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Session 7 of STC 391 International Credit, Finance and Insurance
Session 7 Agenda:   Elements of International Finance <ul><li>Risk Management </li></ul><ul><li>Finance  Sources, Tools an...
Thanks for the Help: <ul><li>Dagmar Grieder, International Banker </li></ul><ul><li>Mark Hagan, the Wells Fargo Trade Bank...
Finance to Support Technology Commercialization <ul><li>1. Risk Reduction </li></ul><ul><ul><ul><li>Due Diligence Processe...
Risk Reduction
Due Diligence <ul><li>The Process of Verifying: </li></ul><ul><ul><li>financial strength/stability </li></ul></ul><ul><ul>...
Partner Selection <ul><li>Identify clear business objectives </li></ul><ul><li>Match structure to strategy </li></ul><ul><...
Partner Selection Structural Issues <ul><li>Sales Rep in each country </li></ul><ul><ul><li>Advantages:  Low initial cost ...
Partner Selection (con’t)   Structural Issues <ul><li>Liaison Office </li></ul><ul><ul><li>Advantages:  Better control </l...
Managing Partnerships <ul><li>Agreement Tools </li></ul><ul><ul><li>NDA </li></ul></ul><ul><ul><li>software evaluation agr...
IP Protection & Exploitation Partnerships <ul><li>Structure contracts to carefully address IP rights </li></ul><ul><ul><li...
Labor Issues <ul><li>Can you fire those whom you hire? </li></ul><ul><li>What will it cost you to “downsize” or rearrange ...
Cultural Considerations in Business Agreements <ul><li>Contractual relations grow out of business relations </li></ul><ul>...
Cultural Issues (con’t) <ul><li>Face-saving is very important: and may apply to either or both sides </li></ul><ul><li>Dif...
Financing from a Partnering Perspective... <ul><li>Equity or Debt base? </li></ul><ul><li>Home based or foreign sourced </...
Risk Factors - International <ul><li>Political  </li></ul><ul><ul><li>Unexpected changes (country or regional) </li></ul><...
Risk Factors - International <ul><li>Commercial </li></ul><ul><ul><li>Buyer credit acceptability </li></ul></ul><ul><ul><l...
Risk Factors - International <ul><li>Foreign Exchange </li></ul><ul><ul><li>Currency rate fluctuations </li></ul></ul><ul>...
Risk Factors - International <ul><li>Time and Distance </li></ul><ul><ul><li>Shipping Hazards </li></ul></ul><ul><ul><ul><...
Risk Factors - International <ul><li>Government Regulations </li></ul><ul><ul><li>Special import or export licenses </li><...
OFAC - Blocked Countries <ul><li>AFGHANISTAN (Cautions) </li></ul><ul><li>BALKANS (Cautions) </li></ul><ul><li>BURMA (MYAN...
Boycotting Countries Countries Participating in the Arab League Boycott of Israel
International Finance  Tools and Processes
Global Capital Resources <ul><li>Private Capital Sources </li></ul><ul><ul><li>Alternative Financial Vehicles  </li></ul><...
Private Financing <ul><li>YOUR BANK </li></ul><ul><li>YOUR CUSTOMER’S/Partner’s BANK </li></ul><ul><li>A bank specializing...
Private Capital Sources <ul><li>Profit </li></ul><ul><li>Venture Capital </li></ul><ul><li>Joint Venture -- Capital from  ...
Resource Examples <ul><li>Silicon Valley Bank  </li></ul><ul><li>Asia Development Bank, www. asiandevbank.com </li></ul><u...
Diverse Financing Resources <ul><li>Local  Global </li></ul><ul><ul><li>Local Bank </li></ul></ul><ul><ul><li>Community Ex...
Beware of Definitions <ul><li>Conceptions of Venture Capital are not equal! </li></ul><ul><ul><li>China:  ID’s ventures  ...
International  Payment Mechanisms
Int’l Payment Mechanisms <ul><li>Cash in advance </li></ul><ul><li>Open account </li></ul><ul><li>Letter of credit </li></...
Cash in Advance <ul><li>Seems easy - if buyer agrees to do it! </li></ul><ul><li>Buyer pays with no assurance of shipment ...
Open Account <ul><li>Buyer Credit </li></ul><ul><ul><li>payment occurs after merchandise is shipped and received </li></ul...
Letters of Credit <ul><li>Involves banks as an active party </li></ul><ul><li>Documents are exchanged for payment </li></u...
Documentary Collection <ul><li>Banks facilitate, but not active parties </li></ul><ul><ul><li>Buyer credit issues remain <...
Sales Terms Risk Chart Exporter    Sales Terms   Importer Risk   Risk Open Account Docs Against Acceptance Docs Against Pa...
Cash Up Front EX IM
Cash Up Front EX IM Open Account
Cash Up Front Confirmed L/C Letter of credit Doc’s Agst Pmt Doc’s Agst Accept Open Account EX IM !?
Negotiating Sales Terms <ul><li>Buyer wants financing </li></ul><ul><li>Seller wants immediate payment </li></ul><ul><li>N...
I NTERNATIONAL  T RADE  P AYMENT  T ERMS funds flow charts/ payment terms table
Letters of Credit :  Terminology  Transaction Flows Payment Options
Letters of Credit <ul><li>Definition </li></ul><ul><ul><li>A letter of credit is a document  </li></ul></ul><ul><ul><li>is...
Typical Documents Under L/C <ul><li>Draft </li></ul><ul><li>Commercial Invoice </li></ul><ul><li>Bills of Lading (Transpor...
Regulations <ul><li>ICC Uniform Customs and Practices Publication 500 (rev. 1993) - UCP 500 </li></ul><ul><li>Uniform Comm...
Types of LC’s <ul><li>Commercial (Documentary) </li></ul><ul><ul><li>Primary mechanism for payment </li></ul></ul><ul><ul>...
Types of LC’s <ul><li>Standby </li></ul><ul><ul><li>Most often used as a default mechanism - other payment type used as pr...
