Bank of America Solutions for Importers. An Importer s Guide to Global Trade Services

Bank of America Solutions for Importers An Importer s Guide to Global Trade Services Bank of America Merrill Lynch Solutions for for Importers Exporters 1

Table of Contents An Importer s Guide to Global Trade Services 01 2 Introduction to Global Trade Services 2 Overview of Trade Services 3 Understanding Your Payment Options 5 Trade Solutions 9 Risks 02 15 Working With Your Bank 16 Services to meet the diverse needs of the importer 03 22 Import LCs Defined 27 Frequently Asked Questions 29 Parties and Roles in Commercial LC Transactions 30 Mitigating the Risk of Fraud in the Trade Arena 31 AML Policies and Office of Foreign Assets Control (OFAC) Compliance at Bank of America Merrill Lynch 33 20 Most Important Characteristics of an Import LC 34 Understand and Control Your Import LCs 35 Opening a Commercial LC 42 Understanding the commercial LC application 45 A Discussion of UCP 600 55 S.W.I.F.T. Samples and Comments on Specific Fields 57 Comments on Specific Fields in Preceding Sample 04 62 Purchase Order-to-Pay Service 05 66 A Closer Look at Letter of Credit Documents 66 What are some of the typical documents required in an LC? 78 Frequently Asked Questions 79 A Discussion of ISBP for the Examination of Documents under Documentary Credits 06 81 Documentary Collection for Importers 84 Cash Flow Bank of America Merrill Lynch Solutions for Importers 2

Table of Contents 07 88 Bankers Acceptances Under Import LCs 91 Bankers Acceptance Cash Flow 08 93 Obtaining Your Merchandise 09 95 Incoterms International Shipping/Trade Terms 10 100 Standby LCs and Special Purpose LCs 100 Standby LCs 103 Special Purpose LCs 11 106 International Cash Management and Foreign Exchange Services 106 International Treasury Management Services 109 Foreign Exchange Services 110 CashPro FX 111 Seminars and Workshops 112 Accounting Considerations 12 114 International Trade Glossary 120 Table of Weights and Measures The material presented in this guide is for informational purposes only, and is not intended as an exhaustive treatise on international banking, nor is it intended to explore all the possible risks involved in using import letters of credit or other services mentioned. Bank of America Merrill Lynch Solutions for Importers 3

Chapter 01 Introduction to Global Trade Services Bank of America Merrill Lynch Solutions for Importers

Chapter 01 Introduction to Global Trade Services Overview of Trade Services What do we mean by trade services? Trade is a broad term covering a variety of transactions linked to the export and import of goods. Traditional trade services include letters of credit (LCs), international collections and bankers acceptances. What is the history of trade? The economic history of man has led us from self-sufficiency to division of labor, from provision of bare necessities to satisfaction of sophisticated needs. The primitive caveman attended only to his own needs, but civilization soon progressed to a stage in which each individual specialized in what he could do best and exchanged his surplus output for that of his neighbor. This was the beginning of trade. When small city-states developed into nations, the need for trade increased. No nation could supply all of its needs with its own resources. Consequently, these small city-states had to begin trading with one another. What may have started as barter led to the development of currency, silver and gold coins, and eventually to paper notes and negotiable instruments such as LCs. As far back as the fifteenth century B.C., Phoenician traders carried LCs to foreign ports in the form of clay tablets, stamped with the seals of prominent merchants. During the Middle Ages, LCs were written on sheepskins and used extensively by traders such as Marco Polo. Today business is conducted not only domestically but also abroad. As the search for new markets and lower cost labor has led to international commerce, so it has led to finding alternative ways to do financial business overseas. The buyers and sellers in international trade are confronted with diverse geographic, social, economic and political conditions. The dynamic interplay of these forces requires the trading partners to assess the risks of the transaction and to decide how the risks may be reduced or eliminated. What is the primary role of a bank in international trade? The primary role of a bank is to provide risk reduction alternatives to both the buyer and the seller. This booklet will attempt to examine the many facets of international trade from an importer s, or buyer s, point of view. What happens in a trade transaction? A seller approaches or is approached by a potential buyer. Trade transactions begin with the negotiation of a contract between a buyer and a seller and end with the exchange of goods or services for monetary payment. Why do you need Bank of America Merrill Lynch Global Trade Services? As noted above, trade can be domestic or international. Clients utilize Bank of America Merrill Lynch Global Trade Services specifically to overcome the risks of doing business abroad, where the cultures, regulations and payment conventions may differ significantly from those in the United States. In the United States, you could potentially perform your own analysis on your potential sellers and, with a sense of security, close a deal. In this case, your bank would get involved only in the collection and/or disbursement of funds. Overseas, you need greater protection when dealing with sellers who are less well known and where you could potentially have limited legal ability to collect for any loss Bank of America Merrill Lynch Solutions for Importers 2

Chapter 01 Introduction to Global Trade Services suffered. Hence, a bank provides upfront financial protection in the form of LCs, as well as offers guidance and support in the use of other forms of payment. Bank of America Merrill Lynch works to provide value-added world-class business services. We provide a consultative approach to trade services in which our clients draw from the solid base of experience and expertise of a dedicated staff eager to propose new ideas.. Understanding Your Payment Options How will you pay for your shipment? Nations, companies and individuals have engaged in trade for centuries and, from the beginning, have searched for the best means of securing payment. Today, an importer has four basic alternatives for providing payment to sellers of imported goods. Each method addresses certain levels of risk for the buyer and the seller. Open Account: The seller ships the goods in advance of payment or according to the negotiated terms. In this instance, the seller relies on the buyer s good faith that the payment will be made after he has received the goods. Traditionally, if open account or cash in advance are agreed upon as the payment method, documentation covering the shipment of merchandise is handled outside of banking channels. The banking system at one time was only involved in the remittance of funds. Banks are now involved in the facilitation of open account payments, using varying degrees of conditional checking of original purchase orders against invoices. Bank of America Merrill Lynch offers a Purchase Order-to-Pay service, with three levels of data matching. Please see Chapter 4 of this guide for details. If payment is to be made using a collection or LC, a bank normally adds its service and documentary expertise on behalf of either the buyer, the seller or both. In all cases, the actual movement of funds is done via one of our traditional cash management products such as direct debit or credit to an account, wire transfer or check. Collection: There are two types of Collections: clean and documentary. Clean: A clean collection refers to the absence of supporting documentation. A check or a draft is presented for payment under a clean collection. Check: Payment by check is typical for domestic open account transactions, but less appropriate for international transactions. In an international transaction, overseas sellers must give checks to their banks for collection and conversion to their home currency, a process that can take three to six weeks. A more satisfactory method therefore is the wire transfer; buyers instruct their banks to arrange for the seller s bank account to be credited directly. Draft: A draft is an instrument much like an ordinary check in appearance which, in this circumstance, is used as a formal demand for payment. It is also known as a bill of exchange. Documentary: A documentary collection provides a buyer and seller with a measure of protection whereby a bank intermediates to exchange payment for documents of title to the goods. The collecting bank releases the documents, which normally allows the buyer to take delivery of the goods. The bank then either wires the buyer s payment to the remitting/seller s bank for credit to the seller s account or creates an acceptance (please refer to Chapter 7 for an explanation of acceptances) covering the transaction. There are two forms of documentary collections: regular and direct. Regular: After making a shipment, sellers present the shipping documents to their banks, who in turn send them to the buyers banks for payment or acceptance. Bank of America Merrill Lynch Solutions for Importers 3

