  Buyers Bank holds documents required for Customs clearance until payment is made

  Can ensure release of goods in exchange for payment

  Credit risk related to buyer

  Buyer decides whether to pay

  Demurrage, spoilage, price changes and other risks remain with seller

  Works best with trusted customers and when geopolitical risk is low

Letters of Credit Explained

Letters of credit work through a series of formal agreements

  Buyer’s Bank substitutes its credit worthiness for that of the buyer

  Typically goods cannot be obtained by buyer until payment is made

  Credit risk is with buyer’s bank and country of domicile

  Works well for higher risk transactions

Seller Buyer

Buyer’s Bank Seller’s Bank

•  Contract •  Purchase Order •  Confirmation

•  FX & Export Financing •  LC Advice / Confirmation •  Documents & Payment

•  Correspondents •  Credit Line for confirmations

•  LC Application •  Loan / Collateral •  Documents & Payment •  FX & Trade Financing

Letter of Credit - Pro’s & Con’s for Exporters

Pros

  Eliminates buyer credit risk and ensures prompt payment

  High degree of Exporter control

  Confirmations eliminate bank/country risk

  Rules are well defined and predictable (e.g. subject to UCP600)

  Usance (term) LCs offer cost effective trade financing option; could be competitive advantage

  “Irrevocable” means terms and conditions can only change if buyer, seller and bank agree.

Cons

  Guarantee is contingent on strict compliance with terms & conditions

  Order fulfillment systems may not support LC or trade documentation requirements, so automation may be limited

  Heavy reliance on carriers, forwarders and other 3rd parties for LC compliance

  Complexity of LCs and related rules require high degree of expertise

  Visibility limited and monitoring is time consuming

L/C Terminology

  Issuing Bank •  Buyer selects; establishes loan/credit line to secure LCs

  Advising Bank •  Has correspondent relationship with Issuing Bank; authenticates LC and

passes to seller •  Seller selects (communicates in order confirmation LC instructions)

  Confirming Bank •  Seller selects; has credit line established for Issuing Bank

  Negotiating Bank = Bank that examines your documents & claims funds (advising or confirming bank)

  Reimbursement Bank •  Nominated by Issuing Bank according to offshore account holdings

  Applicant = Buyer

  Beneficiary = Seller

Typical Letter of Credit Parameters

  Parties involved

  Key dates:   LC Issuance   Date & Place of Expiry   Latest date of shipment   Period for presentation

  Currency / Amount

  Availability (e.g. with any bank by negotiation)

  Tenor

  Who pays the Bank charges

  Who pays for shipping & provides marine insurance

  Partial / Transshipments

  Port / Airport of departure

  Port / Airport of destination

  Description of Goods

  No need for line item detail

  Simpler the better!

  Invoice must match LC description

  All other documents must be consistent

Who, How Much and When Shipping & Goods

LC Parameters – Cont’d

  INCO Terms

  Required Documents   Commercial Invoice   Packing List   Insurance Certificate   Certificate of Origin   Inspection Certificate   Transport Document

Questions: Are the documents and other terms as requested? Can we comply?

  Documents dated prior to LC not acceptable

  Special language to appear on invoice

  Restriction on House Airwaybills

  Third party documents not allowed

Question: Are there conditions that make compliance difficult?

Trade Terms & Documents Additional Conditions

Letter of Credit Process Flow

Seller / Beneficiary

Applicant / Buyer

Issuing Bank Advising Bank

Freight Forwarder

3 L/C Application

Reimbursing Bank

Purchase Order & Confirmation START HERE 1 & 2

Goods

6 Shipment

L/C

5

7 Transport Docs

Letter of Credit 4

Export Documents

11

12 Documents to Buyer

10 Payment

8 LC & Documents

9 Claim

Common Discrepancies & Implications

  Letter of credit expired   Late presentation of documents   Late shipment

  Partial or transshipment effected contrary to LC terms

  Bills of Lading not clean

What happens now?   Guarantee no longer applies   Documents will be sent on

“approval”   Fees & Delays

  Inconsistent spelling of parties’ names on documents

  Merchandise description on invoice not per LC

  Documents inconsistent with one another

  Insurance omits coverage required in LC

  Insurance issued after ship date   Bills of Lading not endorsed

What do we do?   If there is time documents can be

resubmitted with corrections

Minor Major

Solutions - People

  Maintain a working environment that fosters open communication & shared accountability

  Hire people with international trade, logistics or trade finance experience

  Invest in ongoing training across your organization

  Consider outsourcing certain functions as needed   Freight Forwarders   Specialty Providers

  Your Partners are part of the team (e.g. outsource providers & your Bank)

Maintaining a highly skilled, passionate cross functional team working together to ensure overall success is fundamental for international growth.