Other Types of Letters of Credit <ul><li>Irrevocable vs. Revocable </li></ul><ul><li>Import vs. Export </li></ul><ul><li>S...
Parties to a Letter of Credit <ul><li>Applicant </li></ul><ul><li>Beneficiary </li></ul><ul><li>Issuing (Opening) Bank </l...
LC  Issuance  Process Buyer’s Country Seller’s Country Sales contract Buyer applies  for LC.  Credit  relationship require...
LC  Payment  Process Buyer’s Country Seller’s Country Shipment Issuing Bank Advising Bank Buyer/Applicant Seller/Beneficia...
Payment Options <ul><li>Sight </li></ul><ul><ul><li>Payment effected when complying documents are presented </li></ul></ul...
Payment Options <ul><li>Time - Bankers Acceptances </li></ul><ul><ul><li>provides short term financing - 30 to 180 days </...
LC Confirmation <ul><li>What is confirmation? </li></ul><ul><ul><li>A second bank, usually the advising bank, undertakes t...
Letters of Credit:  Documentation & Discrepancies
Documents <ul><li>Buyer and seller must agree on documents </li></ul><ul><li>Generally, documents will verify: </li></ul><...
Incoterms 1990 & 2000 <ul><li>Generally accepted terms developed by the ICC for the uniform interpretation of common contr...
Incoterms 1990 & 2000 <ul><li>General/Multimodal/Container </li></ul><ul><ul><li>FCA, CPT, CIP </li></ul></ul><ul><li>Mari...
Common LC Documents <ul><li>Draft </li></ul><ul><li>Commercial Invoice  </li></ul><ul><li>Bill of Lading (ocean, air, rail...
What’s a Draft? Draft must show: Tenor (sight)   Date Payee (ABC Exporter)  Amount Drawee (Trade Bank)   Signature Endorse...
Discrepancies <ul><li>Two types of discrepancies </li></ul><ul><ul><li>ones that can be remedied by the bene prior to pres...
Discrepancies <ul><li>Discrepancies can: </li></ul><ul><ul><li>Cause payment delays </li></ul></ul><ul><ul><li>Cause payme...
GO! To Pay or Not to Pay? Documents Comply Documents are Discrepant Bank Must Pay! Bank Must Refuse!
Bank Error <ul><li>Improper Payment </li></ul><ul><li>Bank may forfeit its right to be reimbursed by applicant </li></ul><...
Standby LC’s
Standby Letters of Credit <ul><li>Easy way to remember: </li></ul><ul><ul><li>this type of LC “stands by” in case another ...
Sample <ul><li>Open account sale - 30 days after shipment </li></ul><ul><li>Established buyer, but PO larger than usual </...
Sample <ul><li>If payment is received within 30 days, then LC is not used and expires </li></ul><ul><li>If payment is not ...
Insurance
Receivable Insurance <ul><li>Allows exporter to extend open account payment terms </li></ul><ul><li>Covers consumables, ra...
Receivable Insurance <ul><li>Single-buyer and multi-buyer policies available </li></ul><ul><li>Risks covered: political, c...
Export Finance
Public and Quasi-public Resources <ul><li>EX-IM Bank </li></ul><ul><ul><li>The Export-Import Bank of the US is an independ...
Export Finance <ul><li>Ex - Im Bank Working Capital Guarantee </li></ul><ul><li>Medium-term buyer financing </li></ul><ul>...
EX-IM Bank Services <ul><li>Working Capital Guarantee </li></ul><ul><li>Short-Term, Multiple Buyer </li></ul><ul><li>Small...
Ex-Im Bank Working Capital Guarantee <ul><li>Guarantee for  lenders  making working capital lines available to exporters <...
EX-IM Bank <ul><li>Operating Policies </li></ul><ul><ul><li>Funds higher risk ventures which haven’t attracted private fin...
EX-IM Bank <ul><li>Additional Operating Policies </li></ul><ul><ul><li>Sale of military goods only supported if they are d...
Medium-term Buyer Financing <ul><li>Direct financing available to foreign buyers </li></ul><ul><li>Exporter paid immediate...
Third-Party Financing <ul><li>Accommodates customers desire for extended payment terms and your desire for cash </li></ul>...
EX-IM Bank  Tools &Definitions <ul><li>Letter of Interest (LI) </li></ul><ul><ul><li>used in sales negotiation </li></ul><...
EX-IM Bank Tools & Definitions <ul><li>Final Commitment (AP) </li></ul><ul><ul><li>Application comes from foreign buyer or...
EX-IM Bank Definitions <ul><li>Glossary </li></ul><ul><ul><li>Short-Term: credit terms of 180 days </li></ul></ul><ul><ul>...
Overseas Private Investment Corporation (OPIC) <ul><li>OPIC is a U.S. government agency that sells political risk insuranc...
OPIC <ul><li>Complement the private sector by:  </li></ul><ul><ul><li>Managing risk with  political risk insurance  – assi...
SBA Export Assistance  <ul><li>Exporting Working Capital  </li></ul><ul><ul><li>Guarantees up to 90% of a bank line of cre...
Immigration as Free Trade Policy <ul><li>Regulated Immigration mostly a 20 th  Century phenomena </li></ul><ul><li>Is it p...
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  • Business structure can affect the process of getting capital to handle a business’ needs. Those topics covered by Jerry Lewis should give you a sense of how to save money through proper business structuring and tax avoidance. This session is going to concentrate on business capital sources, particularly those that are targeted at helping business with international needs. There are two approaches to this process -- the first includes ways to secure cash. The second, risk reduction, is another set of strategies for saving it.
  • Who are partners: lawyers, accountants, tax advisors, market researchers, bankers International Business associates clients joint venture partners employees other business partners R&amp;D researchers distributors, etc.
  • Jerry Lewis talked about preliminary strategies for entering a country without establishing a presence. Here are the pros and cons – the cons show you why “presence” may be desirable...