Chapter 01 Introduction to Global Trade Services Direct: The sellers/exporters deliver the documents with a collection letter to the foreign collecting banks themselves and send copies of the collection letter to their banks for follow-up (tracing and payment settlement). The collection letter or form is provided to the seller by the seller s bank and bears the seller s bank letterhead and the collection reference number. LC: This is a trade finance instrument issued by a buyer s bank in favor of a beneficiary/ seller, which substitutes the bank s credit-worthiness for that of the buyer. In a narrow sense, it is a specialized instrument used to guarantee payment for a shipment of goods or services from one party to another. An LC is payable against conforming documents. Cash in Advance: The buyer pays in advance of shipment of goods or according to the terms, such as cash on delivery. As an importer, you most likely will not agree to this option, as you will be out the cash before receipt of the goods. What types of agreements are made between the buyer and the seller? The sales contract is an agreement between the buyer and the seller in which the various terms, conditions and details of the transaction are specified. Given the complexities of international trade, it is important that the sales contract state, in terms clear to all parties, the requirements involved in the transaction. In the simplest form, the sales contract is an accepted order to buy or offer to sell that arises from correspondence between the buyer and seller. The agreement may be made verbally or in writing. The buyer may initiate the correspondence by inquiring as to the price and terms of sale for specific merchandise or by simply placing an order for the merchandise when the price and terms have previously been established. The sales contract has four main components: Description of the goods Price Method of payment Timing of delivery Although contracts can be verbal, it is highly recommended that they be formalized in writing in all situations. The sales contract should clearly specify the documents required for any international transaction. The LC must specify the documents required for payment under the LC. The seller is responsible for the production and/or procurement of all documents. Documents required under LCs will be more thoroughly discussed in Chapter 5. A purchase order is a common vehicle that the buyer uses to place an order for merchandise or services when the price and terms have previously been established. Unlike a sales contract, it should always be submitted by the importer or buyer. A purchase order should itemize in precise detail the description of the goods, quantity ordered with unit description and delivery instructions for each item. If a purchase order is referred to within the merchandise description of an LC, this can help make the seller responsible for providing merchandise according to the submitted purchase order. The seller can also be required to state that merchandise is in accordance with the buyer s purchase order when submitting documents, thereby making the seller responsible for the fulfillment of the purchase order. A purchase order can also be used without an LC for an open account payment. As you will see in Chapter 4 of this guide, Bank of America Merrill Lynch now provides an electronic solution for importers who wish to utilize open account payments but want the assurance of conditions matching against their purchase order prior to payment. Bank of America Merrill Lynch Solutions for Importers 4

Chapter 01 Introduction to Global Trade Services How does Bank of America Merrill Lynch support its Global Trade Services clients? Bank of America Merrill Lynch is able to act on many fronts for our clients. We act as financial service consultants. We provide import and export financial services to our clients. We act on clients behalf both domestically and overseas via our global branch network. We provide various credit services to support clients import/export needs. We provide economic analyses and forecasts about various countries around the world. We listen to our clients needs for new technology that will keep them competitive in the world marketplace, and then we put our experts to work on solutions that meet their needs. Trade Solutions What international trade services are available with Bank of America Merrill Lynch? As a truly global organization, Bank of America Merrill Lynch is uniquely positioned with trade services and expertise to serve clients needs in markets worldwide to help them seize international opportunities wherever they arise. Our services range from trade services and lending to liquidity management, payment services, structured trade finance and foreign exchange services. We deliver what clients organizations need to succeed in international business by offering innovative, tailored solutions, a wealth of trade expertise, the latest in technology and a network of offices around the world. With more than 1,000 trade specialists in over 50 offices worldwide and an extensive international correspondent bank network, we can provide the global reach and regional expertise to help you accomplish your trade goals. Bank of America Merrill Lynch finances international trade through bankers acceptances as well as several types of LCs. We also offer various open account, collections and reimbursement services. Open account services As you ll learn in Chapter 4 of this guide, Bank of America Merrill Lynch and other international banks have been involved in open account services for years, but at Bank of America Merrill Lynch we ve recently added an electronic engine to the process on our TradePro platform, providing initiation and reporting on open account payments as well. Additionally, Bank of America Merrill Lynch specialists route international payments as quickly as possible to their final destination, often by simply crediting one of the many accounts our correspondents keep with us. When you need documentation sent with your payment, or your supplier prefers checks, our foreign draft service allows you to draw a check on a local bank in multiple currencies. Our foreign exchange services provide comprehensive foreign currency payment services, and the ability to purchase competitively-priced spot and forward contracts for payments on import transactions. Please refer to Chapter 11 of this guide for more information on foreign exchange and international cash management services offered by Bank of America Merrill Lynch. Bankers acceptances A bankers acceptance is a negotiable instrument that is drawn on, and accepted by, a bank to finance a trade-related transaction. It is often a relatively inexpensive way to finance trade transactions. Bankers acceptances are versatile and can be used for several purposes: acceptances can cover both documentary LCs (Documentary BAs) and open account transactions (Clean BAs). They can finance imports, exports, and domestic transactions. Acceptances offer a source of funds at competitive rates since banks are not required to provide reserves for financing such transactions. Acceptances are very liquid they can readily be sold in secondary markets. Bank of America Merrill Lynch Solutions for Importers 5

