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Selling Overseas 101: Managing Payment Riskand Financing the Sale
Jerry WatterworthRegions Bank(561)361-5655
2The U.S. Commercial Service. Your Global Business Partner. The U.S. Commercial Service. Your Global Business Partner. export.govexport.gov 800.USA.TRADE 800.USA.TRADE
Managing Payment Risk and Financing the Sale
Getting Paid and Managing Risk– Methods of Payment– Credit Insurance– Foreign Exchange
Financing Options– Using Letters of Credit – Working Capital for the exporter– Programs for the foreign buyer– Forfaiting
Conclusions
3The U.S. Commercial Service. Your Global Business Partner. The U.S. Commercial Service. Your Global Business Partner. export.govexport.gov 800.USA.TRADE 800.USA.TRADE
Methods of Payment
Cash in advance– Wire transfer– Check or draft
• US vs. Foreign – Credit card
4The U.S. Commercial Service. Your Global Business Partner. The U.S. Commercial Service. Your Global Business Partner. export.govexport.gov 800.USA.TRADE 800.USA.TRADE
Methods of Payment
Instrument issued by a bank on behalf of a buyer (importer) in favor of a seller (exporter), promising payment upon presentation of documents in compliance with the letter of credit.
– Sight vs. Time (deferred payment)– Advised vs. Confirmed– Transferable LCs– Back-to-Back LCs
Letters of Credit
5The U.S. Commercial Service. Your Global Business Partner. The U.S. Commercial Service. Your Global Business Partner. export.govexport.gov 800.USA.TRADE 800.USA.TRADE
Regions Bank
Issuing / Opening Bank
Advising / Confirming Bank
Ap
plicati
on
Beneficiary
Seller
Exporter
Docu
men
ts
Contract
Goods
Docu
men
ts Letter of Credit (Sight/Time)
Documents
Applicant / BuyerImporter
L/C
Export Letter of Credit Process
6The U.S. Commercial Service. Your Global Business Partner. The U.S. Commercial Service. Your Global Business Partner. export.govexport.gov 800.USA.TRADE 800.USA.TRADE
Risks and Benefits:Letters of Credit
Importer– Assurance that the shipped goods are as ordered.– Payment is made after the shipment is out of exporter’s control
Exporter– Assurance that the payment will be made– Banks are in the middle of the process– Can use buyer’s credit to obtain goods
7The U.S. Commercial Service. Your Global Business Partner. The U.S. Commercial Service. Your Global Business Partner. export.govexport.gov 800.USA.TRADE 800.USA.TRADE
Methods of Payment
Payment process whereby a sight draft and the documents are sent by the exporter (or their bank) to an overseas collecting bank, and documents are released upon payment to the collecting bank. It is important that the collection form be properly completed and the documents presented with the sight draft.– Sight – Time (or deferred)
Collections/Documents Against Payment
8The U.S. Commercial Service. Your Global Business Partner. The U.S. Commercial Service. Your Global Business Partner. export.govexport.gov 800.USA.TRADE 800.USA.TRADE
Transaction between Buyer and Seller whereby documents are forwarded through bankingchannels for payment and/or acceptance.
Remitting Bank Presenting Bank
Cash
Documents
Cash Docs Cash D/P D/A
Seller Buyer
Documentary Collections
9The U.S. Commercial Service. Your Global Business Partner. The U.S. Commercial Service. Your Global Business Partner. export.govexport.gov 800.USA.TRADE 800.USA.TRADE
Risks and Benefits Collections
Importer– Relies on the exporter to ship goods as ordered– Payment is made before goods can be inspected
Exporter– Retains control of title to the goods until payment is made– Transaction is facilitated through banks– Collections are a simple and inexpensive payment
method, but less secure than letters of credit
10The U.S. Commercial Service. Your Global Business Partner. The U.S. Commercial Service. Your Global Business Partner. export.govexport.gov 800.USA.TRADE 800.USA.TRADE
Methods of Payment
Open account terms – ship the goods and wait for the
payment. Keep your fingers crossed…….
