1. Making our experience and expertise work for you!

2. Welcome to TD Banks Crash Course in International Trade! The TD Bank is an international bank with a network of Trade Services and Treasury units across Canada and offices strategically located in key world financial centres. We have a thorough knowledge of global markets and the ability to successfully respond to the demands of the international marketplace. This Crash Course is intended to provide you with a basic overview of international trade. However, as each trade relationship and transaction is unique, we encourage you to contact our nearest International Trade office. A listing of these offices can be found by clicking on the International Offices link.

3. What will you learn from the Crash Course? The risk issues involved when buying and selling internationally from the perspective of both the Importer and the Exporter. The different methods used to effect payment in international trade. The various types of Guarantees used in international trade. Definitions of important --and often confusing-- terms.

4. Risk Issues in International Trade In any business transaction, there are risks. However, these risks are emphasized when dealing internationally. Added to the commercial risks present in a domestic transaction are foreign exchange as well as country risks. COUNTRY RISKS Stable political climate? War? Revolution? Positive economic environment? Solid legal infrastructure? Foreign exchange restrictions? FOREIGN EXCHANGE RISKS Volatile foreign currency? COMMERCIAL RISKS Reliable information concerning the companys track record? Insolvency of your trading partner? Default or termination on your contract?

5. Making and Receiving Payment Internationally : International Payment Instruments u Clean Payments u Documentary Collections u Letters of Credit We now introduce you to the different payment methods available in settling an international trade transaction. The mechanics of these methods and their advantages and disadvantages from the point of view of both the Importer and the Exporter will be discussed.

6. Clean Payments u Introduction: What is a Clean Payment? u Basic Facts: Open Account & Payment in Advance u Mechanics: How does a Clean Payment transaction work? u Risk Analysis: Advantages and Disadvantages

7. Clean Payments Introduction: What is a Clean Payment? Clean Payments are characterized by trust. Either the Exporter sends the goods and trusts the Importer to pay once the goods have been received, or the Importer trusts the Exporter to send the goods after payment is effected. In the case of Clean Payment transactions, all shipping documents, including title documents, are handled directly by the trading parties. The role of banks is limited to clearing funds as required.

8. Clean Payments Basic Facts: Open Account & Payment in Advance There are two types of Clean Payments: Open Account & Payment in Advance. Open Account. The Importer is trusted to pay the Exporter after receipt of the goods. Payment in Advance. An arrangement whereby the Exporter is trusted to ship the goods after receiving payment from the Importer.

9. Clean Payments Mechanics: How does an Open Account transaction work? OPEN ACCOUNT: The Exporter ships the goods and the documents directly to the Importer and waits for the Importer to send payment. Exporter Importer 2 GOODS 1 PAYMENT

10. Clean Payments Mechanics: How does a Payment in Advance transaction work? PAYMENT IN ADVANCE: The Importer sends payment directly to the Exporter and waits for the Exporter to send the goods and documents. Note: The Payment in Advance and Open Account schematics vary only in the order in which events take place. Exporter Importer 2 GOODS 1 PAYMENT

11. Risk Analysis: Clean Payments Advantages to Exporter: Assumes no risks Disadvantages to Exporter: None Advantages to Importer: None - but could secure low cost! Disadvantages to Importer: Assumes all risks Opportunity cost of using companys cash resources until goods are received. Open Account Payment in Advance Advantages to Exporter: None - but could clinch the sale! Disadvantages to Exporter: Assumes all risks Advantages to Importer: Assumes no risks Delays use of companys cash resources. Disadvantages to Importer: None

12. INTERNATIONAL PAYMENTS RISK SPECTRUM As we move through the different ways to effect payment in international trade, we will build the Risk Spectrum. The Risk Spectrum is intended to summarize the risks associated with the payment methods in relation to the Exporter and the Importer. Notice that Open Account and Payment in Advance sit at opposite ends of the Risk Spectrum. LEAST RISK TO IMPORTER HIGHEST RISK TO IMPORTER HIGHEST RISK TO EXPORTER LEAST RISK TO EXPORTER Open Account Payment in Advance

13. Documentary Collections uIntroduction: What is a Documentary Collection? uBasic Facts: Documents Against Payment (D/P) & Documents Against Acceptance (D/A) uMechanics: How does a Documentary Collection work? uRisk Analysis: Advantages and Disadvantages of Documentary Collections

14. Documentary Collections Introduction: What is a Documentary Collection? 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. * Collections are subject to the the Uniform Rules for Collections published by the International Chamber of Commerce. The last revision of these rules came into effect on January 1, 1996 and is referred to as the URC 522. TD provides copies on request at the nearest International Trade Services office. * Except in the case of availized drafts. Please inquire at the nearest TD International Trade Centre for details.