Chapter 01 Introduction to Global Trade Services Non-Discounted Bankers Acceptances: Bank of America Merrill Lynch either creates and accepts or accepts a time draft drawn on us that relates to a specific financial transaction in which our client is involved. We are obligated to pay the specified amount on the maturity date of the draft. Our obligation for payment to any holder of the draft at maturity date is unconditional, independent of the underlying financial transaction. Discounted Bankers Acceptances: Bank of America Merrill Lynch creates or accepts, and discounts, a time draft drawn on us that relates to a specific financial transaction in which our client is involved. The drawer is paid at the time of acceptance of the draft, less fees and discount charges. The discount rate applied is based on the market rate that investors in the secondary market are paying for drafts of various tenors and amounts; this rate fluctuates daily. In recent years the cost of financing on an acceptance basis has generally been lower than prime-rate-based lending. LCs An LC is an instrument issued by a bank by which the bank substitutes its obligation to pay the seller for the obligation of the buyer, on specified terms. LCs have many variations. Standby LCs: Standby LC is a term used for the type of LC that functions like a guarantee. Standby LCs usually provide a type of monetary assurance to compensate a beneficiary in the event of noncompliance by the applicant with the terms of a contract. They are often used instead of cash deposits or as performance or bid bonds in international and domestic transactions. Like other LCs, standby LCs provide a bank s name and credit support for a specific transaction. In a standby LC, the beneficiary looks first to the account party for payment before seeking payment from the bank. Standby LCs can cover either financial, performance or trade-related transactions. Financial standby LCs: We issue a standby LC for our client or add our confirmation to a standby LC issued by a correspondent bank. Financial obligations involve repayment of funds borrowed or advanced in the event the applicant fails to do so. In effect, we substitute our own credit standing for that of our client (or our correspondent bank) and provide additional assurance that payment will be made in the event of default. Performance standby LCs In this type of obligation, we provide assurances of compensatory payment to the beneficiary in the event that the applicant does not perform the contractual agreement the applicant has entered into with the beneficiary. We add our credit standing to that of our client (or our correspondent bank) and provide additional assurance that payment will be made in the event of default under bid bonds or performance bonds. Commercial LCs: Commercial LCs involve payment in exchange for compliant documents required under an LC, relative to goods shipped or services performed. The beneficiary obtains payment from the issuing bank or confirming bank (if any). Import and export LCs are types of commercial LCs. Import LCs: We issue a new documentary LC for our client. By doing so, we substitute our own credit standing for that of the buyer and provide additional assurance that payment will be made to the seller if terms and conditions of the LC have been fulfilled. Export LCs: Export LCs, when properly executed, may help protect an exporter s (beneficiary s) interests against the risk of losing title to the goods until they are paid. Bank of America Merrill Lynch assists with the structuring of LCs, arranges for their confirmation and identifies discrepancies in documents that may delay payment. Confirmed export LCs: Another bank, usually one of our correspondents, issues its own LC and asks us to authenticate it, add our confirmation to it and advise it to the beneficiary. When we confirm another bank s LC, we add our credit standing to that of the issuing bank and guarantee that payment will be made to the seller if terms and conditions of the LC have been fulfilled. Unconfirmed Export LCs: A bank, usually the applicant s bank in the country of the applicant of the LC, issues its own LC and asks us to authenticate it and advise it to the beneficiary without adding our own confirmation. Bank of America Merrill Lynch Solutions for Importers 6

Chapter 01 Introduction to Global Trade Services Deferred Payments Import LC deferred payments: Deferred payments are created under import LCs that we issue for the applicant, our client. We are obligated to make payment on the designated maturity date. As no draft, or negotiable instrument, exists under a deferred payment LC, the beneficiary cannot obtain payment prior to the maturity date. There is no draft to discount. See this guide s section on page 88 for more information about drafts. Confirmed export deferred payments: Payments under LCs issued by correspondent banks are postponed (after presentation of documents) for periods of time as stipulated in the LC. If we add our confirmation to the correspondent bank s LC, we are obligated to make payment on the designated maturity date whether or not the funds have been made available to us by the issuing bank. The advantage of a negotiable instrument in the form of a draft does not exist and, therefore, the beneficiary cannot obtain payment prior to the maturing date, as there is no draft to discount. See this guide s section on page 88 for more information about drafts. Unconfirmed export deferred payments: As in the case of unconfirmed LCs, we will pay only when and if funds have been made available to us by the issuing bank. The advantage of a negotiable instrument in the form of a draft does not exist and, therefore, the beneficiary cannot obtain payment prior to the maturing date, as there is no draft to discount. See this guide s chapter on page 88 for more information about drafts. Reimbursements Unconfirmed reimbursements: An issuing bank authorizes Bank of America Merrill Lynch to debit its account and to pay claims made by paying, accepting or negotiating banks. We will make such payments only if the issuing bank has sufficient funds on deposit with us to cover the claim. Confirmed reimbursements: An issuing bank asks Bank of America Merrill Lynch to confirm its obligations under an LC it has issued and authorizes us to debit its account and to pay claims made by paying, accepting or negotiating banks. By adding our confirmation, we add our bank s creditworthiness to that of the issuing/authorizing bank and are obligated to make payment whether or not the issuing/authorizing bank has sufficient funds on deposit with us to cover the claim. Air release Bank of America Merrill Lynch issues our indemnity on behalf of and for the account of our client in favor of an airline for the purpose of authorizing the carrier to release a shipment of goods when the air waybill has been consigned to the bank. In return for our issuing the indemnification on our client s behalf, our client must provide us with an indemnity in our favor. This arrangement pertains to import LCs and incoming collections. Shipside bonds/steamship guarantees Bank of America Merrill Lynch issues our indemnity on behalf of and for the account of our client in favor of an ocean carrier for the purpose of authorizing the carrier to release a shipment of goods without the normally required shipping documents. In return for our issuing the indemnification on our client s behalf, our client must provide us with an indemnity in our favor. This arrangement also pertains to import LCs. Bank of America Merrill Lynch Solutions for Importers 7