Solutions – Process & Tools

  Automate wherever possible utilizing third party websites

  Maintain & monitor credit limits and terms systematically

  Provide visibility to order placement & confirmation activity to Export Credit

  Automatic LC required details on invoice & other documents

  Systematic tracking •  LC balance (amount & quantity) •  LC latest ship date, presentation

period and expiration •  Late payments

Tools:

There are a variety of key process steps and tools that can provide the team with visibility, help address problems proactively and increase the odds of success.

Process:   Document end-to-end steps & timing;

continually improve the process

  Maintain policies & procedures

  Communicate detailed LC requirements in order confirmation

Alternative Solutions – Outsource Providers

  Serve as travel agents for international trade

  May specialize in certain service areas, modes of transport or markets

  Help transport goods

  Can help product flow and reduce cost (e.g. consolidation of cargo, routing options)

  Need to ensure services fit your needs and compare prices

Freight Forwarders:

Depending on the size and the nature of your international business, external providers can act as an extension of your operation or help optimize results.

  Minimize risk by providing expertise & software

  Reduce costs by accelerating payments, doing document preparation and avoiding fees

Specialty Providers:

Group Activity – Mock LC Scenario

Activity:   Review example LC specifics we required in our Pro Forma Invoice   Review LC received differences (highlighted in yellow)   Make the key decision as a group:

Do we release our product for shipment or do we require an amendment first?

Considerations:   Customer relationship / mutual trust   Policy   Risk trade offs (e.g. inventory, production timing, the sale)   Contingency plans – other buyers?

The Scenario: We work for NACM Exporters, Inc., makers of exceptional quality Widgets sold around the world. We recently agreed to fill an order from our customer, ABC Company in Singapore. The agreed plan is to ship $200K worth of Widgets per month by vessel for three months for a total of $600K.

Example Amendment Request

Re: URGENT / LC AMENDMENT NEEDED! Your PO 12345 / Our Confirmation 678910/ LC no. 123456789 dated Feb. 20, 2012

Dear Mona, (our Customer Contact)

Thank you for your time on the phone this morning and for your understanding and help. As we discussed, the following amendment is needed in order for us to release your order for shipment.

1. Field 31D - Extend expiration to June 15, 2012 2. Field 59 - Beneficiary’s address changed to read “52 Lois Lane…” 3. Field 43P - Partial shipments are now allowed. 4. Field 44C - Delete latest date of shipment 5. Field 46A - Under documentary requirement 3 Certificate of USA Origin, delete “/Chamber of Commerce” 6. Field 48 – Delete period for presentation. Add special condition “Documents presented later than 21days after ship date but within the validity of this credit is acceptable.”

Please kindly request these changes with your bank as soon as possible and advise once the amendment is issued. Once the amendment is received by our bank, we will expedite your order and inform you of shipping details timely.

Very best regards, John Smith Export Credit Manager

Questions?

Thank you for coming today!

Appendix Example Specialty Provider: Trade Technologies – Concepts & Benefits

Export Insurance & Financing Programs: Small Business Administration


Le#er of Credit Advice

LC Review and Upload

  ISSUED

  SENT TO BENEFICIARY

  COPY TO TRADE TECHNOLOGIES COPY

  TRADE TECHNOLOGIES REVIEWS & INFORMS BENEFICIARY OF INCONSISTENCIES

  AMENDMENTS IF ANY REQUESTED & RECEIVED

  TRADE TECHNOLGOGIES UPLOADS TO BENEFICIARY’S FILES

Advising Bank

Beneficiary


Goods are Shipped

Trade Prepares Documents

Trade Banks Documents

NegoQaQng Bank

Beneficiary

Automate as much of process as possible, including utilizing bank websites and third party software.