15. Documentary Collections Basic Facts: Documents Against Payment (D/P) & Documents Against Acceptance (D/A) Documentary Collections may be carried out in two different ways: Documents Against Payment. Documents are released to the Importer only against payment. Also known as a Sight Collection or Cash Against Documents (CAD). Documents Against Acceptance. Documents are released to the Importer only against acceptance of a draft. Also known as a Term Collection.

16. Documentary Collections Mechanics: How does a Documentary Collection work? The mechanics of a Documentary Collection are easily understood when separated into the following three steps: Flow of Goods Flow of Documents Flow of Payment

17. Documentary Collections: Flow of Goods After the Importer and the Exporter have established a sales contract and agree on a Documentary Collection as the method of payment, the Exporter ships the goods. In a Documentary Collection, the Importer is known as the drawee and the Exporter as the drawer. GOODS Exporter/Drawer Importer/Drawee

18. Documentary Collections: Flow of Documents After the goods are shipped, documents originating with the Exporter (e.g. commercial invoice) and the transport company (e.g. bill of lading) are delivered to a bank, called the Remitting Bank in the Collection process. The role of the Remitting Bank is to send these documents accompanied by a Collection Instruction giving complete and precise instructions to a bank in the Importers country, referred to as the Collecting/ Presenting Bank in the Collection process. The Collecting/ Presenting Bank acts in accordance with the instructions given in the Collection Instruction and releases the documents to the Importer against payment or acceptance, according to the Remitting Banks Collection instructions. Note: The Exporters Bank and the Remitting Bank need not be the same. Also, the Collecting Bank and Presenting Bank need not be the same. Each role could be performed by a different bank. Collecting/ Presenting Bank Importer/ Drawee Remitting Bank 2 3 4 Exporter/ Drawer GOODS 1 Documents

19. Documentary Collections: Flow of Payment Payment is forwarded to the Remitting Bank for the Exporters account. And the Importer can now present the transport document* to the carrier in exchange for the goods. Remitting Bank Presenting/ Collecting Bank 1 2 Exporter/ Drawer Importer/ Drawee Documents 4 3 *In this case, we are assuming that the transport document is a title document. GOODS

20. Risk Analysis: Documentary Collections As discussed earlier, Documentary Collections may be settled in two different ways. Documents Against Payment (D/P) refers to a Collection where the Importer receives the documents only in exchange for payment. With Documents Against Acceptance (D/A), the Importer may obtain the documents in exchange for the acceptance of the obligation to pay at a specified future date. These two methods of settlement carry different risks for both Importers and Exporters. Documents Against Payment (D/P) Documents Against Acceptance (D/A) Advantages to the Exporter: Documents are not released to the Importer until payment has been effected. Less costly than a Letter of Credit. Disadvantages to the Exporter: Risk of refusal of payment. Commercial and country risks not hedged. Advantages to the Importer: Ability to examine documents before authorizing payment. Unlike a Letter of Credit, a line of credit is not required, and fees are minimal. Disadvantages to the Importer: In the case that transport documents carry title, cannot access goods until payment has been made. Advantages to the Exporter: Less costly than a Letter of Credit. May provide formal/legal means to collect unpaid obligation. Disadvantages to the Exporter: Risk of non-acceptance of documents. Commercial and country risks not hedged. Although bill of exchange/draft is accepted by the Importer, there is no guarantee of payment by the banks involved. Legal enforcement of unpaid obligation costly and time- consuming. Advantages to the Importer: Will receive goods before having to make payment. Disadvantages to the Importer: Dishonouring an accepted draft is a legal liability and may ruin business reputation.

21. INTERNATIONAL PAYMENTS RISK SPECTRUM Documentary Collections offer more of a compromise in risk-taking between the Importer and the Exporter than Clean Payments as illustrated in the diagram below. LEAST RISK TO IMPORTER HIGHEST RISK TO IMPORTER HIGHEST RISK TO EXPORTER LEAST RISK TO EXPORTER Open Account Documentary Collections ÕDocuments Against Acceptance ÕDocuments Against Payment Payment in Advance

22. Letters of Credit u Introduction: What is a Letter of Credit? u Basic Facts: G Revocable & Irrevocable Letter of Credit GSight & Term Letter of Credit GConfirmed Letter of Credit u Mechanics: How does a Letter of Credit transaction work? u Risk Analysis: Advantages & Disadvantages

