EXPORT PAYMENTS & FINANCE International Business Expansion Workshop Mobile Area Chamber of Commerce November 7, 2017
Export Tools and Risk Mitigation ALL BUSINESS IS RISKY. DO YOU REALLY WANT TO GAMBLE INTERNATIONALLY?
DEFINING THE RISKS COMMERCIAL RISK SOVEREIGN RISK ECONOMIC CONDITIONS POLITICAL CONDITIONS SHIPPING TERM RISK LEGAL RISK
RISK MITIGATION CASH IN ADVANCE CONFIRMED L/C ADVISED L/C DOCUMENTS AGAINST PAYMENT DOCUMENTS AGAINST ACCEPTANCE OPEN ACCOUNT RISK FREE CONF. BANK RISK OPENING BANK RISK SOVEREIGN RISK COMCL. & SOVN.RISK SELLER OWNS GOODS COMCL. & SOVN. RISK BUYER HAS GOODS TRADE ACCEPTANCE COMCL. & SOVN. RISK BUYER HAS GOODS
CASH IN ADVANCE PAYMENT BY BUYER PRIOR TO GOODS BEING SHIPPED QUESTIONS YOU SHOULD ASK??? WHAT IS CASH? WHEN SHOULD IT BE RECEIVED? ARE THERE ANY RISKS?
WHEN TO USE CASH IN ADVANCE BUYER IN VERY HIGH RISK COUNTRY CUSTOMIZED PRODUCT LITTLE OR NO COMPETITION UNKNOWN BUYER TIME CONSTRAINTS YOU MAY WANT TO CONSIDER PARTIAL CASH IN CONJUNCTION WITH ANOTHER PAYMENT METHOD
LETTERS OF CREDIT A LETTER OF CREDIT IS AN IRREVOCABLE, CONDITIONAL UNDERTAKING BY A BANK TO EFFECT PAYMENT TO THE BENEFICIARY (SELLER) PROVIDED SPECIFIED DOCUMENTS ARE PRESENTED IN COMPLIANCE WITH ITS TERMS AND CONDITIONS.
LETTER OF CREDIT BENEFITS SUBSTITUTES BUYER (COMMERCIAL) RISK WITH FOREIGN BANK RISK CONFIRMATION ELIMINATES FOREIGN BANK AND SOVEREIGN RISK PROVIDES CONDITIONAL ASSURANCE THAT GOODS WILL BE PAID FOR MAY BE USED AS A SELLING AND FINANCING TOOL GOVERNED BY ICC 600
WHEN TO USE LETTERS OF CREDIT MEDIUM OR HIGH RISK COUNTRY (ADVISED OR UNCONFIRMED ) HIGH RISK OR NEW BUYER CUSTOMIZED PRODUCT LARGE DOLLAR TRANSACTION
Application Export Letter of Credit Process Letter of Credit (Sight/Time) Issuing / Opening Bank Documents $ Advising / Confirming Bank $ $ Goods Beneficiary Seller Exporter Applicant / Buyer Importer Contract
DOCUMENTARY COLLECTIONS THE PRESENTATION OF INVOICES, SHIPPING DOCUMENTS ETC. BY THE SELLER S BANK TO THE BUYER S BANK WITHOUT ANY PRIOR CONDITIONAL BANK GUARANTEE OF PAYMENT. GOVERNED BY ICC 522
Documentary Collection Process Transaction between Buyer and Seller whereby documents are forwarded through banking channels for payment and/or acceptance. Cash Remitting Bank Documents Presenting Bank Cash Docs Cash D/P D/A Seller GOODS CONTRACT Buyer
DOCUMENTARY COLLECTIONS SIGHT: PAID IMMEDATELY DOCUMENTS AGAINST PAYMENT AKA SIGHT DRAFT, CAD OR D/P BUYER MUST PAY FOR DOCUMENTS PRIOR TO DOCUMENTS BEING RELEASED TIME: DELAYED PAYMENT DOCUMENTS AGAINST ACCEPTANCE AKA TIME DRAFTS, TRADE ACCEPTANCE OR D/A BUYER ACCEPTS DRAFT PRIOR TO DOCUMENTS BEING RELEASED AND OBTAINS GOODS
SIGHT vs. TIME EXPORTER OWNS GOODS TILL PAID FOR CAN RE-SELL OR REPATRIATE GOODS IF NOT PAID FOR RISK PROTECTION USING A/R INSURANCE BUYER CONTROLS GOODS AFTER ACCEPTING THE DRAFT GOODS UNDER BUYER S CONTROL RISK PROTECTION USING A/R INSURANCE
WHEN TO USE COLLECTIONS BUYER IN LOW RISK COUNTRY BUYER HAS LOW CREDIT RISK SELLER NEEDS COMPETITIVE SELLING TERMS PLUS SOME PROTECTION AGAINST NON-PAYMENT LONG STANDING RELATIONSHIP ACCOUNTS RECEIVABLE INSURANCE AVAILABLE
OPEN ACCOUNT SELLER DELIVERS GOODS AND SHIPPING DOCUMENTS DIRECTLY TO BUYER WITHOUT ANY BANK INTERVENTION OR ASSURANCES OF PAYMENT
WHEN TO USE OPEN ACCOUNT VERY LOW RISK COUNTRIES FINANCIALLY STRONG BUYER PREVIOUS POSITIVE SELLING EXPERIENCE COMPETITION FORCES LIBERAL PAYMENT TERMS RISK CAN BE MITIGATED USING A/R INSURANCE
SHIPPING TERM RISK PAYMENT TERMS PLUS SHIPPING TERMS EQUALS TERMS OF SALE INCOTERMS 2010 WHICH SHIPPING TERM DO YOU CHOOSE AND WHY?