Chapter 01 Introduction to Global Trade Services Collections Incoming clean domestic collections: Bank of America Merrill Lynch receives a clean collection from a domestic bank. We will serve as collecting bank and communicate with the drawee, usually our client, to facilitate payment to the remitting bank. Incoming clean international collections: Bank of America Merrill Lynch receives a clean collection from a foreign bank. We will serve as collecting bank and communicate with drawee, usually our client, to facilitate payment to the remitting bank. Outgoing clean domestic collections: Bank of America Merrill Lynch opens/sends a request for payment to a domestic collecting bank at the request of our client. When paid by the collecting bank, we will remit funds to the drawer (our client). Outgoing clean international collections: Bank of America Merrill Lynch opens/sends a request for payment to a foreign collecting bank at the request of our client. When payment is received from collecting bank, we will remit funds to the drawer (our client). Oncoming documentary collections: Bank of America Merrill Lynch receives a documentary collection from another bank. We will serve as the collecting bank and communicate with the drawee, usually our client, to facilitate payment to the remitting bank. Outgoing documentary collections: Bank of America Merrill Lynch opens/sends a request for payment of documents to a collecting bank at the request of our client. When paid by the collecting bank we will remit funds to the drawer (our client). Export bills collections: Bank of America Merrill Lynch creates a collection instrument for tracking and receiving funds due a correspondent bank in exchange for documents sent to a third bank. Delivery of documents may be an integral part of the service. Trade acceptances A trade acceptance is a time draft that is accepted for payment by a party other than a bank usually the buyer. This could apply to any of the types of collections, as defined above. Bank of America Merrill Lynch Solutions for Importers 8

Chapter 01 Introduction to Global Trade Services Risks Trade involves buyers and sellers seeking to exchange goods or services despite their differences in language, national custom, credit procedures and accounting practices. Merchants have always had, and continue to seek, ways of minimizing the risk of non shipment and/or risk of nonpayment. Following is a chart comparing the payment terms. Table 1.1: Comparison of payment terms with relative risk* Method of Payment Goods Available to Buyer Timing of Payment to Seller Risk to Buyer Risk to Seller Sight LC Upon settlement of LC unless goods consigned direct to buyer When documents have been presented and found to comply with LC terms (normally after shipment) Has assurance of shipment but relies on seller to ship goods as described in the documents Very little or none based on conditions in the LC and provided no discrepancies between documents and LC Time (Usage) LC Upon the bank releasing documents of title, unless goods consigned direct to buyer Upon maturity of payment terms, or upon discounting of a bankers acceptance Actual payment (regardless of product quality) is due after possession of goods Very little or none, based on conditions in the LC and provided no discrepancies between documents and LC Sight Draft for Collection DP1 After payment unless goods consigned direct to buyer Upon presentation of draft and documents to buyer Has assurance of shipment but relies on seller to ship goods as described in the documents Possible nonpayment by buyer Time Draft for Collection DP2 Upon acceptance of time draft, unless goods consigned direct to buyer Upon maturity of time draft trade acceptance Buyer undertook obligation to pay when accepted time draft; relies upon seller to ship goods as described Possible nonpayment by buyer at maturity of trade acceptance (buyer has possession of the goods) Open Account Upon delivery Upon payment of invoice None Full reliance on buyer to pay invoice as agreed * None of these payment methods protect against fraud. This chart is provided for information and illustration only. It does not purport to encompass all of the possible risks to a buyer or seller involved in any given trade transaction. 1 DP1 Also known as Documents Against Payment or Cash Against Documents (CAD). 2 DP2 Also known as Documents Against Acceptance, Time Draft, and Trade Acceptance. Bank of America Merrill Lynch Solutions for Importers 9

Chapter 01 Introduction to Global Trade Services What are some of the decision factors used in determining payment terms? When do the goods pass from the seller to the buyer and when does payment occur? Can you, as a buyer, trust the seller to deliver promptly with the correct goods if you have already paid for the merchandise (cash in advance terms)? Are you willing to pay promptly if goods are shipped first (open account terms)? The answer to these questions will depend on how well the parties know each other. This knowledge can be gained through experience or research. Alternatively, intermediaries can be used to mitigate the risks; this has been the traditional role of banks. The choice of method of payment (means by which the buyer will pay the seller) takes into account several factors: Physical location of buyer and seller Extent of competition from other sellers Level of personal knowledge or prior experience between the buyer and seller Availability of other buyers Accounting, payment and regulatory restrictions between countries Reputation of buyer and seller Creditworthiness of buyer and seller Customary practices in the individual country or industry Dollar amount of transaction Urgency to receive payment What are the risks associated with making the payment? The importation of goods from foreign markets involves greater risks for you as an importer than those associated with domestic trade. While in domestic trade, you may be willing to pay cash in advance due to good credit information, reliable bank checks, easy communication and an understandable legal system. You will often require greater protection in international trade. The documentary collection and the LC are two such alternatives to open account and cash-in-advance methods of payment. Both of these alternative methods of payment protect the buyer and the seller from losses in varying degrees and offer both the buyer and the seller varying degrees of convenience in making payments. In general, the greater the protection for the buyer, the less convenient and the more costly the payment terms are for the seller. One of the most important determinants of the payment method to be utilized in any particular transaction is the level of risk in the transaction. You, as buyer, must always weigh the risks and the amount of protection desired against being noncompetitive within your market. During the negotiation process, both sides must: Analyze the major risks they encounter in international trade transactions Review alternative payment methods, the levels of protection and the types of financing provided with each one Understand the various factors that must be considered in the formulation of a sales contract Understand international credit policy as related to the transaction Bank of America Merrill Lynch Solutions for Importers 10

