Export Letter of Credit Essentials

1. Export Letter of Credit
Essentials
Presented by:
Scott Smithhisler, Global Trade Consultant

2. Agenda:
 Welcome & Introductions
Today we’ll strive to make
 Customer Relationships Export L/Cs more about
people, processes and tools,
 High Level Export Process & Owners
and less about chance.
 Export Credit Policy
 Standard Operating Procedures
 Trade Risks
 Payment Terms Options
 Letters of Credit – What & How
 Discrepancies and Implications
 Solutions – People, Process & Tools
 Group Activity – LC Scenario & Key Decision
 Q&A

3. Customer Relationships
Strong relationships and underlying agreements are vital to successfully doing
business in international markets and long term growth.
What do your customer relationships look like?
 Distributor: Has exclusive rights
to sell your product in one or
more countries
 Dealer: Similar arrangement but
sells other competing brands
 Licensee: Has the right to use
your trademark and manufacture
products under certain
restrictions
 Retailer: Buys directly from you
and sells to consumers
 Affiliate: An operation fully
owned by your company

4. High Level Export Process & Team
1. Customer Relationship
Sales / Legal
• Customer selection
• Legal agreement 2. Pricing
• Credit terms according to Merchandising / Finance
risks & policy • Product offering 3. Order Fulfillment
• Prices consider INCO terms Customer Service / Credit
• Quote to Customers
• Customer purchase order
• Collaboration & changes
• Credit check
• Proforma Invoice (includes
4. L/C Receipt required LC specifics)
Credit
• Review
• Request amendments 5. Shipping
• Release product for shipment Customer Service / Logistics
• Shipment Planning
• Shipment 6. Payment & Delivery
• Transport & other documents Credit / Finance / Customer
• Draw on LC & monitor
• Documents to Customer
• Payment to seller
• Customs clearance at destination
• Happiness! Let’s do more of this!

5. Export Credit Policy
Competing in international markets requires companies to take “smart risks.”
Having a sound export credit policy that enables sustainable growth while ensuring
receivables are managed effectively is critical for success.
Policy Main Elements:
 Approval by Sr. Leadership in
Finance, Sales & Operations
 Customer selection criteria and
credit application approval
process
 Credit limits and terms to be
assigned against criteria
 Customer credit strength
 Customer history & performance
 Geopolitical risk rating
 Order value
 Override approvers & limits

6. Standard Operating Procedures
Conducting any business requires creating and maintaining standard operating
procedures (SOP). This is especially important when a business model, such as
Export Sales, involves a cross functional team.
SOP Main Elements:
 Approval by Sr. Leadership in
Finance, Sales & Operations
 Clear description of the end-to-
end process and supporting job
functions
 Delineation of roles and
responsibilities and
communication required
 Metrics and reporting
 Guidelines for on-going training

7. Key SOP Topics – Title Passage & Consignment of Goods
Certain elements of the SOP are tied 1. How legal title passes from seller to
to managing export risks & product buyer
flow.  Physical movement of goods
 Transport documents (e.g. cargo
As such, they should be considered receipt, waybill, bill of lading)
in the export credit policy and
decision making. 2. Transport Documents
 Bill of Lading (B/L) = Negotiable Title
 Cargo Receipts, Truck Bills & Waybills
= Non-Negotiable Receipts
3. Consignment of the Goods
 Open Consignment = “To Order”
Title passes via endorsement
 Straight Consignment = “To”
No endorsement required; can help
expedite delivery

8. International Commercial (INCO) Terms
INCO terms: Examples:
 Define Buyer & Seller’s
liabilities & responsibilities Any Mode of Transport
 Indicate a named place EXW, Named Place of Delivery
(EXW = Ex Works)
 Depict what the selling price  Seller is responsible for warehouse
includes services and export packing
 Are specific to either sea/  Buyer arranges for loading at point of
inland waterway transport origin through delivery to final
destination
or other modes
Ocean Transport
CIF, Port of Destination
CIF = Cost, Insurance & Freight
 Seller is responsible for transport to
destination port and insurance
 Buyer arranges for pick up at local dock,
arranges clearance and pays duty

