Professional Documents
Culture Documents
Exports in a
Challenging Global
Economy”
Lansing, MI
2
Pricing/Shipping Terms
• Known as Incoterms 2010
– Published by:
ICC Publishing Corporation
156 Fifth Avenue
New 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.
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Know the Rules
Incoterms 2010
Rules for Any Mode or Modes of Transport
EXW = Ex Works
FCA = Free Carrier
CPT = Carriage Paid To
CIP = Carriage & Insurance Paid To
DAT = Delivered At Terminal
DAP = Delivered At Place
DDP = Delivered Duty Paid
5
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 6
Payment Methods
7
There is a mismatch between
Buyer and Seller Goals
When do YOU want to get paid?
When do Buyers want to pay?
Now!
Later!
8
Payment Methods: 4 Methods
Best
Lowest Cash
Risk Flow
Buyer (Importer) Perspective Seller (Exporter) Perspective
• Open Account • Cash In Advance
• Documentary Collection • Letter of Credit
• Letter of Credit • Documentary Collection
Highest • Cash In Advance • Open Account Worst
Risk Cash
Flow
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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
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Payment Methods: 4 Methods
11
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
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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) 13
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
15
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
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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
Advising/
Issuing Bank Exporter (Seller)
Confirming bank
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Sight LC Transaction Flow
Buyer (Applicant) Seller (Beneficiary)
Sales Contract
Importer
(Buyer)
2 4
Issuing Advising/ Exporter
Bank Confirming bank (Seller)
Application LC Advised
3
Foreign BANK PNC Bank
LC Issued
(Issuing Bank) (Advising Bank)
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Sight LC Transaction Flow
Buyer Seller
5
(Applicant)
Shipment
Buyer pays
BEFORE receipt
of goods 8 $ 6 Documents
$ 8
$
Foreign BANK PNC Bank
Payment Claim
7
20
Time LC Transaction Flow
Buyer Seller
5
(Applicant)
Shipment
Payment
At
Maturity 8 $ 6 Documents
$ 8 6 Documents
8
$
Payment Documents
Foreign BANK 6 PNC Bank
7 Acceptance
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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
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
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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
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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
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Sight Collection (D/P)
Buyer Seller
Buy/Sell
1
Agreement
2
Shipment
4 $ 4 4 $ 2 Documents
Documents 4
$
Foreign BANK PNC Bank
3 Documents
2
Shipment
$
Foreign BANK PNC Bank
3 Documents
35
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!!!!
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“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…”
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Contact Information