Mitigating Risk Inherent in International Trade AMCHAM: Doing business with Colombia Wednesday 6 th April & Tuesday 12 th April, 2011

What type of issues are businesses facing in todays environment?

Todays Environment Reduced demand for products and services Heightened risk in international trade as uncertainty of the credit risk of buyers Accounts Receivables days on hand increasing as buyers try to stretch their credit limits

Why Trade Finance? IssueConsequencesTF Solution Reduced demand for products and services Need to look for new markets – overseas Uncertainty involved in new trade relationships *Use TF as a marketing tool Eg Use LC to offer attractive terms *Internet Merchant Services Heightened risk of international trade in current climate Even trade relationships that have been longstanding are more risky in current environment *Trade in Goods: Letters of Credit Documentary Collections *Trade in Services: Letters of Guarantee (Bonds), Standby Letters of Credit

Why Trade Finance? IssueConsequencesTF Solution Increasing Account Receivables days on hand Lengthening operating cycle can cause strain on cash flow *Pre/post Shipment Financing eg Discounting Receivables *Discounting of Bankers Acceptance under Export LC

Risk profile of Methods of Payment HIGH LOW

Documentary Collections A method of payment used in international trade whereby the Exporter entrusts the handling of commercial and often financial documents to banks and gives the banks instructions concerning the release of these documents to the Importer. Banks involved do not provide any guarantee of payment.

Documentary Collections Documentary Collections may be carried out in two different ways: 1.Documents Against Payment: Documents are released to the Importer only against payment. Also known as a Sight Collection or Cash Against Documents (CAD). 2. Documents Against Acceptance: Documents are released to the Importer only against acceptance of a draft. Also known as a Term Collection. (30, 60, 90 days)

Documentary Collections Collecting/ Presenting Bank Importer/ Drawee Remitting Bank Exporter/ Drawer GOODS Exporter submits documents such as invoice & B/L Sends documents together with collection instructions Acts in accordance with collection instructions and releases documents

Letters of Credit Letters of Credit Documentary Primary Source of PaymentPrimary Source of Payment Meant to be drawn/exercisedMeant to be drawn/exercisedStandby Secondary source of payment (in the event of defaultSecondary source of payment (in the event of default Not meant to be drawn/exercisedNot meant to be drawn/exercised

Letters of Credit- Documentary a payment undertaking given by a bank (Issuing Bank/Drawee), on behalf of a buyer (Applicant), to pay a seller (Beneficiary/Drawer) a given amount of money, on presentation of specific documents representing the supply of goods, within specific time limits, documents must conform to terms and conditions set out in L/C (Banks obligation to ensure) and documents must be presented at a specific place. Banks deal only in documents and not in goods

Letters of Credit Letters of Credit may be: 1. 1.Sight : If payment is to be made at the time that documents are presented and there are no discrepancies 2. 2.Term: If payment is to be made at a future fixed time from shipping date/invoice date

Letters of Credit Confirmed Letters of Credit Under a Confirmed Letter of Credit, a bank, called the Confirming Bank, adds its commitment to that of the Issuing Bank to pay the Exporter under the Letter of Credit provided all terms and conditions of the Letter of Credit are met. The Confirming Bank is usually located in the same country as the Exporter.

etters of Credit: Issuance L etters of Credit: Issuance Importer applies for Letter of Credit. Request to advise & possibly confirm the Letter of Credit Advise /Confirmation of the Letter of Credit. Advising/ Confirming Bank Issuing Bank Exporter/ Beneficiary Importer/ Applicant Contract Negotiations

etters of Credit: Flow of Documents & Payments L etters of Credit: Flow of Documents & Payments Issuing Bank Exporter/ Beneficiary Importer/ Applicant Documents Advising/ Confirming Bank GOODS Documents

Standby Letter of Credit Form of guarantee / secondary source of payment Default instrument issued to cover the non- fulfillment of a customers obligation under an underlying contract or agreement relating to a trade related or financial transaction Banks in the US are not empowered to issue guarantees so they developed the SBLC to get around this

Bonds & Guarantees –Bid/Tender –Performance –Advance payment –Customs –Immigration

Pre-Shipment Financing Advances made to a client based on export orders (raw material financing) -With recourse financing -ECA supported (without recourse) -LIBOR-based pricing for eligible borrowers

Post- Shipment Financing Advances made to an exporter after the shipment has been made based on satisfactory evidence of debt (foreign open a/c receivable financing) - Buyer Credit or Supplier Credit -ECA supported -Intl trade lines, LIBOR based pricing for eligible borrowers

Why Scotiabank Trade Finance? International Bank – global reach into target markets (lower transaction costs across network) Network of correspondent banks 175 years in existence, presence in 50 countries Among Top 10 performing banks in the world Global Finance Magazine awarded Scotiabank Best Trade Finance Bank –Canada 2006, 2008, 2009, 2010

Why Scotiabank Trade Finance? Can leverage technology and expertise (Tradexpress Elite) Can offer a full range of services/creative tailored solutions Has access to cheaper international funding (high credit rating) Can offer training & support to its clients

For More Information : Joanna del Pino, Snr Manager, Trade Finance Ext 2050

THANK YOU