9. International Trade Risks
Commercial
 Buyer history
 Credit reporting limited
 Financial standards may differ
 Potential for loss during transit
Geopolitical
Government stability and consistency

Economic
 Foreign exchange rate fluctuations
 Foreign Bank solvency
 Sovereign risk
Legal
 Contract enforceability
 Goods recoverable
 Customs & Tax regulations change

10. Terms Options - Balancing Risk, Cost & Timing
OPEN ACCOUNT
DOCUMENTARY
COLLECTION
LETTER OF CREDIT
CASH IN ADVANCE

11. Cash in Advance, Open Account & Documentary Collections
CIA / Open Account Documentary Collections
 Checks, wire transfers, automated  Buyers Bank holds documents
clearing house, credit cards, drafts, required for Customs clearance until
money orders, cash payment is made
 One party has all the leverage  Can ensure release of goods in
exchange for payment
 Mitigate risk using a combination of
steps and/or timing  Credit risk related to buyer
• Down payment and open  Buyer decides whether to pay
account for the balance
 Demurrage, spoilage, price changes
• Down payment to secure order and other risks remain with seller
with remainder due at shipment
time  Works best with trusted customers
and when geopolitical risk is low
• Full payment due at shipment
time

12. Letters of Credit Explained
Letters of credit work through a  Buyer’s Bank substitutes its credit
series of formal agreements worthiness for that of the buyer
• Contract  Typically goods cannot be
Seller
• Purchase Order
• Confirmation Buyer obtained by buyer until payment is
made
 Credit risk is with buyer’s bank
and country of domicile
 Works well for higher risk
• LC Application transactions
• FX & Export Financing • Loan / Collateral
• LC Advice / Confirmation • Documents & Payment
• Documents & Payment • FX & Trade Financing
Seller’s Bank • Correspondents
• Credit Line for
Buyer’s Bank
confirmations

13. Letter of Credit - Pro’s & Con’s for Exporters
Pros Cons
 Eliminates buyer credit risk and  Guarantee is contingent on strict
ensures prompt payment compliance with terms & conditions
 High degree of Exporter control  Order fulfillment systems may not
support LC or trade documentation
 Confirmations eliminate bank/ requirements, so automation may be
country risk limited
 Rules are well defined and  Heavy reliance on carriers,
predictable (e.g. subject to UCP600) forwarders and other 3rd parties for
LC compliance
 Usance (term) LCs offer cost effective
trade financing option; could be  Complexity of LCs and related rules
competitive advantage require high degree of expertise
 “Irrevocable” means terms and  Visibility limited and monitoring is
conditions can only change if buyer, time consuming
seller and bank agree.

14. L/C Terminology
 Issuing Bank
• Buyer selects; establishes loan/credit line to secure LCs
 Advising Bank
• Has correspondent relationship with Issuing Bank; authenticates LC and
passes to seller
• Seller selects (communicates in order confirmation LC instructions)
 Confirming Bank
• Seller selects; has credit line established for Issuing Bank
 Negotiating Bank = Bank that examines your documents & claims funds
(advising or confirming bank)
 Reimbursement Bank
• Nominated by Issuing Bank according to offshore account holdings
 Applicant = Buyer
 Beneficiary = Seller

15. Typical Letter of Credit Parameters
Who, How Much and When Shipping & Goods
 Parties involved  Partial / Transshipments
 Key dates:  Port / Airport of departure
 LC Issuance
 Date & Place of Expiry  Port / Airport of destination
 Latest date of shipment
 Description of Goods
 Period for presentation
 No need for line item detail
 Currency / Amount
 Simpler the better!
 Availability (e.g. with any bank by
negotiation)  Invoice must match LC
description
 Tenor
 Who pays the Bank charges  All other documents must be
consistent
 Who pays for shipping & provides
marine insurance