Chapter 01 Introduction to Global Trade Services What overriding risks are always factors to consider? Commercial risk As a buyer, you are primarily concerned with whether sellers can and will ship the goods. You need to determine if sellers have the ability to produce or obtain the goods, as well as whether they will ship the products in a timely fashion. Not only do you need to know if they will ship, you are also vitally interested in knowing if the goods will be of the quality and quantity ordered and expected. To help mitigate commercial risk, you can investigate your sellers trade references from other buyers (whose names you have requested from the supplier) and/or through local World Trade Centers or Chambers of Commerce. Political and economic risk You should also familiarize yourself with information concerning the economic and political stability of the country in which you re doing business. This information should also include current and future trends of the country s economy, political situation and the possibility of the implementation of exchange controls. Bank of America Merrill Lynch economists follow the economic and political situations in most countries very closely and can be an excellent source for this type of information. Other sources are foreign country consulate offices and various publications produced by Dun and Bradstreet International, the U.S. Department of Commerce International Trade Administration, Moody s, local Chambers of Commerce or World Trade Centers. Economic and political risks you might want to be aware of are: cancellation of export licenses due to currency freezes, hostile laws and court systems, civil war, boycotts and sanctions, confiscation of merchandise, currency devaluation, liquidity problems and implementation of exchange controls. Risks associated with various trade payments? Cash in advance is the riskiest to the buyer. Open Account is riskiest to the seller. You must weigh the pros and cons of using the various payment methods against the risks. The chart below should help to visualize the risks. Payment Method Risk Risk to Seller Risk to Buyer Riskiest Open Account Documentary Collection Letter of Credit Cash in Advance Riskiest Bank of America Merrill Lynch Solutions for Importers 11

Chapter 01 Introduction to Global Trade Services How do you determine the appropriate payment option? In addition to the very important payment and shipment risks, the following chart gives some guidelines on determining which payment options may be appropriate for a particular trade transaction. Please note that the key determinants are: relationship, type of goods (stock or custom), political and economic environments, and the importance of timely cash flow and delivery. Table 1.2: Payment Options Cash in Advance LC Documentary Collections Open Account Relationship New New Established Established Type of Goods Custom made Custom made Stock items Stock items Political Unstable Unstable Stable Stable Economic Unstable Unstable Stable Stable Timing of Cash Flow and Delivery Yes Yes No No What are the advantages of LCs to the buyer (importer)? Buyers can benefit in the following ways: Buyers usually do not have to tie up working capital prior to actual shipment of merchandise. LCs allow for flexibility in documentary requirements. Buyers are provided additional assurance that their bank will pay the seller only when the seller s documents are in strict compliance with the terms and conditions of the LC. LCs offer the opportunity to receive extended payment terms from the seller, by arranging for an LC that is payable at a future date. LCs provide the ability to delay payment until documents are received. This type of payment mechanism enhances the buyer s ability to plan sales and distribution because latest shipping date is known. Barring supplier fraud, payment is limited to what was ordered. Bank of America Merrill Lynch can issue LCs denominated in foreign currency, which enables the buyer to comply with seller s request for payment in foreign currency. Bank of America Merrill Lynch Solutions for Importers 12

Chapter 01 Introduction to Global Trade Services What are the risks of LCs to the buyer? LCs deal only in documents, not in goods. The major risk may be that the merchandise may not be as it is represented in the documentation. What are the advantages of LCs to the seller (exporter)? Sellers can benefit in the following ways: Minimized credit risk by shifting risk from the buyer to the buyer s bank Reduced commercial/political risk by shifting it from the buyer to the buyer s bank Assurance of prompt payment by reducing the risk that payment for the goods might be delayed or otherwise jeopardized by political or foreign exchange problems in the buyer s country Improved ability to obtain bank financing in certain markets What are the risks to the seller? The seller s documentation must be in strict compliance with the terms and conditions of the LC to help ensure payment. What about the risk of fraud? Since the beginning of time, buyers with specific needs have been approached by sellers who claim to be able to fulfill those needs, but have no intention of doing so. As markets in certain countries tighten and economies in these countries suffer, fraudulent schemes will be increasing. These schemes will proliferate particularly in countries with few or no exchange controls, weak legal systems and an inability to use their resources in the global mainstream. Please refer to pages 30 32 of this guide for information about Bank of America Merrill Lynch s procedures and policies that attempt to prevent fraud, money laundering and other illegal activities.. Bank of America Merrill Lynch Solutions for Importers 13

Chapter 02 Working with Your Bank Bank of America Merrill Lynch Solutions for Importers

Chapter 02 Working With Your Bank As an importer, you know that sourcing products globally can lower costs, broaden product lines and diversify sources of supply. You also know the challenge of getting the right product to the right place at the right time. Different time zones, languages and business practices can hinder communication. Lengthy shipping times and customs clearances can complicate inventory management. And the payment terms demanded by overseas suppliers can tie up your credit and slow down the flow of documents needed to clear merchandise through customs. You need specialized banking services to help overcome these obstacles. You need a bank with seasoned experts in international trade and a family of specialized banking services tailored to the unique needs of the importer. You need Bank of America Merrill Lynch Import Services Bank of America Merrill Lynch Import Services offers you a comprehensive array of services; services that can help you receive products quicker, reduce the amount of credit you have to tie up, and ease your administrative burdens. Our network of correspondent banks is extensive, allowing us to work directly with your supplier s banks. With this worldwide network of correspondent banks, Bank of America Merrill Lynch can help you access almost any market. Payment options to meet your needs Bank of America Merrill Lynch stands ready to assist you with a full range of payment options. Our international trade specialists can assist you in selecting the option that best fits the needs of both you and your vendors. Whether you are buying on open account, with cash against documents or on an LC basis, we have the resources and the expertise you need. And we deliver our services in almost any currency you might choose. Our specialists are dedicated to handling your transactions as efficiently and as smoothly as possible. Accessible expertise Bank of America Merrill Lynch has more than 1,000 experienced international trade specialists dedicated solely to the management and growth of our clients international business. Strategically located from coast to coast in the United States and in various foreign locations, we travel extensively to keep in touch with clients. Our expertise in structuring import transactions offers you the kind of knowledge and experience you need. Bank of America Merrill Lynch Solutions for Importers 15

