Getting Paid in International Trade

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Mike Filchock's powerpoint slides from his presentation at Fayette County's Exporting 101 Seminar. Mike is with SunTrust Bank's Global Trade Solutions Department.

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  • Getting Paid in International Trade

    1. 1. Global Trade Solutions International Payment Methods August 7, 2008 Fayette County Chamber of Commerce
    2. 2. Agenda Why Offer International Banking? Products and Services for Exporters Risk Comparison – International Methods of Payment Letter of Credit Collections
    3. 3. Why Offer International Banking? <ul><li>Statistics show that more and more companies are doing business overseas. </li></ul><ul><li>The majority of growth opportunities for many companies are in international sales. </li></ul><ul><li>They need a bank that can handle both their domestic and international business. </li></ul>We pledge to be a premier global trade solutions provider − focused on our clients and differentiated by our exceptional sales and service delivered by our world class team of professionals.
    4. 4. Why Offer International Banking? U.S. Exports of Goods & Services $ Millions Source: U.S. Census Bureau, Foreign Trade Division
    5. 5. Source: International Trade Administration – National Trade Data Why Offer International Banking? Export Volume By State 2007 Total $13,615,040,574 $13,943,964,664 $13,375,889,564 South Carolina 25 $13,877,619,708 $10,795,768,491 $9,036,640,599 Alabama 24 $20,073,302,703 $20,576,630,980 $19,632,738,011 Georgia 16 $21,218,226,522 $19,463,348,583 $18,114,767,389 North Carolina 15 $22,019,725,551 $19,069,849,639 $16,122,874,281 Tennessee 14 $42,084,595,133 $35,868,406,183 $30,213,626,405 Illinois 5 $53,074,909,007 $37,948,360,874 $33,792,503,705 Washington 4 $57,369,299,166 $50,492,176,404 $44,400,728,905 New York 3 $127,746,135,340 $116,818,585,165 $109,967,840,247 California 2 $150,888,054,964 $128,761,036,151 $117,244,970,494 Texas 1 $1,037,142,972,794 $904,379,818,171 $817,935,848,814 U.S. Total 2006 2005 2004 State
    6. 6. Why Offer International Banking? U.S. Exports To World 2007 In Thousands $ USD $430,488,183 $362,128,377 $380,900,446 Brazil 10 $489,180,769 $555,158,870 $696,895,563 Italy 9 $660,952,830 $999,885,781 $661,188,662 Singapore 8 $685,783,325 $761,162,512 $832,933,353 Netherlands 7 $841,937,705 $836,582,038 $709,711,337 Germany 6 $1,053,120,825 $1,289,925,477 $1,545,584,537 Japan 5 $1,081,774,436 $1,176,059,116 $1,111,231,073 United Kingdom 4 $1,084,126,434 $978,733,120 $801,369,605 China 3 $1,440,521,932 $1,410,939,190 $1,495,069,577 Mexico 2 $4,706,549,260 $4,836,478,593 $4,265,235,922 Canada 1 2006 2005 2004 Country
    7. 7. Why Offer International Banking? <ul><li>Last 3 decades – export volume at least double of previous decade. </li></ul><ul><li>Small to Medium size enterprise (SMEs) exporters grew 99.7% between 1996 and 2006 (double the growth of large exporters) </li></ul><ul><li>More than 2/3 of U.S. exporters have fewer than 20 employees. </li></ul><ul><li>More than 2/3 of SME exporters are non-manufacturers. </li></ul><ul><li>In 92 markets SMEs responsible for at least ½ of all U.S. exports. </li></ul>Consider the following information from the International Trade Administration: The total number of SMEs exporting < 10% of all SMEs in U.S . Globalization affects nearly every business and every business professional in the world. 70 to 90% of U.S. corporations face foreign competition in their U.S. markets. Why aren’t more SMEs exporting? Payment Risk