16. LC Parameters – Cont’d
Trade Terms & Documents Additional Conditions
 INCO Terms  Documents dated prior to LC not
acceptable
 Required Documents
 Commercial Invoice  Special language to appear on
 Packing List invoice
 Insurance Certificate
 Restriction on House Airwaybills
 Certificate of Origin
 Inspection Certificate  Third party documents not allowed
 Transport Document
Question: Are there conditions that
make compliance difficult?
Questions: Are the documents and
other terms as requested? Can we
comply?

17. Letter of Credit Process Flow Freight Forwarder
Applicant / Buyer 6 Shipment
Goods 7 Transport Docs
START HERE 1 & 2 Seller / Beneficiary
Purchase Order & Confirmation
12
3 L/C Documents
Application to Buyer 9 5
L/C
Claim
Reimbursing Bank 10
Payment
11
Export Documents
8 LC &
Letter of Credit
Documents
Issuing Bank 4
Advising Bank

18. Common Discrepancies & Implications
Minor Major
 Inconsistent spelling of parties’  Letter of credit expired
names on documents  Late presentation of documents
 Merchandise description on  Late shipment
invoice not per LC
 Partial or transshipment effected
 Documents inconsistent with one contrary to LC terms
another  Bills of Lading not clean
 Insurance omits coverage required
in LC What happens now?
 Insurance issued after ship date  Guarantee no longer applies
 Documents will be sent on
 Bills of Lading not endorsed
“approval”
 Fees & Delays
What do we do?
 If there is time documents can be
resubmitted with corrections

19. Solutions - People
Maintaining a highly skilled, passionate cross functional team working together to
ensure overall success is fundamental for international growth.
 Maintain a working environment
that fosters open communication
& shared accountability
 Hire people with international
trade, logistics or trade finance
experience
 Invest in ongoing training across
your organization
 Consider outsourcing certain
functions as needed
 Freight Forwarders
 Specialty Providers
 Your Partners are part of the
team (e.g. outsource providers &
your Bank)

20. Solutions – Process & Tools
There are a variety of key process steps and tools that can provide the team with
visibility, help address problems proactively and increase the odds of success.
Process: Tools:
 Document end-to-end steps & timing;  Automate wherever possible
continually improve the process utilizing third party websites
 Maintain policies & procedures  Maintain & monitor credit limits
and terms systematically
 Communicate detailed LC
requirements in order confirmation  Provide visibility to order
placement & confirmation activity
to Export Credit
 Automatic LC required details on
invoice & other documents
 Systematic tracking
• LC balance (amount & quantity)
• LC latest ship date, presentation
period and expiration
• Late payments

21. Alternative Solutions – Outsource Providers
Depending on the size and the nature of your international business, external
providers can act as an extension of your operation or help optimize results.
Freight Forwarders: Specialty Providers:
 Serve as travel agents for  Minimize risk by providing
international trade expertise & software
 May specialize in certain service  Reduce costs by accelerating
areas, modes of transport or payments, doing document
markets preparation and avoiding fees
 Help transport goods
 Can help product flow and
reduce cost (e.g. consolidation of
cargo, routing options)
 Need to ensure services fit your
needs and compare prices

22. Group Activity – Mock LC Scenario
The Scenario: We work for NACM Exporters, Inc., makers of exceptional quality
Widgets sold around the world. We recently agreed to fill an order from our
customer, ABC Company in Singapore. The agreed plan is to ship $200K worth of
Widgets per month by vessel for three months for a total of $600K.
Activity:
 Review example LC specifics we required in our Pro Forma Invoice
 Review LC received differences (highlighted in yellow)
 Make the key decision as a group:
Do we release our product for shipment or do we require an
amendment first?
Considerations:
 Customer relationship / mutual trust
 Policy
 Risk trade offs (e.g. inventory, production timing, the sale)
 Contingency plans – other buyers?