23. Letters of Credit A Letter of Credit is a written undertaking by the Importers bank, known as the Issuing Bank, on behalf of its customer, the Importer (Applicant), promising to effect payment in favour of the Exporter (Beneficiary) up to a stated sum of money, within a prescribed time limit and against stipulated documents. A key principle underlying Letters of Credit is that banks deal only in documents and not in goods. The decision to pay under a Letter of Credit will be based entirely on whether the documents presented to the bank appear on their face to be in accordance with the terms and conditions of the Letter of Credit. It would be prohibitive for the banks to physically check whether all merchandise has been shipped exactly as per each letter of Credit. The International Chamber of Commerce (ICC) publishes internationally agreed-upon rules, definitions and practices governing Letters of Credit, called Uniform Customs and Practice for Documentary Credits (UCP). The last revision of these rules was effective Jan. 1, 1994 and is referred to as the UCP 600. Copies of the UCP 600 are available from a TD branch or our nearest TD International Trade Services office. Introduction:What is a Letter of Credit?

24. Letters of Credit u Letters of Credit are either Revocable or Irrevocable: –A Revocable Letter of Credit can be revoked without the consent of the Exporter, meaning that it may be canceled or changed up to the time the documents are presented. Revocable Letters of Credit are very rarely used. –An Irrevocable Letter of Credit cannot be canceled or amended without the consent of all parties including the Exporter. Unless otherwise stipulated, all Letters of Credit are irrevocable. u Letters of Credit may be settled either by sight or by acceptance: –If payment is to be made at the time that documents are presented, this is referred to as a sight Letter of Credit. –If payment is to be made at a future fixed time from the presentation of documents, this is referred to as a term Letter of Credit Basic Facts: Revocable/Irrevocable & Sight/Term

25. Letters of Credit Basic Facts: Confirmed Letter 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. An Exporter would request a Confirmed Letter of Credit if it does not consider the financial strength of the Issuing Bank or the country in which it is located to be acceptable risks.

26. Letters of Credit Mechanics: How does a Letter of Credit work? The mechanics of a Letter of Credit are easily understood when separated into the following three steps: Issuance Flow of Goods Flow of Documents & Payment

27. Letters of Credit: Issuance After the trading parties agree on a sale of goods where payment is made by Letter of Credit, the Importer requests that its bank (the Issuing Bank) issue a Letter of Credit in favour of the Exporter (Beneficiary). The Issuing Bank then sends the Letter of Credit to the Advising Bank. A request may be included for the Advising Bank to add its confirmation. The Advising Bank is usually located in the country where the Exporter does business and may be the Exporters bank, but does not have to be. Next, the Advising/Confirming Bank verifies the Letter of Credit for authenticity and sends it to the Exporter. 1 Importer applies for Letter of Credit. 3 Request to advise & possibly confirm the Letter of Credit Advice /Confirmation of the Letter of Credit. Advising/ Confirming Bank Issuing Bank 2 4 Exporter/ Beneficiary Importer/ Applicant Contract Negotiations Note: For the purpose of the Crash Course, the Advising Bank is also acting as the Confirming Bank. However, the roles of advising and confirmingthe Letter of Credit may be performed by two separate banks.

28. Letters of Credit: Flow of Goods Upon receipt of the Letter of Credit, the Exporter reviews the Letter of Credit to ensure that it corresponds to the terms and conditions in the purchase and sales agreement; that the documents stipulated in the Letter of Credit can be produced; and that the terms and conditions of the Letter of Credit can be fulfilled. Assuming the Exporter is in agreement with the above, it arranges for shipment of the goods. GOODS Exporter/Beneficiary Importer/Applicant

29. Letters of Credit: Flow of Documents & Payment After the goods are shipped, the Exporter presents the documents specified in the Letter of Credit to the Advising/ Confirming Bank. Once the documents are checked and found to comply with the Letter of Credit (i.e. without discrepancies), the Advising/ Confirming Bank forwards these documents to the Issuing Bank. The drawing is negotiated, paid or accepted as the case may be. Cond... Issuing Bank 2 4 Exporter/ Beneficiary Importer/ Applicant Documents 5 3 Advising/ Confirming Bank 1 GOODS

30. Letters of Credit: Flow of Documents & Payment In turn, the Issuing Bank examines the documents to ensure they comply with the Letter of Credit. If the documents are in order, the Issuing Bank will obtain payment from the Importer for payment already made to the Confirming Bank. Documents are delivered to the Importer to allow it to take possession of the goods. Issuing Bank 2 4 Exporter/ Beneficiary Importer/ Applicant Documents 6 5 3 7 Advising/ Confirming Bank 1 GOODS