INCOTERMS 2010 ICC OFFICIAL RULES FOR THE INTERPRETATION OF TRADE TERMS EXW FCA FAS FOB EXWORKS ( named place) FREE CARRIER ( named placed) FREE ALONGSIDE SHIP ( named port of shipment) FREE ON BOARD ( named port of shipment)
INCOTERMS 2010 ICC OFFICIAL RULES FOR THE INTERPRETATION OF TRADE TERMS CFR CIF CPT CIP COST AND FREIGHT ( named port of shipment) COST, INSURANCE AND FREIGHT ( named port of destination) CARRIAGE PAID TO ( named place of destination) CARRIAGE & INSURANCE PAID TO ( named place of destination)
INCOTERMS 2010 ICC OFFICIAL RULES FOR THE INTERPRETATION OF TRADE TERMS DAT DELIVERED AT TERMINAL ( named terminal at port or place of destination.) DAP DELIVERED AT PLACE ( named place of destination) DDP DELIVERED DUTY PAID ( named place of destination) A complete copy of the INCOTERMS 2010 can be obtained from the ICC Publishing, Inc. 156 Fifth Avenue, Suite 820, New York, NY 10010 (212) 206-1150 Fax (212) 633-6025
LEGAL RISKS Export Controls Foreign Corrupt Practices Act Contracts Agent Relations Intellectual Property Rights Arbitration Governing Law
STRUCTURING THE EXPORT TRANSACTION NEGOTIATION/COMMUNICATION IS THE KEY ANALYZE THE RISKS AND MARKET CONDITIONS SELECT THE APPROPRIATE PAYMENT METHOD SELECT THE APPROPRIATE SHIPPING TERM: INCOTERMS 2010 DETERMINE THE CURRENCY SET TRANSACTION PARAMETERS USING: PRO FORMA INVOICE LETTER OF CREDIT INSTRUCTIONS
TRADE FINANCE OPTIONS EximBank Programs SBA Programs Private Insurance Banker s Acceptances
Who Is EximBank What Do They Do EXIM Bank is an independent agency of the U.S. Government Established in 1934 Headquartered in Washington, D.C Regional Export Finance Centers: Eastern: Miami, New York, Atlanta Central: Chicago, Detroit, Minneapolis, Houston, Dallas Western: Orange County CA, San Francisco, Seattle, San Diego Mission: Support U.S. exports in order to create and sustain U.S. jobs
Growing Your Sales and Minimizing Risk Exporter s Need Exim Solution Funds to Fulfill Orders Extension of Credit Foreign Buyer Financing Working Capital Guarantee Credit Insurance: Foreign Accounts Receivables Medium and Long Term Insurance and Loan Guarantees
Eligibility Requirements Exporters must : be in business at least one year (unless otherwise noted), have financial statements or tax returns, have a DUNS number For Working Capital and Short-Term insurance, exported products and services must be: 50-plus% U.S. content, including labor, excluding markup (cost basis) For Medium-Term Insurance and Guarantees, exported products and services must be : 85-plus% U.S. content, including labor, excluding markup (cost basis) for full support of the transaction
Exim Products Cover the Spectrum Pre-Export Financing Post-Export Financing Working Capital Guarantee - Export Credit Insurance - Loan Guarantee - Direct Loan
Solution #1 :Working Capital Guarantee This is a guarantee to a commercial lender which makes a loan to an exporter to purchase or manufacture U.S. goods and services for export Loan proceeds may also be used to collateralize a standby-by letter of credit to be used as a performance bond (25% collateralization required)
Working Capital Guarantee Assists small and mid-size companies in obtaining working capital to produce or purchase US goods and services for export Provides a 90% guarantee of repayment (principal and interest) on loans to exporters May be set up as Transaction-Specific or a Revolving Line of Credit No minimum or maximum amounts Loan supports advances made against export-related inventory (including WIP) and foreign receivables: -Up to 75% advance rate on inventory, and up to 90% on foreign receivables
