1 Daniel W. Holt Small Business Administration Dan.

On Your Mark…. Every morning in Africa, a gazelle wakes up. It knows it must run faster than the lion or it will be killed. Every morning a lion wakes up. It knows it must outrun the gazelle or starve. It doesn’t matter if you’re a gazelle or lion. When the sun comes up, you better start running!

Building a Global Reach to Run a Global Race The Intermodal Global Supply Chain  1970 – 1 million containers  2000 – 20 million containers  2020 – 50 million containers  2050 – 100 million containers

The Pace Quickens Changing U.S. Economy 1970…International trade is 7% 2000…International trade is 27% 2050…International trade up to 50% Changing U.S. Life Styles Local Economy of 19 th Century—93% of Work Force Employed in Agriculture Global Economy of 21 st Century—3% of Work Force Employed in Agriculture

The Global Marketplace of the 21 st Century – Looking Ahead (% of World GDP)

Countries Ranked by Population: 2000 Country Population 1 China 1,262,474,301 2 India1,002,708,291 3 United States 282,338,631 4 Indonesia 224,138,438 5 Brazil 175,552,771 6 Russia 146,001,176 7 Pakistan 141,553,775 8 Bangladesh130,406,594 9 Japan 126,699, Nigeria 123,749,589

Types of Exporters Direct Indirect Trading Company Export Management company

Sheep/Goats If you can’t do it here- you can’t do it there. What is your export credit policy? What Incoterm do you quote? Who is your freight forwarder? Letter of Credit?

Do you have a passport? Business Plan? Pricing Banker What country? What is your HS number? Credit Insurance

DOMESTIC RISK BANKRUPT DOES NOT WANT TO PAY CAN NOT PAY PRODUCT DISPUTE WENT OUT OF BUSINESS

International Trade Exporter(Seller) Importer(Buyer) I want to sell. I want to buy. Country Border

International Trade Some Things are Different Language Currency Banking Credit Terms & Risk Transportation / Packaging Insurance - Shipping - War Government Requirements - Each Country

International Trade Some Things are Different Language Currency Banking Credit Terms & Risk Transportation / Packaging Insurance - Shipping - War Government Requirements - Each Country

FOREIGN RISK THE MONEY IS NO GOOD THERE WAS A COUP A BRIBE IS NEEDED FOR CUSTOMS DOCUMENTS ARE NOT CLEAN FOREIGN BANK HOLDS MONEY

COUNTRY RISK ALWAYSThe first consideration will ALWAYS be country risk.

COUNTRY RISK If the deal is in a country that is too risky, the customer can never be good.

Political Risk Transfer risk- shortage of foreign exchange Political risk- events that prevent payment –moratorium on external debt –legal discharge of debt –war –cancellation of import license

Customer Risk Is the customer about to go bust? Can the customer pay on our credit terms? Is our goods “special”? Is this the first sale? Is the order more that the last order? Do we have a credit application?

CONTROLS BANK CREDIT REPORTING AGENCIES INSURANCE RESEARCH LETTER OF CREDIT

CONTROLS CASH IN ADVANCE FREIGHT FORWARDER GOOD BUSINESS CONTROLS

What is the HS number? It ’ s like a Social Security Number, uniquely explains your product. Helps others who are not familiar with your product. HS is a Product Classification. A Harmonized System is used because Customs officials worldwide don ’ t speak the same language. With everyone using the same “ songbook, ” we can watch the flow of goods in and out of countries.

Classifying your Product Classify your good on WHAT IT IS, not on its end use, nor its destination (like Mexico or Malaysia.) Example: A bolt by itself may be a part of a machine, but it is first and foremost a bolt, and it should be classified as such. Example: Grass seed and fertilizer mix. Classify the mixture as being primarily grass seed, if it is.

HSystem Harmonized System The World HS number is 6 digits longThe World HS number is 6 digits long US schedule B number is 10 digits longUS schedule B number is 10 digits long The whole world only recognizes the first 6 digits (everybody has the same songbook)The whole world only recognizes the first 6 digits (everybody has the same songbook) THE MORE NUMBERS, THE MORE DESCRIPTIVE

Where to find the HS code: Where to find the HS code: The Harmonized Tariff Schedule of the US is online, but can be purchased at the government bookstore The U.S. Department of Commerce Schedule B Classification of Exports U.S. Census Bureau: Durable Goods (Chapters 1-71): (301) Non-Durable Goods (Chapters 72-97): (301) Don't know: (301) Census On-line: - choose Schedule B Search Engine from tool bar - or select Search and type in a key word(s) in capital letters Remember: the US-specific number Schedule B is 10 digits long; the first 6 digits is a world recognized HS number

Containers and Cases General Rules of Interpretation If a container is suitable for repetitive use, it must be classified on its own. Example: If you are exporting propane in a tank to Canada, you actually have to classify the propane in its own classification and the tank in its classification, because the tank itself is reusable in Canada.