    8. 8. Why Offer International Banking? <ul><li>Four Common Misconceptions about Exporting </li></ul><ul><ul><li>You have to be Big to Export – While large companies do the greatest volume of international trade, smaller companies are also taking advantage of opportunities in foreign markets. Surveys show that 60% of US firms now exporting successfully have fewer than 100 employees. </li></ul></ul><ul><ul><li>To Export You Must Have a Big Export Department – The size of the company’s export department depends upon the method by which the products are marketed. </li></ul></ul><ul><ul><ul><li>Direct Exporter – sells to a company or agency in a foreign country and ships the product to the overseas destination. </li></ul></ul></ul><ul><ul><ul><li>Indirect Exporter – sells through an intermediary company in the US., and requires no more specialized staff than is necessary for domestic sales. </li></ul></ul></ul><ul><ul><li>To Export You Must Have Substantial Volume – Due to many smaller companies actively involved in international trade is a testament to the fact that large volume is not a necessity for exporting. If a US company devotes even 10% of its production capacity to foreign markets then it can expect to build substantial and permanent trade in foreign markets. </li></ul></ul><ul><ul><li>You Must be Fluent in Foreign Languages to Export – Knowledge of a foreign language is not essential to exporting. On the few occasions when correspondence and documents are not in English, many translation sources are available. SunTrust’s global trade solutions can help. </li></ul></ul>
    9. 9. Why Offer International Banking? <ul><li>You’ve Made the Decision to Export Overseas… </li></ul><ul><li>Order from overseas buyer? </li></ul><ul><li>Made decision to diversify your business? </li></ul><ul><li>Whichever the case, you’ll treat this transaction the same as a U.S. sale….hmmm…. </li></ul><ul><li>You have additional risks…. </li></ul>
    10. 10. Why Offer International Banking? <ul><li>Commercial </li></ul><ul><ul><li>Any event that prevents the buyer from paying or prevents the seller from delivering the product or service. </li></ul></ul><ul><ul><ul><li>Problems with payment arrangements on behalf of the exporter and/or importer </li></ul></ul></ul><ul><ul><ul><li>Problems with the merchandise on behalf of the exporter and/or importer </li></ul></ul></ul><ul><ul><ul><li>Additional costs for financing, insurance, and shipping </li></ul></ul></ul><ul><ul><ul><li>Protracted default </li></ul></ul></ul><ul><ul><ul><li>Bankruptcy or insolvency by the buyer </li></ul></ul></ul><ul><li>Political </li></ul><ul><ul><li>Any event or unforeseen factor not necessarily within control of the buyer and/or exporter </li></ul></ul><ul><ul><ul><li>Problems with currency exchange </li></ul></ul></ul><ul><ul><ul><li>Government or political intervention </li></ul></ul></ul><ul><ul><ul><li>Problems with the movement of merchandise </li></ul></ul></ul><ul><ul><ul><li>Natural Disasters </li></ul></ul></ul><ul><ul><li>A variety of financing options are available when negotiating payment terms… </li></ul></ul>RISKS
    11. 11. Products and Services
    12. 12. Products and Services <ul><li>Trade Services </li></ul><ul><li>Commercial Letters of Credit - Import & Export </li></ul><ul><li>Standby Letters of Credit </li></ul><ul><li>Documentary Collections </li></ul><ul><li>Export Credit Insurance </li></ul><ul><li>International Correspondent Banking </li></ul><ul><li>Trade Finance </li></ul><ul><li>Working Capital Loans for exports </li></ul><ul><li>Foreign Receivable Financing </li></ul><ul><li>Foreign Buyer Financing </li></ul><ul><li>Overseas Investment Financing </li></ul>International Trade Products
    13. 13. Risk Comparison
    14. 14. Risk Comparison INTERNATIONAL METHODS OF PAYMENT Exporter Risk High Importer Risk Low Trade Terms Open Account Documentary Collection(Time) Documentary Collection (Sight) Letters of Credit (Time) Letters of Credit (Sight) Cash in Advance INTERNATIONAL METHODS OF PAYMENT