31. Risk Analysis: Letters of Credit Importer Exporter Advantages: An undertaking from the Issuing Bank that you will receive payment under the Letter of Credit provided that you meet all terms and conditions of the Letter of Credit. Shifts credit risk from the Importer to the Issuing bank. Not obligated to ship against a Letter of Credit that is not issued as agreed. Disadvantages: Documents must be prepared in strict compliance with the requirements stipulated in the Letter of Credit. Non- compliance leaves Exporter exposed to risk of non-payment. Advantages: Importer is assured that, for the Exporter to be paid, all terms and conditions of the Letter of Credit must be met. Ability to negotiate more favourable trade terms with the Exporter when payment by Letter of Credit is offered. Disadvantages: A Letter of Credit assures correct documents but not necessarily correct goods. Ties up line of credit.

32. INTERNATIONAL PAYMENTS RISK SPECTRUM We have completed the International Payments Risk Spectrum. Whereas payment settled via Open Account and Payment in Advance represent a high degree of risk for one of the parties involved, both Documentary Collections and Letters of Credit offer a compromise in risks facing the Importer and the Exporter. LEAST RISK TO IMPORTER HIGHEST RISK TO IMPORTER HIGHEST RISK TO EXPORTER LEAST RISK TO EXPORTER Open Account Documentary Collections ÕDocuments Against Acceptance ÕDocuments Against Payment Letters of Credit ÕUnconfirmed ÕConfirmed Payment in Advance

33. You have almost made it... You have completed the section of the Crash Course that deals with the different methods used to effect payment in international trade. Now we move to the final objective of the Course: to look at Guarantees which are often required to support foreign contracts.

34. Guarantees Introduction: What is a Guarantee? Basic Facts: Bid, Advance Payment & Performance Guarantees Mechanics: How does a transaction involving a Guarantee work?

35. Guarantees Introduction: What is a Guarantee? A Guarantee is issued by a bank on behalf of its customer, the Exporter, as financial assurance to the Importer to be collected in the event that the Exporter defaults on certain specified contractual obligations. The bank that issues a Guarantee will pay the named beneficiary the amount specified on presentation of a written demand as outlined in the Guarantee. While there are standard Guarantee formats, Guarantees can be tailored to meet your specific contractual needs. Often Standby Letters of Credit are used instead of Guarantees. Standby Letters of Credit work in much the same way as Guarantees, offering financial assurance to the Importer if the Exporter defaults on agreed-upon contractual obligations. However, there are at least two important ways in which Standby Letters of Credit differ from Guarantees : H Standby Letters of Credit are governed by the International Chamber of Commerces UCP while Guarantees are subject to the laws of the country of the Issuing Bank. H Banks in several countries, including the United States, are not empowered to issue Guarantees, and therefore use Standby Letters of Credit instead.

36. Guarantees Basic Facts: Types of Guarantees These types of Guarantees are commonly requested in foreign contracts: Bid Guarantee: An Importer will often ask foreign contract bidders to post a Bid Guarantee as evidence of serious intent to supply the goods or services if selected. In the event that the selected supplier is unwilling or unable to carry out the contract, the Importer can collect the amount of the Bid Guarantee. Advance Payment Guarantee: An Advance Payment Guarantee covers the amount of the down-payment the Exporter requests from the Importer and provides the Importer with some security that, if the Exporter does not deliver under the terms of the contract, the amount of the down- payment would be retrievable. Performance Guarantee: A Performance Guarantee permits the Importer to draw on the Guarantee if the Exporter fails to perform according to the terms of the contract. For example, in the event that the Exporter is unable to complete the contract as agreed halfway through a project, the Importer is compensated with the amount of the Performance Guarantee.

37. Guarantees During contract negotiations, the Importer requests that the Exporter provide a Guarantee securing an aspect of the contract (e.g. bid, advance payment). The Exporter (Applicant) enlists its bank (Issuing Bank) to issue the Guarantee in favour of the Importer (Beneficiary) for a specified amount and within a stated time frame. In the event of default by the Exporter, the Importer would demand against the Guarantee through the Advising Bank. Mechanics: How does a transaction involving a Guarantee work? 1 Advice of the Guarantee. 3 Guarantee is sent to a correspondent bank of the Issuing Bank for advice to the Importer. Applies for Guarantee. Issuing Bank Advising Bank 2 4 Exporter/ Applicant Importer/ Beneficiary Contract Negotiations A correspondent bank is a foreign bank with which the Issuing Bank has established a relationship where secure transactions may be processed. A correspondent bank is a foreign bank with which the Issuing Bank has established a relationship where secure transactions may be processed.

38. Congratulations! You made it through the Crash Course. Now test your knowledge by taking TD s International Trade Quiz!