Working Capital Guarantee Asset-Based: fully collateralized Personal guarantees are required of owner(s) Cost: $100 application fee Up to 1.75% facility fee Reduced fee if: Exports sales structured under L/Cs and/or secured by export credit insurance; exporter s financial ratios are within its industry median A lower fee may be negotiated with a Delegated Authority Lender (see list on www.exim.gov) Interest rate is determined by the lender
Working Capital Guarantee
Solution 2: Export Credit Insurance Benefits: RISK PROTECTION: Protects US exporters against non-payment by foreign buyers due to Commercial Risks & Political Risks (see next slide) SALES TOOL: Allows exporters to offer competitive credit terms to foreign buyers Generally up to 180 days, some products may qualify for 360 day terms FINANCING AID: Obtain additional financing Insured foreign receivables may be added to your borrowing base by assignment of policy proceeds (claim payments) to a lender
Risks Covered Commercial Risks Insolvency Bankruptcy Protracted Default Note: commercial disputes are not covered Political Risk Transfer Risk War, revolution, insurrection, expropriation Cancellation of and import or export license
Short Term Export Credit Insurance Policies for Small Business*: Express Insurance 95 % cover, no deductible, pay-as-you-go, EXIM Bank obtains and reviews all credit info on buyers, maximum of 10 buyers Multi-Buyer 95 % cover, no deductible, pay-as-you-go, some buyer approval authority may be given to exporter Single-Buyer 90% cover, no deductible * SBA definition
Small Business Express Insurance: Key Features 95% coverage for non-payment due to commercial insolvency/bankruptcy/default) and political (war, revolution, transfer risk ) risks Insuring existing buyers is optional No deductible! No application fee! EXIM Bank pre-approves all credit limits requested and obtains credit information on your buyers at no additional cost to you 5 business day buyer approval turnaround on credit limits of $300,000 or less (longer turnaround on higher amounts) No minimum sales volume or premium pay only on the gross invoice value of what you ship, when you ship!
Small Business Multi-Buyer Policy Coverage: 95% commercial and 95% political Exporter must qualify as small business by SBA definition, and Average export credit sales over the past 3 years must be less than $7.5million In same line of business for at least 3 years (No material adverse issues) Must insure ALL export credit sales (L/C, CIA, CAD, SDDP, and Canadian sales may excluded) No deductible, no application fee, no advance premium required, pay-as-you-ship, no minimum premium requirement Buyer credit limits endorsed to policy (requires minimal preapprovals by EXIM Bank)
Standard Business Multi-Buyer Policy For experienced exporters with over 500 employees and /or $7.5 million in annual export credit sales Must insure ALL export credit sales (L/C, CIA, CAD, SDDP and Canadian sales may be excluded) On a case-by-case basis, exporter may request to exclude certain countries and/or buyers ( Reasonable Spread of Risk ) Coverage: 95% for both commercial and political risks No minimum premium, pay-as-you-ship Buyer credit limits endorsed to policy (requires minimal pre-approvals by EXIM Bank)
Short-Term Single Buyer Insurance Policy Insures a single sale or multiple sales to one buyer 90% coverage, both commercial and political; 98% for bulk agricultural transactions 95% for letter of credit transaction Maximum policy period: 1 year No deductible, No application fee Premium based on country, type of buyer, and length of credit term extended (see rates on www.exim.gov) Charged on sales volume (not credit limit) Pay-After-You-Ship premiums Reduced $500 minimum premium for small business exporters ($2500. minimum premium for non-small business)