    15. 15. Risk Comparison <ul><li>Can your business afford the loss if it is not paid? </li></ul><ul><li>Will extending credit and the possibility of waiting several months for payment still make the sale profitable? </li></ul><ul><li>Can the sale be made only by extending credit? </li></ul><ul><li>How long have the buyers been operating, and what is their credit history? </li></ul><ul><li>Has your business sold successfully to the buyer before? </li></ul><ul><li>Are there reasonable alternatives for collecting if the buyer does not pay? (Does the buyer’s country have the legal and business infrastructure for settling disputes fairly and swiftly?) </li></ul><ul><li>If shipment is made but not accepted, can alternative buyers be found? </li></ul>Questions to Ask Before Selecting the Payment Method
    16. 16. International Methods of Payment Getting Paid and Managing Risk
    17. 17. Risk Comparison INTERNATIONAL METHODS OF PAYMENT Exporter Risk High Importer Risk Low Trade Terms Open Account Documentary Collection(Time) Documentary Collection (Sight) Letters of Credit (Time) Letters of Credit (Sight) Cash in Advance INTERNATIONAL METHODS OF PAYMENT
    18. 18. International Methods of Payment <ul><li>Time of Payment: prior to shipment. </li></ul><ul><li>Buyer Pays </li></ul><ul><ul><li>Wire Transfer </li></ul></ul><ul><ul><li>Check </li></ul></ul><ul><ul><li>Draft </li></ul></ul><ul><ul><li>Credit Card </li></ul></ul><ul><li>Goods available to Buyer: upon delivery </li></ul><ul><li>Risk to Seller: no risks </li></ul><ul><li>Risks to Buyer: loses use of funds until goods arrive. Seller may not ship goods as ordered or at all. </li></ul><ul><li>No Credit Approval Required </li></ul>Cash In Advance
    19. 19. International Methods of Payment <ul><li>Time of Payment: upon payment of invoice. </li></ul><ul><li>Goods available to Buyer: upon delivery. </li></ul><ul><li>Risk to Seller: completely relies on Buyer to pay invoice when due. </li></ul><ul><li>Risks to Buyer: no risks. </li></ul><ul><li>Recommended for sales to long-standing customers with satisfactory payment history </li></ul>Open Account
    20. 20. International Methods of Payment <ul><li>Time of Payment: at time of presentation of the draft </li></ul><ul><li>Goods available to Buyer: after payment if ALL Ocean Bills of Lading are included with the documents and after the cargo has arrived. </li></ul><ul><li>Risk to Seller: possible non-payment of the draft. </li></ul><ul><li>Risk to Buyer: has assurance of shipment, but Seller may not ship goods as ordered. Must pay to get title to goods. </li></ul><ul><li>Not recommended for sales on extended terms </li></ul>Documentary Collections Sight Draft or Documents Against Payment
    21. 21. International Methods of Payment <ul><li>Time of Payment: at a future date . </li></ul><ul><li>Goods available to Buyer: upon acceptance of the draft by the Buyer and after the cargo has arrived. </li></ul><ul><li>Risk to Seller: possible non-payment of the draft AND Buyer has the cargo. </li></ul><ul><li>Risk to Buyer: accepts draft before getting title to goods. Seller may not ship goods as ordered. </li></ul>Documentary Collections Time Draft or Documents Against Acceptance payable at XX days (i.e., 30/45/60 – per sales agreement) after sight, after bill of lading Date, or after invoice date.
    22. 22. International Methods of Payment <ul><li>Applicant : Buyer (importer) requesting issuance of letter of credit (LC). </li></ul><ul><li>Beneficiary : Seller (exporter) in whose favor the LC is issued. </li></ul><ul><li>Issuing Bank : Buyer’s bank who issues the LC. </li></ul><ul><li>Advising Bank : Seller’s Bank who authenticates the LC. </li></ul><ul><li>Negotiating Bank : Seller’s Bank that reviews the LC documents and forwards them to the Issuing Bank. </li></ul><ul><li>Confirming Bank : Seller’s Bank that commits payment to the Seller if the Issuing Bank fails to pay. (Optional) </li></ul>Letter of Credit – What Is It and Who are the Participants?