Chapter 02 Working With Your Bank Innovative services developed as needs change Bank of America Merrill Lynch has developed a forward-looking suite of electronic banking services, allowing importers to initiate transactions and receive reports via the internet with the use of TradePro. By fully integrating electronic applications into our global issuance system, we can issue your LCs faster and more accurately. Take advantage of the trade module, Trade Pro, to: Increase processing efficiency and decrease processing errors Easily share trade data critical to business partners both within other areas of your organization and with outside partners such as freight forwarders and customs brokers Have better and faster access to your global trade activity and information Enjoy round-the-clock access to your trade information no matter where you re located. As a premier provider of cash management services, Bank of America Merrill Lynch has developed innovative sweep accounts and automatic investment services to keep your money working longer for you. An extensive network Our correspondent bank network is able to handle almost any import transaction efficiently. Over the past thirty years we have carefully developed and cultivated an extensive network of correspondents worldwide. Our network allows us to deal directly with your vendors banks, saving you time and money. Our in-depth knowledge of overseas markets and business practices can be invaluable to importers seeking to structure unusual transactions. Services to meet the diverse needs of the importer Open account Lowering fees and streamlining financial supply chain processes are a top priority for most buyers. At the same time, ensuring vendors have financing options similar to those associated with traditional LCs is an important consideration. Bank of America Merrill Lynch is committed to developing solutions to assist buyers in optimizing and integrating their supply chains. Our open account payment solutions help clients re-engineer their trading processes and unlock substantial amounts of working capital for their company and their trading partners. Bank of America Merrill Lynch has enhanced its web-based trade activity management system to handle purchase order advising, tracking and reconciliation for LC and open account payments. Our goal is to integrate LCs, documentary collections and open account trade payments seamlessly into each customer s preferred electronic delivery channel. A complete description of this service is provided in Chapter 4 of this guide. Documentary collections Many clients find that suppliers who initially ask for cash in advance or an LC may be willing to sell on a documentary collection basis. Commonly referred to as cash against documents or as sight draft terms, this payment mechanism allows foreign vendors to instruct Bank of America Merrill Lynch to retain control of the shipping documents until payment is made or their draft is accepted. By routing Documentary Collections through Bank of America Merrill Lynch, vendors have reasonable assurance that a world-class bank is following their instructions. Our clients benefit by not having to prepay for the product or tie up their credit. LCs LCs continue to be one of the most common payment options used in international trade, especially for imports from Asia and Latin America. Bank of America Merrill Lynch has international trade specialists to help you structure your LCs and a correspondent bank network that can get the LC to your supplier as quickly as possible. As one of the largest issuers of LCs in the world, Bank of America Merrill Lynch has invested in electronic application systems that free our clients from retyping any of the standard clauses in their LCs. Using a standard web browser, Bank of America Merrill Lynch Solutions for Importers 16

Chapter 02 Working With Your Bank you supply only the details specific to the particular transaction and send the application to us via the internet. Your web-based electronic applications are fully integrated into our issuance system for truly superior response time and accuracy. This same system gives you activity and status reports, available on your personal computer at your convenience. LCs are primarily oriented toward protecting the interests of beneficiaries. No LC can protect the buyer against fraud. Protection in any import transaction is contingent upon the performance of the exporter, and there is no substitute for knowing the reputation of your supplier. However, Bank of America Merrill Lynch s international trade specialists can help structure your credits to better protect your interests. When appropriate, performance bonds, inspection certificates, insurance policies and more specific shipping schedules can be incorporated into your credits, giving you additional control over the transaction. Our specialists can explain to you when a standby LC might be an appropriate way to assure payment to a vendor. Whenever you need help in structuring your LCs, you can rely on Bank of America Merrill Lynch. Easy L/C When you re involved in global trade, the need for LCs isn t limited by the size of your company. Smaller companies often have modest credit needs and straightforward shipping arrangements, but they shouldn t have to navigate the same complex and time-consuming application, underwriting, and approval processes as larger companies seeking LCs with more complicated requirements and higher dollar values. If your import credit needs do not exceed $100,000.00 and you have an account with Bank of America Merrill Lynch, Easy L/C offers a simplified application form and streamlined approval process, which reduces turnaround time and can save you money with a low front-end fee. The application is short and simple to complete. We can even send it to you in electronic format to get your application off to the fastest start possible. Your LC is generally approved and issued within 24 hours. Bank of America Merrill Lynch doesn t require a secured deposit as collateral for your Easy L/C. It s prepaid from the cash in your company s existing Bank of America Merrill Lynch account. Cash secured LCs Cash secured LCs are secured by funds that you have in an appropriate Bank of America Merrill Lynch deposit account for the balance and term of the LC. Cash secured transactions are subject to credit approval; collateral advances can be made on balances on hand, subject to financial information verification. Bankers acceptance financing Whether you buy on open account with documentary collections or through LCs, Bank of America Merrill Lynch can finance your imports with bankers acceptances. These short-term, fixed-rate instruments can significantly lower your financing costs. As part of LC transactions, bankers acceptances can give you extended terms, allowing your vendors to maintain their cash flow by discounting the instrument at what is normally a very favorable rate. Your vendor can pay some or all of the financing costs. Borrowing procedures and documentation are simple and straightforward. Private labeling of LCs Bank of America Merrill Lynch provides private labeling of LCs to qualifying clients. Your company becomes the issuer of LCs using an existing subsidiary suitable for the purpose or a new Special Purpose Vehicle company. Bank of America Merrill Lynch provides the same level of operational support for these LCs as provided when we are the issuer of the LCs. Private labeling would allow you to significantly reduce your reliance on bank credit, lower LC charges, improve service to your vendors and improve the efficiency of the process through the intelligent use of technology. Our solutions are designed to give you the choice of how you want to structure the processing of private-labeled LCs, and how you Bank of America Merrill Lynch Solutions for Importers 17

