Export Overview International Services

2 The Exporter’s Objective Take control of the export process to:  Reduce/mitigate risks  Reduce costs  Accelerate payment  Increase export sales

3 Buyer’s & Seller’s Objective Both have a vested interest in closing the transaction, but... there is an inherent conflict in objectives.

4 Buyer wants to delay payment as long as possible. Until…  Receipt and processing of goods  Sale of goods Buyer’s Objective

5 Seller wants payment as soon as possible. At…  Contract signing or  at time of shipment Seller’s Objective

6 Documentation is the engine in global trade. It facilitates:  The movement of freight;  transfer of title;  processing of payment; and  customs clearance. Export Documentation

7 Role of the Freight Forwarder Exporter’s agent in moving shipment to buyer’s destination should be familiar with:  import rules & regulations of foreign countries;  U.S. Government export regulations and  trade documents.

8  Before trying to handle all the documentation, the exporter should consider using a freight forwarder, a specialist in documentation.  Required documents will depend upon both U.S. Government requirements and those of importer’s country. Shipping Documentation

9  Commercial invoice  Packing list  Ocean Bill of Lading  Certificate of origin  Insurance certificate  Inspection certificate  Consular invoice Common Shipping Documents

10  Most commonly used pricing terms that deal with the relation between seller and buyer under the sales contract, especially the seller’s delivery obligation  Deal with a number of obligations imposed upon the parties and with the distribution of risk between them  Critical to the success of the transaction  Incoterms are published by the International Chamber of Commerce  When using Incoterms, refer to them as Incoterms 2010 (Incoterms 2010 as of 1/1/2011) Incoterms

11  Cash in advance  Letter of credit  Documentary collection  Open account Methods of Payment

12 Payment Methods Open Account Documentary Collections Letters Of Credit Cash In Advance Exporter/Seller Most RiskLeast Risk Importer/Buyer Least Risk Most Risk

13 Cash In Advance Cash in Advance

14  Will definitely limit market penetration  But … it eliminates any credit & country risk  Can be very expensive to buyer leading to potential loss of customer by requiring prepayment for goods  May require exporter to provide a performance bond Cash in Advance

15 Letters of Credit

16 A letter of credit is a financial instrument  It evidences a Bank’s commitment to pay money to a specified party provided certain conditions are satisfied What is a Letter of Credit?

17  Transfers credit risk from the buyer to the buyer’s bank  A letter of credit is a written undertaking issued by a bank to pay, in favor of a third party (beneficiary), on behalf of the bank’s customer (applicant).  Letters of credit are documentary in nature. The bank’s promise to pay is contingent solely upon presentation of compliant documents, as specified in the credit terms. Letter of Credit – Definition

18 Secure communications via: S.W.I.F.T. (Society for Worldwide Interbank Financial Telecommunication)  Membership limited to financial institutions  Standardized formats with character limitations  Authentication keys exchanged between member banks for secure transmissions Mitigating Risk of Fraud

19  Letters of credit are separate transactions from the sales contract or agreement on which they may be based  Banks are not responsible for the accuracy, content or the validity of the documents  Both issuing and advising banks deal in documents and not the goods or services to which the documents relate Precepts of Letters of Credit

20  Applicant (Buyer)  Issuing bank (Buyer’s bank)  Beneficiary (Seller)  Advising bank (Seller’s bank) Parties Involved in a Letter of Credit

21 Commercial  Irrevocable  Confirmed  Transferable Standby  Used in lieu of bank guarantees  Financial standbys  Performance Types of Letters of Credit

22 “At sight” terms  Payment due at presentation of conforming documents at the issuing and/or confirming bank’s counter Usance terms  Draft presented for payment at “x” days from Bill of Lading date (or other clearly specified time period) Payment Terms

23 Letter of Credit Issuance Process – Step 1  Buyer applies for letter of credit at his bank  Bank makes credit decision to issue letter of credit in same manner as approving a loan  Bank issues letter of credit based on approved application Buyer Letter of Credit Application Buyer’s Bank Purchase Order

24 Letter of Credit Issuance Process – Step 2  Issuing bank forwards letter of credit to correspondent bank located in seller’s country  Advising bank authenticates letter of credit, forwards to seller Buyer’s Bank Letter of Credit Seller’s Bank Letter of Credit Seller

25 Letter of Credit Payment Process – Step 1  Seller ships merchandise to buyer  Seller prepares specified shipping documents to submit to bank for payment Seller’s Bank DocumentsSellerBuyerGoodsSeller