    23. 23. International Methods of Payment <ul><li>An payment instrument issued by a bank on behalf of its customer. </li></ul><ul><li>The issuing bank substitutes its own credit standing for that of its customer. </li></ul><ul><li>The issuing bank undertakes to pay for the goods or services provided by the beneficiary of the LC; the beneficiary looks to the bank for payment, instead of the buyer (applicant of the LC). </li></ul><ul><li>The LC assures the beneficiary (exporter) of payment when the terms of the credit are met. </li></ul><ul><li>The exporter is not obligated to perform if the terms of the LC are not acceptable. </li></ul>What is a Letter of Credit?
    24. 24. International Methods of Payment <ul><li>SWIFT - Society for Worldwide Interbank Financial Telecommunication supplies secure messaging services and interface software to banks worldwide. Banks send letters of credit through the SWIFT network to each other. Banks have to subscribe to SWIFT. </li></ul><ul><li>INCOTERMS – (International Commercial Terms) – Thirteen (13) Universally recognized definitions of international trade terms – like FOB, CIF, EXW, etc. – developed by the International Chamber of Commerce (ICC). They define trade contract responsibilities and liabilities between buyer and seller. </li></ul>Letter of Credit Terms to Know
    25. 25. Controlling the Letter of Credit Transaction International Methods of Payment
    26. 26. International Methods of Payment <ul><li>Secure vs. total control – Documents – Preparation ? </li></ul><ul><li>Steps Exporter Can Take </li></ul><ul><ul><li>Maintaining Control </li></ul></ul>Controlling the Letter of Credit Transaction
    27. 27. International Methods of Payment <ul><li>Knowing The Rules </li></ul><ul><ul><li>ICC UCP (Uniform Customs & Practice) </li></ul></ul><ul><ul><ul><ul><ul><li>No. 600 </li></ul></ul></ul></ul></ul><ul><li>Rules for Banks Protect Liability </li></ul><ul><ul><li>Banks Service Expect protection from disputes </li></ul></ul><ul><li>“ Independence Principle” </li></ul><ul><li>Use International Banker </li></ul>Maintaining Control
    28. 28. International Methods of Payment <ul><li>Choose Issuing Bank </li></ul><ul><ul><li>Buyer use bank of seller’s choice </li></ul></ul><ul><ul><li>Talk to International Banker </li></ul></ul><ul><li>Confirming the L/C </li></ul><ul><li>Keep Documents Simple </li></ul><ul><ul><li>Seller negotiate w/Buyer prior to L/C issued </li></ul></ul><ul><ul><li>Few documents </li></ul></ul><ul><ul><li>Simple description </li></ul></ul><ul><ul><li>Ensure ALL documents can be produced </li></ul></ul><ul><li>(?) Document -- Certificate -- issued by foreign gov’t </li></ul><ul><li>(?) Document requires signature of SOMEONE controlled by buyer </li></ul>Maintaining Control Steps Exporter Can Take
    29. 29. International Methods of Payment <ul><li>You want these documents in L/C </li></ul><ul><ul><li>Commercial Invoice </li></ul></ul><ul><ul><ul><li>Description </li></ul></ul></ul><ul><ul><ul><li>Stated SAME WAY as L/C </li></ul></ul></ul><ul><ul><ul><ul><li>“ 100% Acrylic Yarn” in L/C vs. “Imported Acrylic Yarn” on invoice </li></ul></ul></ul></ul><ul><ul><li>Bill of Lading (BOL) </li></ul></ul><ul><ul><li>Packing List </li></ul></ul><ul><ul><li>Other Possibles: Cargo Insurance, Certificate of Origin, Phytosanitary Certificate </li></ul></ul>Maintaining Control Steps Exporter Can Take