23. Example Amendment Request
Re: URGENT / LC AMENDMENT NEEDED!
Your PO 12345 / Our Confirmation 678910/ LC no. 123456789 dated Feb. 20, 2012
Dear Mona, (our Customer Contact)
Thank you for your time on the phone this morning and for your understanding and help. As we
discussed, the following amendment is needed in order for us to release your order for shipment.
1. Field 31D - Extend expiration to June 15, 2012
2. Field 59 - Beneficiary’s address changed to read “52 Lois Lane…”
3. Field 43P - Partial shipments are now allowed.
4. Field 44C - Delete latest date of shipment
5. Field 46A - Under documentary requirement 3 Certificate of USA Origin, delete
“/Chamber of Commerce”
6. Field 48 – Delete period for presentation. Add special condition “Documents presented later than
21days after ship date but within the validity of this credit is acceptable.”
Please kindly request these changes with your bank as soon as possible and advise once the
amendment is issued. Once the amendment is received by our bank, we will expedite your order
and inform you of shipping details timely.
Very best regards,
John Smith
Export Credit Manager

24. Questions?
Thank you for coming today!

25. Appendix
Example Specialty Provider:
Trade Technologies – Concepts & Benefits
Export Insurance & Financing Programs:
Small Business Administration

26. ©2010 Trade Technologies, Inc. All rights reserved.
26

27. Advising

ISSUED
Bank

SENT
TO
BENEFICIARY
Le#er
of
Credit
Beneficiary
Advice

COPY
TO
TRADE
TECHNOLOGIES
COPY
 TRADE
TECHNOLOGIES
REVIEWS
&
INFORMS
BENEFICIARY
OF
INCONSISTENCIES
LC
Review
and
Upload
 AMENDMENTS
IF
ANY
REQUESTED
&
RECEIVED
 TRADE
TECHNOLGOGIES
UPLOADS
TO
BENEFICIARY’S
FILES
27 ©2010 Trade Technologies, Inc. All rights reserved.

28. Goods
are
Beneficiary
Shipped
Trade
Prepares
Documents
Trade
Banks
NegoQaQng
Documents
Bank
28 ©2010 Trade Technologies, Inc. All rights reserved.

29. Automate as much of process as possible, including utilizing bank
websites and third party software.
 Reduces errors, delays and costs
 Distributes information across organization
 Provides visibility and control
 Data for reports fuels constant improvement
29 ©2010 Trade Technologies, Inc. All rights reserved.

30.  Sell more internationally with less risk
 Clean documents banked on time
 Accelerated export receivables collection cycle
PROFITS
RISKS
 Significant reductions in labor costs spent on preparing
documents and tracking payments
 Reduced courier expense due to automated document delivery/
presentation and third party data exchange
 Reduced discrepancy and other fees
 In-depth reporting for all completed transactions
 24/7 audit-ready all-inclusive document/data storage
30 ©2010 Trade Technologies, Inc. All rights reserved.

31.  New to Asia Market – Relied on Letters of Credit for Prompt and
Certain Payment
 DSO reduced by over 60%
 Discrepancies virtually eliminated
 Asia Customers increased by 10X
31 ©2010 Trade Technologies, Inc. All rights reserved.