  • High Level: Business Strategy market Research Objectives management Hire the Micro Tax, labor, legal, etc.
  • NDA – Non Disclosure Agreement MOU – Memorandum of Understanding
  • In light of that country’s laws and processes!!
  • Scotland example Indian/World Bank Example
  • There are many services, such as credit bureaus, where you can check on the credibility of a potential business partner. Don’t be shy about checking their credit history if you plan on doing trusted business with them.
  • http://www.treas.gov/offices/enforcement/ofac/
  • Alternative financial vehicles for international efforts are the same ones any entrepreneur may use: second mortgages; friends, family and fools; pooled funds from partners, customers or suppliers, limited partnerships, etc. Think about the sources suggested in your other classes. The more common methods are pretty traditional in basic approach but can get much more elaborate in execution than their domestic counterparts. Banks will provide loans for export and international business expansion. Collateral requirements are often higher since perceived risk is higher. Venture capitalists, and joint venture partners will provide capital in return for equity. They will want to see an aggressive international plan as part of a full business plan, and the more savvy it is, the better the deal will be. Part of the savvyness can come from knowledge of public resources that can be used to increase the leverage on either loan or equity funding. Every major trading nation has international business funds to promote imports and exports both at the national level and the local and regional level. Some of the funds are public/private ventures where, for instance, a government will guarantee loans for small and medium sized enterprises (SMEs) as a way of lowering bank risk in making such a loan. In many cases, there are also wholly public funds available for international business expansion.
  • In the major cities of the triad world, there are banks that specialize in international lending and insurance. That may be your bank. If so, get to know the international staff -- they can be a wealth of information for you. However, when looking at an international business venture, you may be dealing in an area where you need to reach beyond your own banker and it often makes sense to develop a relationship with your customer or supplier’s bank or see if your bank has a relationship with that bank already. Finding a bank or banks to work with that have international experience is extemely important because they can help you with so many elements of international transactions -- everything from currency exchange to shipping insurance.
  • Financial vehicles may include: Loan guarantees bond issues interim financing grant and gov. budget allocations
  • Also, lesser known structures include: BECC: Border Environmental Cooperation Commission, NADBANK: North American Development Bank -- helping Texas communities promote economic development while improving drinking water and the environment Nadbank.org, AND nadbank.com
  • Supports previous points….
  • Not comfortable with this idea? Just think of EBAY: Run purely on Cash in Advance...
  • Think of this a contractual payment system, facilitated by banks, but not rigidly controlled/proscribed as Letters of Credit are.
  • Cash upfront is great if you can get it, if you are the exporter/seller. But it doesn’t leave the importer in a good position -- they are out cash on a transaction that is not yet complete and which has a number of potentially risky steps.
  • With an open account, the tables are switched. The Importer promises to pay you once they have the goods, and you have shouldered all of the risk and the up front costs. Not a pretty picture if something happens to your shipment and they never get it -- you don’t get paid yet are out of pocket all of those expenses! However, once you have an established, working relationship with a company, the risks of an open account can change dramatically.
  • In this view, you can see that there are a variety of payment methods which can provide satisfaction on both sides of the transactions. There are reasons to use all of these techniques. However, the safest and most common confirmed letter of credit is a system specifically developed to ensure that both parties are in agreement at the beginning of a transaction and payment exchange is properly made at the end of the transaction. Refer to the chart “Comparison of Payment/Collection Methods” in your reading for this session to be sure you understand each of these transaction types.
  • Thanks to: Mark Hagen The Trade Bank - San Antonio 40 NE Loop 410, Third Floor San Antonio, TX 78216 210/856-8858
  • ALL of these steps are important! None can be left out.
  • There are choices to be made at each stage of a transaction. There are costs associated with each type of transaction and so the costs need to be weighed against the assurances they bring to the transaction. With an irrevocable contract, the importer pays whether they goods arrive in good order or not! In certain transactions, payment cannot be made unless the importer inspects the entire shipment and ensures that it is intact. Other times, the importer pays at the end of a set interval (which may be a norm for shipping time).
  • Also known as usance
  • http://www.iccwbo.org/index_incoterms.asp will define terms – the wall chart they have is way too cool!
  • With this system, the bank assumes a large part of the risk in the system.
  • Almost every major trading nation as a corollary to the US ExIm bank -- so references to it should be viewed as an example of a widespread resource.
  • Dual use: developed for military mission but has commercial applications also (and must obviously not be under national security export controls)! Small business definition: 500 employees or fewer -- however, there are specific industries where these numbers have been normalized to the industry. E.g. small in the telecom industry is 2000 and under.