26 Letter of Credit Payment Process – Step 2  Seller presents documents to the advising/processing bank  Bank examines documents carefully to determine compliance with letter of credit terms  If documents comply, advising/processing bank informs issuing bank of presentation, obtains reimbursement per credit terms, pays seller Buyer’s Bank Notify Seller’s Bank Documents Seller

27 Letter of Credit Sample

28 Discrepancies occur when there is non-compliance with the terms of the letter of credit and/or when the documents are inconsistent with each another. Discrepancies

29  Expensive and are typically for exporter’s account  Can delay payment: when documents must be presented on approval basis, buyer may delay the payment approval  Can void the protection of the letter of credit; risk of non-payment as buyer may elect not to approve payment altogether (e.g., late shipment may not allow the buyer to resell goods)  If the buyer is having financial problems, the issuing bank may try to find any discrepancies to void the letter of credit Consequences of Discrepancies

30  Seller’s invoice exceeds letter of credit amount  Documents presented after letter of credit has expired  Documents are not presented within the specified presentation period  Late shipment  Missing documents  Absence of required signatures  Documents inconsistent with letter of credit or with each other Common Discrepancies

31  Correct or present new documents  Have Advising/Processing Bank contact Issuing Bank for approval to accept discrepancies  Have Advising/Processing Bank send documents to Issuing Bank for approval What To Do When There Are Discrepancies

32 Yes, when:  Unfamiliar with credit risk of Issuing Bank or country – If confirmed by a U.S. bank, the country/political and credit risks are transferred to U.S. bank – Letters of credit are only as good as the banks that issue/confirm them No, when:  Letter of credit is issued by an investment grade bank  Country risk is acceptable The Letter of Credit: Confirm or Not?

33 Documentary Collections

34  Presentation of ‘financial’ and ‘commercial’ documents on a collection basis by the seller’s bank (i.e. the Remitting Bank) to the bank (i.e. the Collecting Bank) nominated to make presentation to the buyer as per the collection instructions.  The seller draws the ‘financial’ document on the buyer, which stipulates the tenor of the underlying commercial transaction.  Documents are typically released against: – Payment (D/P, Documents against Payment) – Acceptance (D/A, Documents against Acceptance) Definition

35 Documents are presented on a sight basis and are released to the buyer when payment has been made. Payment must be made in ‘good funds’, which can take the form of ‘available funds’ in their account or a FedWire transfer. D/P – Documents Against Payment

36 Documentary Collections – D/P Remitting Bank Collection Letter, Draft, Title Documents Collecting Bank Drawee/ Buyer Drawer/ Seller Title Documents Goods

37 Documents are presented on a time basis and are released to the buyer when the buyer has accepted the ‘financial’ document for payment at a future date. This act of acceptance by the buyer represents their promise to pay as per the tenor of the transaction. D/A - Documents Against Acceptance

38 Documentary Collection Time Draft – D/A Remitting Bank Collection Letter, Draft, Title Documents Collecting Bank Title Documents Drawer/ Seller Drawee/ Buyer Goods Accepted Draft

39  Documents are sent to the wrong department/branch of foreign bank & released to buyer without payment  Time drafts are subject to buyer’s credit risk Documentary Collections Risks

40 Because the importer is not obliged to take up the documents, Buyer can:  Stall (until shipment arrives)  Try to negotiate a lower price  Refuse the shipment (timing, credit, character or country risks) Documentary Collections Risks

41  Banks have no liability to pay or accept the drawers/sellers draft  Banks act only as collecting agents Documentary Collection Summary

42 Open Account

43  Common in both domestic & international commerce  Seller ships the goods to the buyer and separately mails the title documents and invoice calling for payment within a stipulated period of time Open Account

44  Advantage to buyer who is able to receive goods, sell them and possibly collect A/R prior to paying seller  Risks to seller: – buyer credit risk – buyer country risks (e.g., commercial/exchange, controls/FX, volatility/turmoil) Open Account

45 Export Credit Insurance  Protects the exporter from –commercial non-payment risks (buyer insolvency, bankruptcy or protracted commercial default) –political risk that results in non-payment (unrest, currency inconvertibility, withdrawal of import license)  Allows exporters to sell on open account (the riskiest payment method)  Increases exporter competitive edge  Does not protect against quality issues and shortages

46 Some Practical Advice

47 Exporters  Focus on your documents. Keep them simple, relevant and free of discrepancies.  Address the country and credit risks involved – Are they relevant? – Are you comfortable with the risks? – If not, can they be mitigated or eliminated? Practical Advice (continued)

48 Remember: Time = Money Finally, consult with your banker — your partner and ally in the trade transaction. Practical Advice (continued)

49 Joe Pearson AVP, International Business Development Officer BB&T International Services BB&T Contact Information BB&T, Member FDIC.