Chapter 02 Working With Your Bank would like to structure the financial side of these transactions as well. Additionally, because of our comprehensive and aggressive vendor financing program in Asia, our local trade officers can meet with your vendors, help them prepare for your private-labeled LCs, and discuss their financing needs if appropriate. Soft restriction program Our soft restriction program is designed so that Bank of America Merrill Lynch is involved on both the import and export side of an LC transaction, thus reducing processing time. When a new commercial LC is issued to a beneficiary in Asia, the LC contains wording that restricts negotiation of the LC to one of our Asian banking centers. When documents under these LCs are presented to our Asian banking center, we are able to eliminate the duplicate step of document examination. With this program we create both tangible and intangible value for all involved parties. Applicants will realize the advantages of a streamlined import process due to a lowered discrepancy rate, reduced vendor noise because of lower product cost, faster processing and better control over transactions. For vendors, local bank representatives who are familiar with their accounts can assist in eliminating discrepancies. This will provide faster turn-around times, resulting in increased working capital velocity, lower interest costs and lower transaction costs with more efficient processing. Purchase Order to Pay (PO to Pay) Purchase Order-to-Pay is a trade payables solution for clients sourcing goods in overseas markets, which links the client s supply chain partners into an end-to-end payment and settlement process for increased transparency and visibility throughout the supply chain. The service replaces paper-based functions with electronic processes and broadens settlement options by offering open account payments as well as traditional LCs. Through PO to Pay, clients can electronically submit to Bank of America Merrill Lynch purchase order information that is used to construct LC and open account payment instruments for delivery to sellers in paper form or via an electronic channel, including CashPro Online Trade Pro and Electronic Data Interchange (EDI). The service includes a matching engine, the Purchase Order Processing System (POPS), which reconciles purchase order data submitted by buyers with invoice data submitted by sellers prior to payment. Buyers can also upload a PO file with all of their suppliers PO details to automatically create their LCs and/or open account transactions, based on supplier terms and business rules, which streamlines buyers processing steps in their daily work flow. Supply Chain Financing Buyers often mandate that their suppliers extend payment terms and move from LCs to private label LCs or open account terms. This can place significant financial pressure on suppliers who rely on LCs to meet their working capital needs. Buyers now recognize the need for alternatives that enable their suppliers to obtain financing as an inducement for accepting extended terms. By partnering with suppliers to rollout a Supply Chain Finance program, buyers can more efficiently manage working capital and reduce costs in the supply chain while strengthen supplier relationships. Bank of America Merrill Lynch offers a comprehensive suite of supply chain financing programs that enable buyers to provide their suppliers with access to credit. Foreign Exchange Services Bank of America Merrill Lynch Foreign Exchange Services give you the option to pay your vendors in their own currency. We provide a full range of foreign exchange services, from simply sending wires denominated in foreign currency to helping corporate clients develop and execute sophisticated hedging strategies. In addition to competitively-priced spot and forward contracts, options, and futures, our foreign exchange traders can offer information about market trends that can help you plan your foreign exchange strategy. Our London and Singapore foreign exchange operations provide a virtual around-the-clock capability. Bank of America Merrill Lynch Solutions for Importers 18

Chapter 02 Working With Your Bank Cash and Treasury Management Services Bank of America Merrill Lynch Treasury Management Services help you manage your cash position and cash flow. We build comprehensive, customized solutions to meet the unique needs of our clients, improve their financial competitiveness and make their treasury functions more efficient. Working together, we can help you streamline the way you make payments, collect your receipts and reconcile your accounts worldwide. With our broad treasury management suite of services, we guide you through the steps to make your treasury functions more efficient. Small Business Services (Trade Client Services) There may have been a time when you didn t think your company could import merchandise from overseas or sell your goods abroad. Not any more. For companies like yours, great business opportunities lie beyond our country s borders. And isn t opportunity exactly what you seek for your company? Trade Client Services is made up of a team of trade finance professionals with many years of experience. They re waiting for your call and the opportunity to help you find working capital solutions for your organization. Trade Client Services has been organized to cover all U.S. time zones, so you ll easily and conveniently be able to speak with a representative personally. Let Bank of America Merrill Lynch introduce a few ways you can increase opportunities Economic forecasting and industry specialists At http://corp.bankofamerica.com portal, click on Investment Solutions to find the latest economic and industry analysis. Bank of America Merrill Lynch Securities economists, based in New York, Hong Kong and London, analyze and forecast U.S. and international economic conditions and financial market trends and post their findings on this site. The coverage includes analysis of macroeconomic indicators, forecasts of interest and foreign exchange rates and perspectives on government policies. This work, coupled with research on emerging markets, fixed income, foreign exchange and global risk, supports a wide variety of Banc of America Securities capital markets and client-focused activities. In the end it s all about the people superior client satisfaction We recognize that you have many choices in banks and that, in the final analysis, service will drive whether you continue to use Bank of America Merrill Lynch. It s for that same reason that your customers continue to do business with you. We strive to maintain a professional and skilled international banking staff in every office location. Furthermore, we are extremely sensitive to the unique needs of each client. We pride ourselves on a high level of personalized service built on a long-term relationship. Bank of America Merrill Lynch has extensive involvement with large retail and consumer companies, and therefore is familiar with the seasonal fluctuations that are prevalent in these industries. Our global trade offices are staffed effectively to manage these peak cycles by proactively working with the client to know exactly when these fluctuations will occur during the year. We understand that there are critical times in each client s business cycle and are committed to constantly providing consistent quality service. A global team of trade associates is typically established to meet our client s specific processing requirements. Bank of America Merrill Lynch will assign a primary operations contact that is responsible for technical consultation and ensuring compliance with each client s service requirements. In the past few years independent research firms have conducted client satisfaction interviews with Bank of America Merrill Lynch import LC clients located throughout the United States. Performance measurement categories included Bank of America Merrill Lynch Solutions for Importers 19

Chapter 02 Working With Your Bank timeliness, accuracy, capability, staff knowledge/servicing, technology and client loyalty. Nearly ninety-six percent of our clients reported that they were either very satisfied (highest possible rating), satisfied, or somewhat satisfied with Bank of America Merrill Lynch s overall import LC service. Our Global Trade Services business is committed to moving to and maintaining a Six Sigma level of client service, and numerous performance measurements are in place to that end. Depend on Bank of America Merrill Lynch Your business is filled with unique and diverse challenges, challenges that demand creative, flexible and comprehensive solutions. To help you find these solutions, you need a bank who has extensive experience, overseas expertise and a wealth of resources. You need Bank of America Merrill Lynch Import Services. We can provide you with a complete range of payment options and a worldwide correspondent network. We ll take the time to help you determine how you can make your international business run as smoothly, efficiently and profitably as possible. We will also be ready to help you reevaluate your options as your needs change. For further information, contact your local Bank of America Merrill Lynch Global Trade & Supply Chain Solutions officer. Bank of America Merrill Lynch Solutions for Importers 20