  • http://www.opic.gov/
  • Transcript of "STC391_Ses_7_2003.ppt"

    1. 1. Session 7 of STC 391 International Credit, Finance and Insurance
    2. 2. Session 7 Agenda: Elements of International Finance <ul><li>Risk Management </li></ul><ul><li>Finance Sources, Tools and Processes </li></ul><ul><li>Insurance </li></ul><ul><li>Export Financing </li></ul>
    3. 3. Thanks for the Help: <ul><li>Dagmar Grieder, International Banker </li></ul><ul><li>Mark Hagan, the Wells Fargo Trade Bank </li></ul><ul><li>Doug Smith, International Trade Center, UT San Antonio/ Austin Community College </li></ul><ul><li>Camino Real and other Texas Export Councils </li></ul>
    4. 4. Finance to Support Technology Commercialization <ul><li>1. Risk Reduction </li></ul><ul><ul><ul><li>Due Diligence Processes </li></ul></ul></ul><ul><ul><ul><li>Credit & Insurance </li></ul></ul></ul><ul><li>2. Capital </li></ul><ul><ul><ul><li>Public and Private Sources </li></ul></ul></ul><ul><ul><ul><li>Financing Mechanisms </li></ul></ul></ul>
    5. 5. Risk Reduction
    6. 6. Due Diligence <ul><li>The Process of Verifying: </li></ul><ul><ul><li>financial strength/stability </li></ul></ul><ul><ul><li>technical qualifications </li></ul></ul><ul><ul><li>business reputation </li></ul></ul><ul><ul><li>ability to perform </li></ul></ul><ul><ul><li>integrity </li></ul></ul><ul><ul><li>compatibility </li></ul></ul><ul><ul><li>the accuracy of the info on all above </li></ul></ul><ul><li>Through 3rd party/independent sources </li></ul>
    7. 7. Partner Selection <ul><li>Identify clear business objectives </li></ul><ul><li>Match structure to strategy </li></ul><ul><li>Clearly identify terms of agreement </li></ul><ul><li>Harmonize legal/local conflicts </li></ul><ul><li>Do NOT abdicate decision-making responsibility! </li></ul><ul><li>Perform DUE DILIGENCE </li></ul>
    8. 8. Partner Selection Structural Issues <ul><li>Sales Rep in each country </li></ul><ul><ul><li>Advantages: Low initial cost </li></ul></ul><ul><ul><li>Disadvantages: Limited control </li></ul></ul><ul><li>Distributor </li></ul><ul><ul><li>Advantages: Low initial cost </li></ul></ul><ul><ul><li>Disadvantages: Limited control </li></ul></ul>
    9. 9. Partner Selection (con’t) Structural Issues <ul><li>Liaison Office </li></ul><ul><ul><li>Advantages: Better control </li></ul></ul><ul><ul><li>Disadvantages: Longer term </li></ul></ul><ul><li>Other Issues ( aka win/win ) : </li></ul><ul><ul><li>cross licensing agreement </li></ul></ul><ul><ul><li>licensing agreement </li></ul></ul><ul><ul><li>joint venture options </li></ul></ul>
    10. 10. Managing Partnerships <ul><li>Agreement Tools </li></ul><ul><ul><li>NDA </li></ul></ul><ul><ul><li>software evaluation agreement </li></ul></ul><ul><ul><li>MOU </li></ul></ul><ul><ul><li>employment contract </li></ul></ul><ul><ul><li>services contract </li></ul></ul><ul><ul><li>licenses and cross-licenses w/ performance requirements </li></ul></ul><ul><ul><li>distribution contracts </li></ul></ul>Others?
    11. 11. IP Protection & Exploitation Partnerships <ul><li>Structure contracts to carefully address IP rights </li></ul><ul><ul><li>clear definition of license to use </li></ul></ul><ul><ul><li>clear definition of joint ownership </li></ul></ul><ul><ul><ul><li>background/foreground definitions </li></ul></ul></ul><ul><ul><li>ensure mechanisms for enforcing IP rights </li></ul></ul>
    12. 12. Labor Issues <ul><li>Can you fire those whom you hire? </li></ul><ul><li>What will it cost you to “downsize” or rearrange your enterprise? </li></ul><ul><li>Labor force availability </li></ul><ul><ul><li>training/apprenticeships </li></ul></ul><ul><ul><li>recruiting & expatriot issues </li></ul></ul>
    13. 13. Cultural Considerations in Business Agreements <ul><li>Contractual relations grow out of business relations </li></ul><ul><li>“Common Law” enforcement is always less clear/certain </li></ul><ul><li>Be prepared to understand the differences between “common practice” and “best practice” </li></ul>
    14. 14. Cultural Issues (con’t) <ul><li>Face-saving is very important: and may apply to either or both sides </li></ul><ul><li>Different countries value assets differently </li></ul><ul><ul><li>eg. On insolvency: labor may be paid ahead of credit </li></ul></ul>
    15. 15. Financing from a Partnering Perspective... <ul><li>Equity or Debt base? </li></ul><ul><li>Home based or foreign sourced </li></ul><ul><li>loans based on inventory or receivables </li></ul><ul><li>Letters of Credit </li></ul><ul><li>local incentives </li></ul>Who are your partners? Why are they your partners?
    16. 16. Risk Factors - International <ul><li>Political </li></ul><ul><ul><li>Unexpected changes (country or regional) </li></ul></ul><ul><ul><li>Military conflict </li></ul></ul><ul><li>Economic </li></ul><ul><ul><li>Economic change in specific countries, regions, or inter-regional </li></ul></ul><ul><ul><li>Military conflict </li></ul></ul>
    17. 17. Risk Factors - International <ul><li>Commercial </li></ul><ul><ul><li>Buyer credit acceptability </li></ul></ul><ul><ul><li>Information difficult to obtain </li></ul></ul><ul><ul><li>Different financial standards </li></ul></ul><ul><ul><li>Cultural/Business Standard Differences </li></ul></ul><ul><li>Language (Negotiation/Interpretation) </li></ul>
    18. 18. Risk Factors - International <ul><li>Foreign Exchange </li></ul><ul><ul><li>Currency rate fluctuations </li></ul></ul><ul><li>Transfer Risk </li></ul><ul><ul><li>Availability of US Dollars </li></ul></ul><ul><ul><li>Currency Restrictions/Licenses </li></ul></ul>