Containers and Cases General Rules of Interpretation Full cartons of eggs are classified under eggs, Without the eggs, the carton is made of paperboard, A can of Coke falls under beverage, A violin case without the violin is HS 4202xx, but if shipped with the violin inside, it is HS , a stringed musical instrument.

The Role of the Ocean Transportation Intermediary (OTI) The freight forwarder

The Ocean Transportation Intermediary coordinates the various parties involved in the cargo movement and the services provided are based on the needs of the individual shipper.

OTI OTI’s combine the former operations of International Freight Forwarders (IFF) and Non Vessel Operating Common Carriers (NVOCC) They are regulated by the Federal Maritime Commission (FMC)

OTI’s Involvement I.Provide Information II.Prepare Documentation III.Move the Shipment

Provide Information Available Steamship Service Port Capabilities Packing Requirements Containerization Options Freight Charges: –Handling Fees –Port Fees, etc.

Prepare Documentation Export Clearance Carriage Insurance Destination Clearance Banking

Move the Shipment Secure (book) space on the carrier Arrange for container to be placed for loading Arrange for any required inspections, fumigations, etc. Secure the on-board carrier bill of lading

OTI’s Receive Compensation From… Shipper –Documentation and Forwarding Fees Ocean Carrier –Brokerage (commission) Inland Carrier –Property Brokerage Insurance Provider –Markup of premium

Freight Insurance Why insure ? Carrier’s limit of liability (COGSA & Warsaw Convention) Filing Claims is problematic and complicated –Insurance pays the claim and then files with the Carrier –You may have to file suit against the Carrier to get his attention –Carrier will try to keep you talking until claim is “Time Barred”. –Irritation Use “declared value” to increase carrier liability ? Expensive & Insurance is cheaper and easier to use….. Usually required with Letters of Credit Cost is usually less than 2% of value of shipment……..(1.25% is average)

CARGO INSURANCE International transportation is risky!  $30 - $50 billion in worldwide losses  Ocean carriers only cover up to $500 per package, Airlines $20/kilo.  General average can put a lien on your cargo!  Buying insurance is a simple, straight- forward process, about $0.40/$100 of value.

I don’t need no stinking marine insurance

Basic collection terms or Accounts Receivable methods  Cash in Advance  Open Account  Documentary Collection  Letter of Credit

AT _SIGHT_____________ ABC CO. XYZ CO. ABC CO. AMOUNT APRIL 24, 1996 (Seller) Importer(Buyer) Agreement (1) B/L (3) Merchandise (2) (5) (6) Documents (4) Open Account Merchandise

Cash Against Documents Advantages to Exporter  Low cost ($ 75.00)  Banks acting as collection agents  Relatively quick payment  Exporter controls goods  Credit insurance available Disadvantages to Exporter  Importer can refuse documents/payment  No title document on air shipments  No guarantee of payment unless insured

AT _SIGHT_____________ ABC CO. XYZ CO. ABC CO. AMOUNT APRIL 24, 1996 Documentary Collection Export Foreign Collecting Bank U.S. Bank (Centura) Importer(Buyer) (Seller) B/L (3) Merchandise (2) (8) (6) (7) (5)

Commercial Letter of Credit THE PURPOSE OF A LETTER OF CREDIT IS TO ALLOW STRANGERS TO DO BUSINESS.

AT _SIGHT_____________ ABC CO. XYZ CO. ABC CO. AMOUNT APRIL 24, 1996 Letter of Credit Exporter Importer(Buyer) (Seller) Agreement (1) B/L (6) Merchandise Merchandise (5) (13) (10) (2) (9) Foreign Issuing Bank (12) (4) Docs/Draft (8) (3) Letter of Credit (11) Apply for LC (7) LC/ Docs Draft LC Advised U.S. Bank

Does a Letter of Credit Guarantee Payment to the Exporter? L/C’s are CONDITIONAL Almost 80% of L/C’s have discrepancies ONE discrepancy can void the L/C Exporters lack control Protect banks, not exporters

INCO Terms 2000 International Commercial Terms

Incoterms Incoterms are used worldwide between a buyer and seller making all parties in the transaction aware of each persons responsibility

EXWORKS

COST INSURANCE AND FREIGHT

FOB – Free On Board Exporter pays crating, containerization, transportation, loading, and port charges. Goods cleared for export by seller.