Chapter 03 Import LCs Defined Bank of America Merrill Lynch Solutions for Importers

Chapter 03 Import LCs Defined An import LC is a conditional payment mechanism under which the issuing bank irrevocably promises to pay the seller if presented documents comply with all of the LC terms and conditions. The issuing bank substitutes its credit for that of the buyer. All LCs have similar attributes and this section will restate some of those attributes. It is important not only to understand the attributes, but also the underlying principles. A commercial LC offers protection to both the buyer and seller and, for this reason, is often used as a means of payment. An LC offers the buyer a high degree of assurance that goods and services will be delivered and reduces trading risks. In the LC process, the bank is the intermediary between the seller (an exporter) and the buyer (an importer). The issuing bank issues the LC on behalf of the importer, examining the documents received, to determine conformity to the terms and conditions of the LC. If the documents are correct, the bank makes payment, either immediately or at a specified future date. When the bank issues the LC, it substitutes its credit for that of the importer. In doing so, the bank promises to pay the exporter upon presentation of documents in good order. The bank deals only with the documents called for in the LC, not with the actual goods involved. For example, if an LC specifies that the exporter ship a container of steel and the quality of the steel does not meet the buyer s expectations, the exporter will nevertheless be paid as long as documents are presented in conformity with the terms and conditions of the LC. Typically the exporter s bank acts as the advising, examining and paying bank. It may also confirm and negotiate LCs on its client s behalf. Prior to any LC transaction, the buyer and seller should negotiate and agree to the terms and conditions to be specified. Bank of America Merrill Lynch can help structure your import LC and suggest terms that are favorable and achievable to both you and your suppliers. This facilitates LC compliance, which helps ensure that you receive your commercial shipment according to the terms agreed upon without delay. Bank of America Merrill Lynch Solutions for Importers 22

Chapter 03 Import LCs Defined LC Flow Chart Buyer Issuing / Buyer s Bank Seller s Bank Seller Buyer 01 02 03 04 05 STEP ONE Buyer Applies for LC STEP TWO Buyer s Bank Issues LC and... STEP THREE Transmits LC to Seller s Bank STEP FOUR Advises LC to Seller STEP FIVE Goods Produced and Shipped Seller Seller s Bank Issuing / Buyer s Bank Buyer 06 07 08 09 STEP SIX LC Presented to Seller s Bank with Required Documentation STEP SEVEN Seller s Bank Examines Documents and Sends Documents to Issuing Bank STEP EIGHT Issuing Bank Examines Documentation STEP NINE Issuing Bank Debits Buyer s Account and Releases LC Documents Making Funds Available for Payment to Seller Seller Buyer 10 STEP TEN Buyer Exchanges Documents for Goods Bank of America Merrill Lynch Solutions for Importers 23

Chapter 03 Import LCs Defined LC Flow Chart Steps 1 Through 4 Buyer Issuing / Buyer s Bank Seller s Bank Seller 01 02 03 04 STEP ONE Buyer Applies for LC STEP TWO Buyer s Bank Issues LC and... STEP THREE Transmits LC to Seller s Bank STEP FOUR Advises LC to Seller 01 The buyer fills out an LC application that satisfies the terms of the purchase agreement plus the requirements of customs law, shipment and document coordination. 02 The issuing bank, usually the buyer s bank, rechecks the application to determine that it is complete and workable. 03 The issuing bank transmits the credit to a correspondent bank by telex, SWIFT (Society for Worldwide Interbank Financial Telecommunication, a telecommunication network of member banks) or (rarely) airmail and asks them to advise and/or confirm the instrument. 04 The correspondent bank receives the letter of credit, checks for authenticity, records the transaction and transmits the instrument to the seller/beneficiary, adding their confirmation if requested. Upon receipt of the letter of credit, the seller should carefully review it to determine whether its performance requirements can be complied with and whether it is acceptable from a credit perspective. Bank of America Merrill Lynch Solutions for Importers 24

Chapter 03 Import LCs Defined Letter of Credit Flow Chart Steps 5 Through 7 Seller Seller Seller s Bank Issuing / Buyer s Bank 05 06 07 STEP FIVE Goods Produced and Shipped STEP SIX Documents Presented to Seller s Bank STEP SEVEN Seller s Bank Examines Documents and Sends Documents to Issuing Bank 05 Upon determination that the LC is acceptable, the seller should ship the goods precisely consistent with its terms and conditions. 06 The seller must prepare documents exactly as required and present them to the proper paying bank. The proper paying bank may be any bank specified in the credit to accept, pay or negotiate. This may be the advising bank, confirming bank, issuing bank or (on a freely negotiable credit) any bank that is willing to negotiate. 07 When the paying bank receives the documents, it will examine them to determine if they are in order pursuant to the credit s terms and conditions. If in order, the bank may pay, accept, or negotiate as required by the LC. The negotiating bank will transmit the documents to the issuing bank and request reimbursement. Under an LC payable at sight, the issuing bank may effect reimbursement to the seller s bank by remitting funds directly to the seller s bank, authorizing the seller s bank to debit the issuing bank s account, or by authorizing the seller s bank to claim from a third bank where the issuing bank maintains an account. Bank of America Merrill Lynch Solutions for Importers 25

Chapter 03 Import LCs Defined Letter of Credit Flow Chart Steps 8 Through 10 Issuing / Buyer s Bank Seller s Bank Issuing / Buyer s Bank Buyer Seller 08 09 10 STEP EIGHT Issuing Bank Examines Documents and Reimburses Bank STEP NINE Issuing Bank Debits Buyer s Account and Releases LC Documents, Seller Receives Payment STEP SEVEN Seller s Bank Examines Documents and Sends Documents to Issuing Bank 08 Upon receipt of the documents, the issuing bank will examine them to determine that they are in order as specified and then reimburse the negotiating bank. For time drafts, reimbursement is made at maturity of the bankers acceptance. 09 The issuing bank debits the buyer s account and releases the documents. For a time draft, the buyer s account will be debited at maturity. The seller s bank pays the exporter after being reimbursed by the buyer s bank. 10 The buyer exchanges the shipping documents for the goods. Bank of America Merrill Lynch Solutions for Importers 26