    19. 19. Risk Factors - International <ul><li>Time and Distance </li></ul><ul><ul><li>Shipping Hazards </li></ul></ul><ul><ul><ul><li>insurance coverage </li></ul></ul></ul><ul><ul><li>Freight Costs and Processes </li></ul></ul><ul><ul><li>Customs </li></ul></ul><ul><ul><ul><li>quotas </li></ul></ul></ul><ul><ul><ul><li>customs delays </li></ul></ul></ul>
    20. 20. Risk Factors - International <ul><li>Government Regulations </li></ul><ul><ul><li>Special import or export licenses </li></ul></ul><ul><ul><li>OFAC (Office of Foreign Asset Control) </li></ul></ul><ul><ul><li>SDN (Specially Designated Nationals) </li></ul></ul><ul><ul><ul><li>also known as Export Denial Orders </li></ul></ul></ul><ul><ul><li>Boycott </li></ul></ul>
    21. 21. OFAC - Blocked Countries <ul><li>AFGHANISTAN (Cautions) </li></ul><ul><li>BALKANS (Cautions) </li></ul><ul><li>BURMA (MYANMAR) </li></ul><ul><li>CUBA </li></ul><ul><li>IRAN </li></ul><ul><li>IRAQ </li></ul><ul><li>LIBYA </li></ul><ul><li>NORTH KOREA </li></ul><ul><li>SUDAN </li></ul><ul><li>SIERRA LEONE </li></ul><ul><li>ZIMBABWE </li></ul>
    22. 22. Boycotting Countries Countries Participating in the Arab League Boycott of Israel
    23. 23. International Finance Tools and Processes
    24. 24. Global Capital Resources <ul><li>Private Capital Sources </li></ul><ul><ul><li>Alternative Financial Vehicles </li></ul></ul><ul><ul><li>Loans </li></ul></ul><ul><ul><li>Equity </li></ul></ul><ul><li>Public and Quasi-public Resources </li></ul><ul><ul><li>Domestic Sources </li></ul></ul><ul><ul><li>International Resources </li></ul></ul>
    25. 25. Private Financing <ul><li>YOUR BANK </li></ul><ul><li>YOUR CUSTOMER’S/Partner’s BANK </li></ul><ul><li>A bank specializing in international banking </li></ul>$$ $$
    26. 26. Private Capital Sources <ul><li>Profit </li></ul><ul><li>Venture Capital </li></ul><ul><li>Joint Venture -- Capital from Partners </li></ul><ul><li>Customers -- Capital from Customers </li></ul><ul><li>Suppliers -- Capital from Suppliers </li></ul>
    27. 27. Resource Examples <ul><li>Silicon Valley Bank </li></ul><ul><li>Asia Development Bank, www. asiandevbank.com </li></ul><ul><li>First American Trade Finance, www.firstamtrade. Com </li></ul><ul><li>Bancomext, www. bancomext.gob.mx </li></ul><ul><li>Bank of America, Bank One, Chase </li></ul><ul><li>Netherlands Foreign Investment Agency, www.nfia.com </li></ul><ul><li>American Bureau of Collections </li></ul><ul><li>Japan Development Bank, www.jdb.go.jp </li></ul>
    28. 28. Diverse Financing Resources <ul><li>Local Global </li></ul><ul><ul><li>Local Bank </li></ul></ul><ul><ul><li>Community Export Loan Funds </li></ul></ul><ul><ul><li>Venture Capital </li></ul></ul><ul><ul><li>Customer/Supplier Financing </li></ul></ul><ul><ul><li>State Financing Support Vehicles </li></ul></ul><ul><ul><li>National Financing Support Resources </li></ul></ul><ul><ul><li>International Financing Resources </li></ul></ul>
    29. 29. Beware of Definitions <ul><li>Conceptions of Venture Capital are not equal! </li></ul><ul><ul><li>China: ID’s ventures  Raise funding. Ventures are fully operational companies. OR Government funding for business. </li></ul></ul><ul><ul><li>Australia: Venture Funds closer to US concept – usually support later stage companies. However, pension fund flexibility is limited – sources harder to find to build the funds. </li></ul></ul>
    30. 30. International Payment Mechanisms
    31. 31. Int’l Payment Mechanisms <ul><li>Cash in advance </li></ul><ul><li>Open account </li></ul><ul><li>Letter of credit </li></ul><ul><li>Documentary collection </li></ul>
    32. 32. Cash in Advance <ul><li>Seems easy - if buyer agrees to do it! </li></ul><ul><li>Buyer pays with no assurance of shipment </li></ul><ul><li>Will you take a check? </li></ul>
    33. 33. Open Account <ul><li>Buyer Credit </li></ul><ul><ul><li>payment occurs after merchandise is shipped and received </li></ul></ul><ul><li>Payment can be made by wire, ACH, draft, check, credit cards, or money orders. Paypal anyone? </li></ul><ul><li>Sometimes combined with a partial payment in advance </li></ul><ul><li>Can be enhanced by credit insurance </li></ul>
    34. 34. Letters of Credit <ul><li>Involves banks as an active party </li></ul><ul><li>Documents are exchanged for payment </li></ul><ul><li>Banks make determination to pay </li></ul><ul><li>Good for: </li></ul><ul><ul><li>New Buyers </li></ul></ul><ul><ul><li>Mitigating certain risks </li></ul></ul><ul><ul><li>Buyer financing options </li></ul></ul>
    35. 35. Documentary Collection <ul><li>Banks facilitate, but not active parties </li></ul><ul><ul><li>Buyer credit issues remain </li></ul></ul><ul><li>Documents exchanged for payment </li></ul><ul><ul><li>buyer makes determination to pay, not bank </li></ul></ul><ul><ul><li>can buyer get merchandise without documents? </li></ul></ul><ul><li>Good for: </li></ul><ul><ul><li>smaller amounts </li></ul></ul><ul><ul><li>established relationships </li></ul></ul>
    36. 36. Sales Terms Risk Chart Exporter Sales Terms Importer Risk Risk Open Account Docs Against Acceptance Docs Against Payment Time Letter of Credit Sight Letter of Credit Cash in Advance high low high low
    37. 37. Cash Up Front EX IM
    38. 38. Cash Up Front EX IM Open Account
    39. 39. Cash Up Front Confirmed L/C Letter of credit Doc’s Agst Pmt Doc’s Agst Accept Open Account EX IM !?
    40. 40. Negotiating Sales Terms <ul><li>Buyer wants financing </li></ul><ul><li>Seller wants immediate payment </li></ul><ul><li>No one wants risk </li></ul>This is NOT impossible!