EximBank What is the Status? Photo / Graphic Photo / Graphic EXIM Bank has been operating since 2015 without a full board meaning no transactions in excess or $10 Million have been approved. Current backlog of pending transaction is approximately $32 Billion Nominations have been submitted to Congress and are awaiting confirmation Results: Reduced revenue returned to U.S. Treasury and fewer jobs supported 2016 $284MM & 52M jobs 2015 $432MM & 109M jobs 2014 $675MM & 164M jobs
Private Insurance Programs Export Credit Insurance (Post-Export Financing) Euler Hermes, Coface, FCIA, AIG Accounts Receivable Insurance Obtained Directly or Through Brokers
SBA PROGRAMS Pre-export Working Capital (can include foreign accounts receivable financing) Export Express $1-$500,000 On Line application In business one year and proceeds will support exports Export Working Capital Guaranty $250,000-$5,000,000 Same application as Eximbank No application Fee No U.S. content or Military Equipment requirements
SBA PROGRAMS INTERNATIONAL TRADE LOAN Up to $5,000,000 Ten Tab Application Purpose: Increase or begin exporting (Direct and Indirect) Become competitive with foreign imports Use: Equipment, real estate, refinancing, permanent working capital (No transfers of ownership) Term loan: Machinery & Equipment up to10 years, Real Estate up to 25 yrs. Blended term for both. Financing for projects that improve the competitive position of US exporter so as to increase exporting
Banker s Acceptances (BA s) What is a BA?: A time draft drawn under a LC on a bank which the bank has accepted. BA may be held and paid at maturity or discounted. Tenor or time is usually 30 to 180 days. Benefits: Provides extended terms to the buyer. Market penetration. Makes the seller more competitive. By discounting, seller may be paid immediately upon acceptance. Can provide to buyer lower interest rates.
Banker s Acceptances (BA s) EXAMPLE: AN EXPORTER RECEIVES A LETTER OF CREDIT FOR $100,000 OPENED BY HIS FOREIGN BUYER S BANK WITH THE TERMS OF THE DRAFT BEING 90 DAYS SIGHT. LC IS CONFIRMED BY SELLER S BANK IN THE U.S. WHEN DOCUMENTS ARE PRESENTED AND ARE FOUND TO BE IN ORDER, THE BANK ACCEPTS THE DRAFT AND SETS THE MATURITY DATE. THE ACCEPTED DRAFT IS NOW A BA AND REPRESENTS THE BANK S PROMISE TO PAY AT MATURITY. THE SELLER HAS TWO CHOICES. HE CAN WAIT 90 DAYS AND BE PAID $100,000 OR HE CAN DISCOUNT THE BA AND BE PAID IMMEDIATELY LESS THE DISCOUNT CHARGE. IN THE EXAMPLE ASSUME THE 90 DAY BA RATE IS 2.6%. $100,000 X.026 DIVIDED BY 360 DAYS TIMES 90 DAYS EQUALS $650 FOR THE INTEREST/DISCOUNT CHARGE. IF THE EXPORTER CHOOSES TO DISCOUNT THE BA HE WOULD RECEIVE $99,350 ($100,000 - $650) IF THE LC STATED THAT THE DISCOUNT CHARGES WERE FOR THE BUYER S ACCOUNT, THEN THE EXPORTER WOULD RECEIVE THE FULL $100,000 AND WHEN THE BUYER PAYS HIS BANK HE WOULD BE CHARGED $100,650. IN ESSENCETHE BUYER HAS NOW BORROWED MONEY IN THE U.S. AND RECEIVED A RATE BETTER THAN HE COULD GET DIRECTLY FROM HIS OWN BANK.
HAVE A PLAN & EXECUTE IT UNDERSTAND HOW THINGS WORK NOTE DEADLINES & PLAN FOR THEM COORDINATE THIRD PARTY ACTIVITY - INTERNALLY AND EXTERNALLY ARRANGE FINANCING, IF NEEDED SOLVE PROBLEMS UP FRONT BUILD IN FLEXIBILITY HAVE A FOCAL POINT AND COMMUNICATE MAKE SURE YOU CAN BUY, BEFORE YOU SELL
FOR ADDITIONAL INFORMATION, CONTACT... http://aitc.ua.edu aitc@ua.edu Glenn Sigler Trade Finance Consultant Alabama International Trade Center Ph (251) 605-0893 glenn.sigler@asbdc.org Carson Strickland Sr. Vice President, Global Trade Finance Regions Bank Ph (251) 690-1396 Cell (251) 459-4278 carson.strickland@regions.com