Options– Uninsured – Insured
11The U.S. Commercial Service. Your Global Business Partner. The U.S. Commercial Service. Your Global Business Partner. export.govexport.gov 800.USA.TRADE 800.USA.TRADE
Foreign Exchange
• To make or receive payments in currency other than one’s local currency
• To hedge against currency fluctuations
• To profit from currency fluctuations
• To buy and sell foreign assets
• Control costs and profit margins
• Reduce cost of currency conversions
• Minimize foreign exchange risks when borrowing in foreign currency
Benefits
Types of F/X Transactions:• Spot (present day)• Forward (agreement to buy or sell
currency in the future)• Flexible Window (Flexible Forward):
A forward contract with a window for currency delivery (i.e., 30 day window) rather than set date
• Options (the rights, not obligation, to buy or sell currency in the future)
Foreign Currency Accounts:• Accounts utilized to hold and manage control
of foreign currencies from anywhere in world
Foreign Loans• Lending in foreign currencies for companies
with expanded business overseas (can be collateralized by accounts receivables); payments are made in foreign currencies
F/X Transactions
12The U.S. Commercial Service. Your Global Business Partner. The U.S. Commercial Service. Your Global Business Partner. export.govexport.gov 800.USA.TRADE 800.USA.TRADE
Directing Methods of Payment
Be proactive - take control of the transaction Decide what your best alternatives are and prioritize them. Be clear - name a payment method as basis for the
transaction For L/C’s - use a letter of instruction, and request a
specimen copy of l/c prior to issuance For Drafts/Collections – check out the collecting bank
before shipment Request a review from BOTH your banker and freight
forwarder prior to shipment
Export 101
How to Finance the Sale
Financing Options– Using Letters of Credit – Foreign Receivables Financing– Working Capital for the US exporter– Programs for the foreign buyer– Forfaiting
Conclusions
14The U.S. Commercial Service. Your Global Business Partner. The U.S. Commercial Service. Your Global Business Partner. export.govexport.gov 800.USA.TRADE 800.USA.TRADE
Use the importer’s credit– Transferable letters of credit
• An export letter of credit which may be transferred, in whole or part, to another beneficiary/supplier
– Back-to-Back letters of credit• An export letter of credit used as collateral to issue another
new commercial letter of credit to a supplier– Letters of credit
• Sight• Time
– Carry the receivable and wait for payment– Discount the proceeds (Bankers Acceptance)
Trade Finance
Options
15The U.S. Commercial Service. Your Global Business Partner. The U.S. Commercial Service. Your Global Business Partner. export.govexport.gov 800.USA.TRADE 800.USA.TRADE
Ex-Im Bank is an independent agency of the United States– Established in 1934– Headquartered in Washington, DC– 8 sales offices
Mission: Support U.S. Exports to create and sustain U.S. jobs
What is Ex-Im Bank?
16The U.S. Commercial Service. Your Global Business Partner. The U.S. Commercial Service. Your Global Business Partner. export.govexport.gov 800.USA.TRADE 800.USA.TRADE
• Programs for the Exporter
• Pre-export working capital (can include foreign accounts receivable financing)
• Post-export Foreign Receivable Financing
• Programs for the Foreign Buyer
• Short-Term Buyer Credit Financing
• Medium-Term and Long-Term Buyer Financing via insurance/guarantee programs
Trade Finance Options:Ex-Im Bank Programs
17The U.S. Commercial Service. Your Global Business Partner. The U.S. Commercial Service. Your Global Business Partner. export.govexport.gov 800.USA.TRADE 800.USA.TRADE
Borrower:Domestic Exporter
Eligibility:• 50% US content or added
value required
Mitigation:• Protects against foreign
buyer commercial and political risks
Advance Rates:• Export related A/R advance
rate up to 95%
Coverage:• Covers 95% commercial
and 100% political risk coverage on financed receivable
Export Credit Insurance(Post-Export Financing)
Borrower:• Domestic Exporter
Eligibility:• 50% US content or
added value required
Mitigation:• Covers Exporter
performance risk
Advance Rates:• Export related A/R
advance rate up to 90%• Inventory must be pre-sold
advance rate up to 75%
Coverage:• Covers 90% of the loan’s
principal and accrued interest
Working Capital Guarantee(Pre-Export Financing)
Pre and Post Export Financing
• Expand international sales and market share
• Expand collateral base
• Allows customer to obtain supplier discounts
• Improves cash flow
• Mitigates foreign commercial and political risks for the Exporter and/or the Bank
Benefits
Programs to assist the US Exporter
18The U.S. Commercial Service. Your Global Business Partner. The U.S. Commercial Service. Your Global Business Partner. export.govexport.gov 800.USA.TRADE 800.USA.TRADE
Profile:
• A US exporter of automotive parts wants to grow its business by expanding its product lines and entering new foreign markets.