    41. 41. I NTERNATIONAL T RADE P AYMENT T ERMS funds flow charts/ payment terms table
    42. 42. Letters of Credit : Terminology Transaction Flows Payment Options
    43. 43. Letters of Credit <ul><li>Definition </li></ul><ul><ul><li>A letter of credit is a document </li></ul></ul><ul><ul><li>issued by a bank </li></ul></ul><ul><ul><li>to an individual or corporation </li></ul></ul><ul><ul><li>by which the bank substitutes its own credit for that of its customer </li></ul></ul><ul><li>Payable against presentation of documents which comply 100% with terms in LC </li></ul>
    44. 44. Typical Documents Under L/C <ul><li>Draft </li></ul><ul><li>Commercial Invoice </li></ul><ul><li>Bills of Lading (Transport Doc’s) </li></ul><ul><li>Packing Lists </li></ul><ul><li>Certificates of Origin </li></ul><ul><li>Insurance Certificates </li></ul><ul><li>Inspection Certificates </li></ul><ul><li>Beneficiary Certificates </li></ul>Beware of Pitfalls!
    45. 45. Regulations <ul><li>ICC Uniform Customs and Practices Publication 500 (rev. 1993) - UCP 500 </li></ul><ul><li>Uniform Commercial Codes </li></ul><ul><li>Federal Reserve Bank Regulations </li></ul><ul><li>ICC Uniform Rules for Bank-to-Bank Reimbursements (1996) - URR 525 </li></ul><ul><li>ISP 98 - for Standby LC’s </li></ul>
    46. 46. Types of LC’s <ul><li>Commercial (Documentary) </li></ul><ul><ul><li>Primary mechanism for payment </li></ul></ul><ul><ul><ul><li>payment triggered by presentation of LC documents </li></ul></ul></ul><ul><li>Used for </li></ul><ul><ul><li>Import </li></ul></ul><ul><ul><li>Export </li></ul></ul><ul><ul><li>Sometimes for domestic shipments </li></ul></ul>
    47. 47. Types of LC’s <ul><li>Standby </li></ul><ul><ul><li>Most often used as a default mechanism - other payment type used as primary payment method </li></ul></ul><ul><ul><ul><li>“Plan B” </li></ul></ul></ul><ul><ul><li>Uses: </li></ul></ul><ul><ul><ul><li>Financial (for payment default) </li></ul></ul></ul><ul><ul><ul><ul><li>both domestic and international </li></ul></ul></ul></ul><ul><ul><ul><li>Bid and Performance Bonds </li></ul></ul></ul><ul><ul><ul><li>Insurance, Real Estate, Government Regulatory Compliance (EPA) </li></ul></ul></ul>
    48. 48. Other Types of Letters of Credit <ul><li>Irrevocable vs. Revocable </li></ul><ul><li>Import vs. Export </li></ul><ul><li>Sight vs. Time </li></ul><ul><li>Confirmed vs. Unconfirmed </li></ul>?
    49. 49. Parties to a Letter of Credit <ul><li>Applicant </li></ul><ul><li>Beneficiary </li></ul><ul><li>Issuing (Opening) Bank </li></ul><ul><li>Advising Bank </li></ul><ul><li>Confirming Bank </li></ul><ul><li>Negotiating Bank </li></ul><ul><li>Reimbursing Bank </li></ul>
    50. 50. LC Issuance Process Buyer’s Country Seller’s Country Sales contract Buyer applies for LC. Credit relationship required Buyer’s bank issues LC and sends to seller’s bank Seller’s bank authenticates LC and sends to seller Issuing Bank Advising Bank Buyer/Applicant Seller/Beneficiary
    51. 51. LC Payment Process Buyer’s Country Seller’s Country Shipment Issuing Bank Advising Bank Buyer/Applicant Seller/Beneficiary 1. Bene sends documents to bank 2. Bank examines 3. If OK, bank starts payment process 4. Adv. Bk sends claim to issuing bank; also sends documents 5. Iss. Bk obtains funds from buyer 6. Iss. Bk pays Adv. Bk. 7. Adv Bk pays bene 8. Iss Bk gets documents 9. They examine 10. Docs released to buyer
    52. 52. Payment Options <ul><li>Sight </li></ul><ul><ul><li>Payment effected when complying documents are presented </li></ul></ul><ul><ul><ul><li>documents must be correct </li></ul></ul></ul><ul><ul><li>May or may not occur immediately </li></ul></ul><ul><ul><ul><li>if payable in the US - 2 to 7 days </li></ul></ul></ul><ul><ul><ul><li>if payable offshore - 7 to 21 days, maybe more </li></ul></ul></ul><ul><ul><ul><li>LC terms may contain special provisions about timing </li></ul></ul></ul>
    53. 53. Payment Options <ul><li>Time - Bankers Acceptances </li></ul><ul><ul><li>provides short term financing - 30 to 180 days </li></ul></ul><ul><ul><li>defined in LC </li></ul></ul><ul><ul><ul><li>requires draft drawn with a defined tenor </li></ul></ul></ul><ul><ul><ul><ul><li>can be xx days from B/L date or other event </li></ul></ul></ul></ul><ul><ul><ul><ul><li>can be xx days from Sight (as defined by accepting bank) </li></ul></ul></ul></ul><ul><ul><li>negotiable instrument </li></ul></ul><ul><ul><ul><li>accepting bank obligated to pay at maturity </li></ul></ul></ul><ul><ul><ul><li>can be discounted to exporter for earlier payment </li></ul></ul></ul>
    54. 54. LC Confirmation <ul><li>What is confirmation? </li></ul><ul><ul><li>A second bank, usually the advising bank, undertakes the credit risk of the bank which issued the LC </li></ul></ul><ul><ul><ul><li>The confirming bank is now obligated to pay against documents in order </li></ul></ul></ul><ul><ul><ul><li>A confirmation is an extension of credit, so the issuing bank must be creditworthy </li></ul></ul></ul><ul><ul><ul><li>LC terms must contain request for confirmation </li></ul></ul></ul>
    55. 55. Letters of Credit: Documentation & Discrepancies
    56. 56. Documents <ul><li>Buyer and seller must agree on documents </li></ul><ul><li>Generally, documents will verify: </li></ul><ul><ul><li>type of merchandise and quality/quantity </li></ul></ul><ul><ul><li>how/when/where shipped </li></ul></ul><ul><ul><li>insurance of goods - who, risks, how much $ </li></ul></ul><ul><li>Other documents may be needed for customs clearance </li></ul><ul><li>Must correspond to shipping terms </li></ul>