    30. 30. International Methods of Payment <ul><li>If Documents discrepant Buyer waive </li></ul><ul><ul><li>Advising Bank agrees Payment made </li></ul></ul><ul><li>REMEMBER!!! </li></ul><ul><li>Documents Accurate & Consistent </li></ul><ul><li>If mistake/problem documents Seller Not Ship Amended </li></ul><ul><ul><li>UCP600 very clear No amendment unless parties agree </li></ul></ul><ul><ul><li>Want written confirmation from exporter’s bank </li></ul></ul><ul><ul><ul><li>L/C Amended </li></ul></ul></ul><ul><ul><ul><li>Advising/Confirming Bank accepted( Payment Risk Falls on Exporter) </li></ul></ul></ul>Maintaining Control Steps Exporter Can Take
    31. 31. International Methods of Payment <ul><li>What is a Discrepancy? </li></ul><ul><li>“ Documents presented are not in compliance with the terms and conditions of the LC and UCP600.” </li></ul><ul><li>Common Discrepancies : </li></ul><ul><li>Credit expired </li></ul><ul><li>Credit amount exceeded </li></ul><ul><li>Documents presented late </li></ul><ul><li>Late shipment </li></ul><ul><li>Partial shipment when partial shipments prohibited </li></ul><ul><li>Shipment made between ports different from those in LC </li></ul><ul><li>Description of goods in invoice differs from LC </li></ul><ul><li>Absence of documents called for in LC </li></ul>Discrepancies
    32. 32. International Methods of Payment <ul><li>Keep Goods From Buyer </li></ul><ul><ul><li>How? </li></ul></ul><ul><ul><ul><li>Have BOL Consigned to Order of Issuing Bank </li></ul></ul></ul><ul><ul><ul><li>Buyer wants BOL made to “Order And Blank Endorsed” and send set to buyer after shipment. </li></ul></ul></ul><ul><li>Every L/C Has 3 IMPORTANT DATES </li></ul><ul><ul><li>Latest Shipment Date </li></ul></ul><ul><ul><li>Documentation Presentation Date </li></ul></ul><ul><ul><li>Expiry Date </li></ul></ul>FINAL TIPS
    33. 33. Letter of Credit Particulars International Methods of Payment
    34. 34. International Methods of Payment <ul><li>Applicant : Buyer (importer) requesting issuance of letter of credit (LC). </li></ul><ul><li>Beneficiary : Seller (exporter) in whose favor the LC is issued. </li></ul><ul><li>Issuing Bank : Buyer’s bank who issues the LC. </li></ul><ul><li>Advising Bank : Seller’s Bank who authenticates the LC. </li></ul><ul><li>Negotiating Bank : Seller’s Bank that reviews the LC documents and forwards them to the Issuing Bank. </li></ul><ul><li>Confirming Bank : Seller’s Bank that commits payment to the Seller if the Issuing Bank fails to pay. (Optional) </li></ul>Letter of Credit Roles
    35. 35. International Methods of Payment <ul><li>Time of Payment: upon presentation of complying documents within a few days after shipment . </li></ul><ul><li>Goods available to Buyer: after payment of the letter of credit and after the cargo has arrived. </li></ul><ul><li>Risk to Seller: Minimal. Depends on ability to meet letter of credit deadlines and documentary requirements. </li></ul><ul><li>Risk to Buyer: has to pay letter of credit before it can get title to goods. Requires proof of shipment, but relies on Seller to ship goods as ordered. </li></ul>Letter of Credit Sight Draft
    36. 36. International Methods of Payment <ul><li>Time of Payment: at maturity of the draft , but must be made regardless of the condition or existence of the goods. </li></ul><ul><li>Goods available to Buyer: after acceptance of the draft by the Issuing Bank under the letter of credit and after the cargo has arrived. </li></ul><ul><li>Risk to Seller: Minimal. Depends on ability to meet letter of credit deadlines and documentary requirements. </li></ul><ul><li>Risk to Buyer: bank has to accept time draft and create legal obligation to Seller before Buyer can get title to goods. Relies on Seller to ship goods as ordered. </li></ul>Letter of Credit Time Draft payable at XX days (30/45/60 – per sales Agreement) after sight or from Bill of Lading date.
