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“Getting Paid for Your

Exports in a
Challenging Global
Economy”
Lansing, MI

Bill Richeson, CTP


Senior Vice President
International Division
PNC Bank
November 17,
Ph: (616)771-8849
2011 1
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

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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

Rules for Sea and Inland Waterway Transport


FAS = Free Alongside Ship
FOB = Free On Board
CFR = Cost & Freight
CIF = Cost, Insurance & Freight 4
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 risk
You must quantify and manage this risk
Banks have tools and expertise to help you mitigate
these risks

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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

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There is a mismatch between
Buyer and Seller Goals
When do YOU want to get paid?
When do Buyers want to pay?

Now!

Later!
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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

Buyer & Seller have Reversed Priorities!

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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

• Cash in Advance Terms


Favor
• Letter of Credit Seller

• Documentary Collection Terms


Favor
Buyer
• Open Account

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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

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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

A versatile tool for closing the gap


that exists between buyers and
sellers.

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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

Buyer has an Importer (Buyer) Exporter and Importer


obligation to the have a sales contract
Issuing Bank to pay between them which
upon claim for supports the
payment underlying transaction
Separate
Contracts

Advising/
Issuing Bank Exporter (Seller)
Confirming bank

Issuing Bank has the obligation to the Exporter


to pay if he has complied with all the terms and
conditions in the L/C

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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

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(Applicant)
Shipment

Buyer pays
BEFORE receipt
of goods 8 $ 6 Documents
$ 8

$
Foreign BANK PNC Bank
Payment Claim
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20
Time LC Transaction Flow
Buyer Seller

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(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

If you want more protection the next step is to consider


having the letter of credit confirmed
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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
Payment Method: Letter of Credit
Set it up right!
1. Irrevocable
11. UCP 600
2. Issue Date, Expiry Date &
Location 12. LC Fees - Who Pays?
3. Issuing Bank/Advising Bank 13. Latest Ship Date
4. Importer/Exporter 14. Presentation Date
5. Value & Currency 15. Partial Shipments (Y/N)
6. Description of Goods/Services 16. Transshipments (Y/N)
7. Required Documents 17. Paying Bank
8. Payment Terms 18. Drawee Bank
9. Incoterms 19. Reimbursing Bank
10. Port-To-Port Info
20. Confirming Bank

20 Points of Negotiation in Structuring your LC


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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
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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

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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

• 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

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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

Buyer pays BEFORE receipt of goods


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Time Collection (D/A)
Buyer Seller
Buy/Sell
1
Agreement

2
Shipment

5 $ 6 Payment at Maturity 6 $ 2 Documents


Documents 5 Acceptance 6

$
Foreign BANK PNC Bank
3 Documents

Buyer pays AFTER receipt of goods


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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
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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)
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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

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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

• 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
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