    57. 57. Incoterms 1990 & 2000 <ul><li>Generally accepted terms developed by the ICC for the uniform interpretation of common contract clauses for carriage in import/export transactions </li></ul><ul><li>Terms define the obligations of buyer and seller for segments of transport, fees and insurance </li></ul><ul><li>Also defines where title passes </li></ul>
    58. 58. Incoterms 1990 & 2000 <ul><li>General/Multimodal/Container </li></ul><ul><ul><li>FCA, CPT, CIP </li></ul></ul><ul><li>Maritime Only </li></ul><ul><ul><li>FAS, FOB, CFR, CIF, DES, DEQ </li></ul></ul><ul><li>Non-existent </li></ul><ul><ul><li>FOB Airport (now FCA) </li></ul></ul><ul><ul><li>FOR/FOT - Free on Rail/Truck (now FCA) </li></ul></ul><ul><ul><li>C&F - Cost and Freight (now CFR or CPT) </li></ul></ul>
    59. 59. Common LC Documents <ul><li>Draft </li></ul><ul><li>Commercial Invoice </li></ul><ul><li>Bill of Lading (ocean, air, rail, truck) </li></ul><ul><li>Packing List </li></ul><ul><li>Certificate of Origin </li></ul><ul><li>Inspection Certificate </li></ul><ul><li>Insurance Certificate </li></ul>
    60. 60. What’s a Draft? Draft must show: Tenor (sight) Date Payee (ABC Exporter) Amount Drawee (Trade Bank) Signature Endorsement (on back)
    61. 61. Discrepancies <ul><li>Two types of discrepancies </li></ul><ul><ul><li>ones that can be remedied by the bene prior to presentation at issuing bank </li></ul></ul><ul><ul><ul><li>buyer probably won’t know they existed </li></ul></ul></ul><ul><ul><li>ones that can’t </li></ul></ul><ul><ul><ul><li>these require approval by the buyer and the issuing bank </li></ul></ul></ul><ul><ul><ul><ul><li>missed critical dates (latest shipment, expiry, presentation) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>problems with the B/L </li></ul></ul></ul></ul><ul><ul><ul><ul><li>third party documents </li></ul></ul></ul></ul>
    62. 62. Discrepancies <ul><li>Discrepancies can: </li></ul><ul><ul><li>Cause payment delays </li></ul></ul><ul><ul><li>Cause payment rejections </li></ul></ul><ul><ul><li>Eliminate your risk protection </li></ul></ul><ul><ul><li>Add extra time and cost to the transaction </li></ul></ul>Discrepancies CAN be avoided!
    63. 63. GO! To Pay or Not to Pay? Documents Comply Documents are Discrepant Bank Must Pay! Bank Must Refuse!
    64. 64. Bank Error <ul><li>Improper Payment </li></ul><ul><li>Bank may forfeit its right to be reimbursed by applicant </li></ul><ul><li>Wrongful Dishonor </li></ul><ul><li>Beneficiary sues bank </li></ul><ul><li>Applicant sues bank </li></ul>Bank can lose $ PS!
    65. 65. Standby LC’s
    66. 66. Standby Letters of Credit <ul><li>Easy way to remember: </li></ul><ul><ul><li>this type of LC “stands by” in case another event does not occur </li></ul></ul><ul><ul><li>functions as a safety net or credit enhancement </li></ul></ul><ul><li>Typical uses: </li></ul><ul><ul><li>Payment guarantees </li></ul></ul><ul><ul><li>Bid and Performance Bonds </li></ul></ul><ul><ul><li>Insurance </li></ul></ul>
    67. 67. Sample <ul><li>Open account sale - 30 days after shipment </li></ul><ul><li>Established buyer, but PO larger than usual </li></ul><ul><li>Buyer issues standby LC allowing seller to draw if payment not received by day 31 </li></ul><ul><ul><li>Issuing bank takes on buyer’s credit risk </li></ul></ul><ul><ul><li>LC requires draft, copy of unpaid invoice, and bene certificate of non-payment </li></ul></ul>
    68. 68. Sample <ul><li>If payment is received within 30 days, then LC is not used and expires </li></ul><ul><li>If payment is not received, seller can draw under LC and receives funds from bank </li></ul><ul><ul><li>Documentation must comply with LC terms </li></ul></ul><ul><ul><li>LC is often payable at issuing bank only </li></ul></ul>
    69. 69. Insurance
    70. 70. Receivable Insurance <ul><li>Allows exporter to extend open account payment terms </li></ul><ul><li>Covers consumables, raw materials, spare parts, agricultural commodities, low cost capital goods, durables, services provided by US personnel </li></ul><ul><li>Short-term policy </li></ul>
    71. 71. Receivable Insurance <ul><li>Single-buyer and multi-buyer policies available </li></ul><ul><li>Risks covered: political, commercial, sovereign </li></ul><ul><li>Deductible required </li></ul><ul><li>Economical (as low as pennies/$100) </li></ul><ul><li>Insurers: Ex - Im Bank, Lloyds, FCIB etc. </li></ul>
    72. 72. Export Finance
    73. 73. Public and Quasi-public Resources <ul><li>EX-IM Bank </li></ul><ul><ul><li>The Export-Import Bank of the US is an independent agency of the federal government, with one mission: to help the private sector create and maintain American jobs by financing exports. </li></ul></ul><ul><ul><li>Uses loan, guarantee and insurance programs to support over $300 B in exports of both goods and services. </li></ul></ul><ul><ul><li>http://www.exim.gov/ </li></ul></ul><ul><li>Note: There are other country ex-im banks Get there from links through exim </li></ul>
    74. 74. Export Finance <ul><li>Ex - Im Bank Working Capital Guarantee </li></ul><ul><li>Medium-term buyer financing </li></ul><ul><li>Forfaiting </li></ul><ul><li>Third-party financing </li></ul>
    75. 75. EX-IM Bank Services <ul><li>Working Capital Guarantee </li></ul><ul><li>Short-Term, Multiple Buyer </li></ul><ul><li>Small Business Services </li></ul><ul><li>Short-Term Single Buyer </li></ul><ul><li>Financial Institution Letter of Credit </li></ul><ul><li>Bank Letter of Credit </li></ul><ul><li>Medium-Term, Single Buyer </li></ul><ul><li>Leasing </li></ul><ul><li>Financial Guarantee </li></ul><ul><li>Credit Guarantee </li></ul><ul><li>Direct Loan </li></ul><ul><li>Project Finance </li></ul>