Freight does not need liberating! There are more terms than FREE ON BOARD

EXW …Ex Works Seller prepares goods and places them on the loading dock.

DAF – Delivered At Frontier Seller delivers freight, cleared for export to named port of import. (DAF Buffalo, NY)

Export Credit Insurance for Managing risk, Improving Financing, and Enabling Trade

Insurance Risk protection: Exporter can offer Open Account terms with a payment guarantee against non-payment due to commercial and political risks Marketing Tool: Offer competitive credit terms directly to foreign buyers to meet/beat the competition and increase sales! Financing Aid: Assign policy proceeds (claim payments) to a lender as additional collateral

Export Credit Insurance for Managing risk, Improve Financing, and Enabling Trade Kathy Edwards Global Business Solutions Corp.

What is Credit Insurance? Risk mitigation insures accounts receivable against non-payment Simplified source of payment Collateral Sleep Insurance

What it is Not A means to make a bad credit good Primary source of repayment Factoring

Types of Coverage Commercial Risks –Insolvency of debtor –Death –Default of payment Political Risk Transfer risk –Government Moratorium preventing release of funds –war/revolution –currency inconvertibility –loss of import/export license (Contract Frustration)

What is NOT covered?? NOT COVERED –Product disputes –Sales to buyers not approved

$27,000$29,400$30,000$33,000Estimated Premium on sales of $6 Mil.45%.49%.50%.55%Premium Rate $100,000$0$150,000$20,000Discretionary Credit Limit -DCL $40,000$0$50,000$0Annual Deductible 95%90% Indemnity $1.5 mil$3 mil$2 mil$1 milPolicy Limit Quotes from Insurers

Underwriting Philosophies Underwriting the Insured – Length of time in business – Financial information – Credit approval experience – Losses Underwriting Buyers – Trade References – Credit reports – Financial information

Underwriting the Insured Policyholder’s ability to assess and control risk Analysis of debtor risk and complete credit files Discretionary credit limits Deductibles

Underwriting Buyers Financial stability of debtor Analysis on book of receivables (Spread of Risk) Low levels of discretion for policyholder Insurer’s expertise in the global marketplace

Advantages of Credit Insurance Protection Against Bad Debt Loss Increased Sales Better Borrowing Position with Insured Receivables Credit Information Resource Collection Services

Credit Insurance as a Sales Aid Open account sales Better credit terms Develop new markets Less “Creative” sales terms from sales staff

Increased Sales Volume - existing customer Without credit insurance:With credit insurance: Credit limit: $ 50,000$100,000 6 turns per year$300,000$600,000 Margin on sale 10%10% Risk potential $ 50,000$10,000 Insurance Cost $0$3,000 (0.5% of sales) Gross Income $30,000$60,000 Net “income” $57,000 Differential income$27,000

Increased Sales Volume - new customer Coverage: $50,000 Terms:60 days open account Annual sales:$300,000 Margins:10% ($30,000) Insurance cost: $1,500 (0.5% of sales) Risk sharing (Deductible):$5,000 Minimum Differential Income$23,500

Policy Assignment Benefits of policy can be assigned to a bank or lending institution Immediate availability of funds Pass cost of funds to importer Claims will be paid directly to the lender

Replace Letters of Credit Letters of Credit – L/C’s do NOT guarantee payment – L/C’s require expertise – L/C may cost the sale if a competitor offers open account terms – L/C’s tie up buyers’ funds or credit facilities – Insurance eliminates high local interest costs – Insurance eliminate bank fees, amendment fees, and discrepancy fees – Insurance builds customer loyalty Documentary Collections – Cover risk with credit insurance

Public Underwriters Export-Import Bank of the United States –Defined programs and costs –Subject to US government policies –Small business policies –Short term, medium term, long term –Single buyer or multi-buyer –Pay as you go to improve cash flow

Types of Credit Insurance Government Insured –Backed by the full faith and credit of the U.S. Government –If the importer defaults, it is the U.S. Government who collects, not the exporter –Underwriters approve your buyers in advance so your buyers and their credit limits are set –Very attractive for bank lending –Pay for insurance as you use it – not in advance –Terms available up to 360 days

Private Insurers Insure domestic as well as foreign receivables No U.S. content requirement No requirement for exporter to provide credit reports or trade references Can insure shipments dispatched from other countries Premiums are paid upfront with minimum premium of $ 5000

Private Insurance Market Export & Domestic Coverage AIG Coface (f/k/a CNA) Euler Hermes ACI (f/k/a Euler ACI) Altradius Trade Credit Insurance (f/k/a Gerling NCM Credit Insurance) FCIA

Kathy Edwards Global Business Solutions