  Reduces errors, delays and costs   Distributes information across organization   Provides visibility and control   Data for reports fuels constant improvement


 Sell more internationally with less risk

 Clean documents banked on time

 Accelerated export receivables collection cycle

 Significant reductions in labor costs spent on preparing documents and tracking payments

 Reduced courier expense due to automated document delivery/presentation and third party data exchange

 Reduced discrepancy and other fees

  In-depth reporting for all completed transactions

  24/7 audit-ready all-inclusive document/data storage


PROFITS RISKS


 New to Asia Market – Relied on Letters of Credit for Prompt and Certain Payment

 DSO reduced by over 60%  Discrepancies virtually eliminated  Asia Customers increased by 10X

RISK MITIGATION & BUSINESS FINANCING

Jeff Deiss Regional Export Finance Manager SBA Office of Interna<onal Trade

Portland, OR www.sba.gov/oit

Risk MiQgaQon Tools – EXPORT INSURANCE

•  Foreign receivables insurance – public (Ex-‐Im Bank) or private providers

•  Ex-‐Im Bank insurance on foreign A/R –  100% against poli<cal risk (foreign government ac<on) –  95% against commercial risk (buyer ac<on)

–  “Express Insurance” – a policy for small businesses with <$7.5 MM in annual exports on their export A/R’s – streamlined coverage of foreign sales up to $300,000 per buyer; up to 10 foreign accounts may be covered.

–  Insurance may be a lower cost alterna<ve to L/C

Risk MiQgaQon Tools – FOREIGN EXCHANGE (FX) RISK

•  Even if your price is in $’s, you are shi]ing this risk to the BUYER and affec<ng your compe<<veness

•  You want to remain compe<<ve as US$ value moves against foreign currency

•  Techniques –  Nebng

–  Forward contract (hedge) –  Futures contract –  Currency op<ons

Business Financing Tools – LOAN GUARANTEES

•  Lender-‐driven – lender makes & services the loan/line of credit; lender decides if guarantee is needed and selects guaranteed program to use

•  The value of loan guarantees –  Insurance and incen<ve for your lender –  Enhanced access to credit for business –  Enhances your borrowing base –  Lenders o]en heavily discount their advance rate when foreign sales serve as collateral; a loan guarantee can overcome this – see TRADE FINANCE GUIDE, p. 16

Business Financing Tools – SBA and EX-‐IM BANK

•  US SMALL BUSINESS ADMINSTRATION (SBA) –  “Small business” – Will guarantee loans up to $5 million

–  Pre-‐export and post-‐export financing; general business financing needs

–  No US content requirement; licensed military exports allowed

–  Preferred and Express Lenders, plus local lenders

Business Financing Tools – SBA and EX-‐IM BANK

•  EXPORT-‐IMPORT BANK OF THE US (EX-‐IM BANK)

–  Any business size –  No upper loan limit

–  Pre-‐export and post-‐export financing –  Export must have majority US content; military exports restricted

–  Delegated Lenders are primary users

Business Financing Tools – SBA LOAN GUARANTEES

•  SBA InternaQonal Trade Loan (ITL)

– 90% guarantees on term loans of $5 million or less

– Working capital, equipment, real estate, refinancing

– Financing for projects that improve the compe<<ve posi<on of US exporter


•  SBA Export Working Capital Program (EWCP)

– 90% guarantees on 1-‐3-‐year revolving lines – Up to $5 million – Working capital – Financing for export orders – Pre-‐export and post-‐export


•  SBA Export Express

– Similar to ITL, but streamlined approvals

– 90% guarantees on loans/lines up to $350,000 – 75% guarantees on loans/lines up to $500,000 – Working capital, equipment, real estate, refinancing

– Available from SBA “Express” Lenders only

Business Financing Tools – EX-‐IM BANK LOAN GUARANTEES

•  EX-‐IM Working Capital Program

– 90% guarantees on 1-‐3-‐year revolving lines – No size limit – Working capital – Financing for export orders – Pre-‐export and post-‐export

NACM LC Class Feb2012

Documents

Transcript of NACM LC Class Feb2012