32. RISK
MITIGATION
&
BUSINESS
FINANCING
Jeff
Deiss
Regional
Export
Finance
Manager
SBA
Office
of
Interna<onal
Trade
Portland,
OR
www.sba.gov/oit

33. Risk
MiQgaQon
Tools
–
EXPORT
INSURANCE
• Foreign
receivables
insurance
–
public
(Ex-­‐Im
Bank)
or
private
providers
• Ex-­‐Im
Bank
insurance
on
foreign
A/R
– 100%
against
poli<cal
risk
(foreign
government
ac<on)
– 95%
against
commercial
risk
(buyer
ac<on)
– “Express
Insurance”
–
a
policy
for
small
businesses
with
<
$7.5
MM
in
annual
exports
on
their
export
A/R’s
–
streamlined
coverage
of
foreign
sales
up
to
$300,000
per
buyer;
up
to
10
foreign
accounts
may
be
covered.
– Insurance
may
be
a
lower
cost
alterna<ve
to
L/C

34. Risk
MiQgaQon
Tools
–
FOREIGN
EXCHANGE
(FX)
RISK
• Even
if
your
price
is
in
$’s,
you
are
shi]ing
this
risk
to
the
BUYER
and
affec<ng
your
compe<<veness
• You
want
to
remain
compe<<ve
as
US$
value
moves
against
foreign
currency
• Techniques
– Nebng
– Forward
contract
(hedge)
– Futures
contract
– Currency
op<ons

35. Business
Financing
Tools
–
LOAN
GUARANTEES
• Lender-­‐driven
–
lender
makes
&
services
the
loan/line
of
credit;
lender
decides
if
guarantee
is
needed
and
selects
guaranteed
program
to
use
• The
value
of
loan
guarantees
– Insurance
and
incen<ve
for
your
lender
– Enhanced
access
to
credit
for
business
– Enhances
your
borrowing
base
– Lenders
o]en
heavily
discount
their
advance
rate
when
foreign
sales
serve
as
collateral;
a
loan
guarantee
can
overcome
this
–
see
TRADE
FINANCE
GUIDE,
p.
16

36. Business
Financing
Tools
–
SBA
and
EX-­‐IM
BANK
• US
SMALL
BUSINESS
ADMINSTRATION
(SBA)
– “Small
business”
– Will
guarantee
loans
up
to
$5
million
– Pre-­‐export
and
post-­‐export
financing;
general
business
financing
needs
– No
US
content
requirement;
licensed
military
exports
allowed
– Preferred
and
Express
Lenders,
plus
local
lenders

37. Business
Financing
Tools
–
SBA
and
EX-­‐IM
BANK
• EXPORT-­‐IMPORT
BANK
OF
THE
US
(EX-­‐IM
BANK)
– Any
business
size
– No
upper
loan
limit
– Pre-­‐export
and
post-­‐export
financing
– Export
must
have
majority
US
content;
military
exports
restricted
– Delegated
Lenders
are
primary
users

38. Business
Financing
Tools
–
SBA
LOAN
GUARANTEES
• SBA
InternaQonal
Trade
Loan
(ITL)
– 90%
guarantees
on
term
loans
of
$5
million
or
less
– Working
capital,
equipment,
real
estate,
refinancing
– Financing
for
projects
that
improve
the
compe<<ve
posi<on
of
US
exporter

39. Business
Financing
Tools
–
SBA
LOAN
GUARANTEES
• SBA
Export
Working
Capital
Program
(EWCP)
– 90%
guarantees
on
1-­‐3-­‐year
revolving
lines
– Up
to
$5
million
– Working
capital
– Financing
for
export
orders
– Pre-­‐export
and
post-­‐export

40. Business
Financing
Tools
–
SBA
LOAN
GUARANTEES
• SBA
Export
Express
– Similar
to
ITL,
but
streamlined
approvals
– 90%
guarantees
on
loans/lines
up
to
$350,000
– 75%
guarantees
on
loans/lines
up
to
$500,000
– Working
capital,
equipment,
real
estate,
refinancing
– Available
from
SBA
“Express”
Lenders
only

41. Business
Financing
Tools
–
EX-­‐IM
BANK
LOAN
GUARANTEES
• EX-­‐IM
Working
Capital
Program
– 90%
guarantees
on
1-­‐3-­‐year
revolving
lines
– No
size
limit
– Working
capital
– Financing
for
export
orders
– Pre-­‐export
and
post-­‐export