    76. 76. Ex-Im Bank Working Capital Guarantee <ul><li>Guarantee for lenders making working capital lines available to exporters </li></ul><ul><li>Covers work-in-process, inventory, foreign receivables </li></ul><ul><li>Eligible products must be at least 50% US content </li></ul>
    77. 77. EX-IM Bank <ul><li>Operating Policies </li></ul><ul><ul><li>Funds higher risk ventures which haven’t attracted private financing </li></ul></ul><ul><ul><li>Under its short term insurance policies, US content must be at least 50%. </li></ul></ul><ul><ul><li>Medium and long-term deals require that any foreign content be financed externally </li></ul></ul><ul><ul><li>Repayment assurances are required </li></ul></ul>higher risk
    78. 78. EX-IM Bank <ul><li>Additional Operating Policies </li></ul><ul><ul><li>Sale of military goods only supported if they are dual use. </li></ul></ul><ul><ul><li>Small businesses (fed definition) get priority attention </li></ul></ul><ul><ul><li>Environmental technologies get priority attention </li></ul></ul>
    79. 79. Medium-term Buyer Financing <ul><li>Direct financing available to foreign buyers </li></ul><ul><li>Exporter paid immediately </li></ul><ul><li>Terms: 1-7 years </li></ul><ul><li>Covers capital equipment </li></ul><ul><li>Rates (based on US) generally lower than buyer’s local financing options </li></ul>
    80. 80. Third-Party Financing <ul><li>Accommodates customers desire for extended payment terms and your desire for cash </li></ul><ul><li>Requires close coordination </li></ul><ul><li>Difficult to find financing sources around the world </li></ul><ul><li>Can be either recourse or non-recourse back to seller </li></ul>
    81. 81. EX-IM Bank Tools &Definitions <ul><li>Letter of Interest (LI) </li></ul><ul><ul><li>used in sales negotiation </li></ul></ul><ul><ul><li>indicates support, not financing </li></ul></ul><ul><ul><li>may be a first step toward financing </li></ul></ul><ul><li>Preliminary Commitment (PC) </li></ul><ul><ul><li>exporter must have a specific deal </li></ul></ul><ul><ul><li>Ex-Im runs a full analysis on players and deal </li></ul></ul>
    82. 82. EX-IM Bank Tools & Definitions <ul><li>Final Commitment (AP) </li></ul><ul><ul><li>Application comes from foreign buyer or guaranteed lender when an export sales contract is about to be completed. </li></ul></ul><ul><li>Preliminary Project Letter (PPL) </li></ul><ul><ul><li>Indicates the general terms and conditions of Ex-Im financing offer </li></ul></ul>
    83. 83. EX-IM Bank Definitions <ul><li>Glossary </li></ul><ul><ul><li>Short-Term: credit terms of 180 days </li></ul></ul><ul><ul><li>Medium-Term: 1-5 years, financing =< $10 million </li></ul></ul><ul><ul><li>Long-Term: >7 years, > $10 million </li></ul></ul><ul><ul><li>Political Risk: war, cancellation of import license, currency inconvertibility, expropriation by government </li></ul></ul><ul><ul><li>Qualified: 2 credit reports & a financial statement </li></ul></ul>
    84. 84. Overseas Private Investment Corporation (OPIC) <ul><li>OPIC is a U.S. government agency that sells political risk insurance and loans to help U.S. businesses of all sizes invest and compete in more than 150 emerging markets and developing nations worldwide. </li></ul><ul><li>OPIC charges market-based fees for its products and therefore it operates on a self-sustaining basis at no net cost to taxpayers. </li></ul>
    85. 85. OPIC <ul><li>Complement the private sector by: </li></ul><ul><ul><li>Managing risk with political risk insurance – assisting particularly in developing countries. </li></ul></ul><ul><ul><li>Providing financing through direct loans and loan guaranties : OPIC can lend up to $250 million per project on either a project finance or corporate finance basis in countries where conventional institutions are often unable or unwilling to lend on such a basis.   </li></ul></ul><ul><ul><li>Working with private capital through OPIC-supported funds : privately managed investment funds that make direct equity and equity-related investments in new, expanding or privatizing companies. By providing long-term, patient growth capital and facilitating critically needed technology and management skills development, these funds act as a catalyst for private sector economic activity in the developing countries served. </li></ul></ul>
    86. 86. SBA Export Assistance <ul><li>Exporting Working Capital </li></ul><ul><ul><li>Guarantees up to 90% of a bank line of credit to cover short-term export working capital. Maturity cannot exceed 12 months. Companies must have at least one year of export experience. </li></ul></ul><ul><li>International Trade Loan Program </li></ul><ul><ul><li>Guarantees a bank line of credit up to $1.25M sto cover short-term export working capital and long term facilities & equipment. </li></ul></ul><ul><ul><li>Qualify if: loan will foster substantial new market development OR an applicant has been adversely affected by import competition </li></ul></ul>
    87. 87. Immigration as Free Trade Policy <ul><li>Regulated Immigration mostly a 20 th Century phenomena </li></ul><ul><li>Is it part of Trade or more generically economic development? </li></ul><ul><li>What are the market forces? </li></ul><ul><li>What is Government’s Role? </li></ul>
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