    37. 37. International Methods of Payment <ul><li>What is it? </li></ul><ul><ul><li>The advising or negotiating bank, may add its “confirmation.” The bank’s commitment of payment of the transaction in the event that the issuing bank fails to pay on behalf of the applicant. </li></ul></ul><ul><li>Advising/Negotiating bank - undertakes credit decision based on factors: </li></ul><ul><ul><li>time period of the LC </li></ul></ul><ul><ul><li>amount, </li></ul></ul><ul><ul><li>political, economic and other risks associated with the country of the issuing bank </li></ul></ul><ul><li>letter of credit - not confirmed - merely “advised” </li></ul>Do you need a confirmed export credit?
    38. 38. International Methods of Payment <ul><li>Consider the reputation and financial strength of the issuing bank. </li></ul><ul><li>What about the political and economic environment in the country of issue? </li></ul><ul><li>What about foreign currency controls in the country of issue that might impact the issuing bank’s ability to pay upon receipt of conforming documents? </li></ul><ul><li>Do national laws in the country of issuance prohibit confirmation? </li></ul><ul><li>What is your quality/relationship with the buyer? </li></ul>Do you need a confirmed credit?
    39. 39. Letter of Credit Flow
    40. 40. International Methods of Payment Letter of Credit Importer Exporter
    41. 41. International Methods of Payment Letter of Credit Importer Exporter Letter of Credit Issuing Bank
    42. 42. International Methods of Payment Letter of Credit Importer Exporter Advising Bank Issuing Bank Letter of Credit
    43. 43. International Methods of Payment Letter of Credit Importer Exporter Advising Bank Issuing Bank Letter of Credit
    44. 44. International Methods of Payment Letter of Credit Importer Exporter Advising Bank Documents
    45. 45. International Methods of Payment Letter of Credit Importer Exporter Advising Bank Documents Issuing Bank
    46. 46. International Methods of Payment Letter of Credit Importer Exporter Advising Bank Documents Issuing Bank
    47. 47. International Methods of Payment Letter of Credit Importer Exporter Advising Bank Documents Issuing Bank
    48. 48. Collection Flow
    49. 49. International Methods of Payment <ul><li>Less secure than Letters of Credit </li></ul><ul><li>More secure than Open Account </li></ul><ul><li>Goods available to Buyer: after payment if ALL Ocean Bills of Lading are included with the documents and after the cargo has arrived. </li></ul><ul><li>Risk to Seller: possible non-payment of the draft. </li></ul><ul><li>Risk to Buyer: has assurance of shipment, but Seller may not ship goods as ordered. Must pay to get title to goods. </li></ul><ul><li>Don’t encumber Buyer’s line of credit </li></ul><ul><li>Inexpensive </li></ul>Documentary Collections Reminder…
    50. 50. International Methods of Payment International Methods of Payment Collection Importer Exporter Collecting Bank (Exporter’s Bank) Documents
    51. 51. International Methods of Payment International Methods of Payment Collection Importer Exporter Collecting Bank (Exporter’s Bank) Documents Collecting Bank (Importer’s Bank)
    52. 52. International Methods of Payment International Methods of Payment Collection Importer Exporter Collecting Bank (Exporter’s Bank) Collecting Bank (Importer’s Bank)
    53. 53. Contact: Michael Filchock Director, Global Trade Solutions 303 Peachtree Street, NE, 29 th Floor SunTrust Plaza Atlanta, GA 30303 Tel: 404-588-7507 Michael.Filchock @ Suntrust.com Valerie Warga Vice President, Global Trade Solutions 303 Peachtree Street, NE, 29 th Floor SunTrust Plaza Atlanta, GA 30303 Tel: 404-813-0455 Valerie.Warga @ Suntrust.com

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