Need:
• The company needs working capital to maintain inventory and offer terms to attract foreign buyers.
Solution:
• A Working Capital Guarantee supported by Ex-Im Bank. With the guarantee, the US exporter obtained a line of credit supported by export inventory and foreign receivables.
Pre & Post Export Financing(Working Capital Guarantee)
19The U.S. Commercial Service. Your Global Business Partner. The U.S. Commercial Service. Your Global Business Partner. export.govexport.gov 800.USA.TRADE 800.USA.TRADE
Foreign Buyer Credit Financing
Borrower: • Foreign Importer
Type of Loan:• Term Loan
Tenor:• Up to 5 years
Eligibility:• Ex-Im financed portion must
be 100% US content including products and/or services
Coverage:• Coverage is 100% of the
remaining 85% to be financed
Product:• Capital goods and related
services financing
Medium-Term Buyer Financing
• Improves cash flow for both importer and exporter
• Reduces foreign commercial and political risks for the Exporter and the Bank
• Increases competitive position by financing at interest rates that are lower than what is available in most foreign countries
BenefitsShort-Term Buyer
Financing (FIBC)
Borrower: • Foreign Importer
Type of Loan:• Revolving Line of Credit
Tenor:• Up to 360 Days
Eligibility:• 50% US content or added
value required on goods and/or services financed
Coverage:• Up to 98% of commercial
and political risk
Product:• Consumer durable goods, bulk
agricultural and capital goods
Programs to Assist the Foreign Buyer
20The U.S. Commercial Service. Your Global Business Partner. The U.S. Commercial Service. Your Global Business Partner. export.govexport.gov 800.USA.TRADE 800.USA.TRADE
Profile:
• A naval unit in the Dominican Republic wanted to buy 2 new ships and refurbish 4 existing ships to strengthen drug interdiction and reduce illegal immigration. The total cost of the project was $26 million.
Need:
• The US supplier did not have the capacity to extend financing under its own facilities.
Solution:
• A Medium Term Guarantee from Ex-Im Bank allowed the DR Government to obtain 5-year financing for this project.
Medium Term
Buyer Credit
21The U.S. Commercial Service. Your Global Business Partner. The U.S. Commercial Service. Your Global Business Partner. export.govexport.gov 800.USA.TRADE 800.USA.TRADE
Trade Finance Options - Forfaiting
Forfaiting is the discounting of international trade receivables on a non-recourse basis.
Tenors may range from a few months to several years (typically 3 to 5 years).
Sums involved may range from a few hundred thousand to millions.
Pricing is usually a fixed rate basis, and is based on the country and foreign bank risk.
Converts a term sale into a cash transaction, and improves cash flow
100% financing, and no US-content requirements
22The U.S. Commercial Service. Your Global Business Partner. The U.S. Commercial Service. Your Global Business Partner. export.govexport.gov 800.USA.TRADE 800.USA.TRADE
Financing Needs Summary
Assess and address your working capital needs:– Meet with your bank to explore your financing options– Explore LC Tools (time LCs, transferable LCs, Back-to-
Back LCs)– Explore government assistance programs
• Florida Export Finance Corporation, or other State agencies• Small Business Administration (SBA)• Export Import Bank of the U.S. (Ex-Im Bank)
– Financing for the exporter or the foreign buyer– Consider Credit Insurance– Explore Discounting Receivables
23The U.S. Commercial Service. Your Global Business Partner. The U.S. Commercial Service. Your Global Business Partner. export.govexport.gov 800.USA.TRADE 800.USA.TRADE
Selling Overseas 101:
Managing Payment Risk and Financing the Sale
Jerry Watterworth
Regions Bank
(561) 361-5655