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“Show Me The Money” Getting Paid for your Export Sales. ISRI National Convention April 6 th , 2006. Presented by : Jane Hay, VP International Banking, U.S. Bank. U.S. Bank . 6 th largest bank in the U.S. 2009 Billion in assets

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slide1

“Show Me The Money”

Getting Paid for your Export Sales

ISRI National Convention

April 6th, 2006

Presented by:

Jane Hay, VP

International Banking, U.S. Bank

u s bank
U.S. Bank
  • 6th largest bank in the U.S.
  • 2009 Billion in assets
  • International Banking offices in 17 cities from Ohio to California
  • Full Operations staff in 7 locations - Seattle, Milwaukee, Minneapolis, St. Louis, Portland, Los Angeles, Hong Kong
  • Extensive Trade Finance experience in the Scrap Industry
discussion points
Discussion Points
  • Options for Export Finance
  • Decision Making Factors
  • Exporter and Importer Perspectives
  • Transaction Overviews
  • L/C’s easy as 1,2,3!
standard international payment methods
Standard International Payment Methods
  • Cash
  • Documentary LC, Confirmed or Unconfirmed
  • Documentary Collections
  • O/A Credit Line
methods of payment risk assessment

Exporter’s RiskImporter’s Risk

High

LOW

High

LOW

Methods of PaymentRisk Assessment
  • Open Account
  • Documentary Collections
    • Time Drafts (D/A)
    • Sight Drafts (D/P)
  • Letters of Credit
  • Cash in Advance
methods of payment decision factors which method to chose
Methods of PaymentDecision Factors – Which Method to Chose??
  • Amount of Order
    • How much can you afford to loose?
    • Is this an unusually large order?
  • Your Company’s Tolerance for Foreign Risk
  • Type of Product
    • Off the shelf versus customized
  • Competitor’s Terms
    • Are they offering terms?
    • What is the industry standard?
methods of payment decision factors which method to chose7
Methods of PaymentDecision Factors – Which Method to Chose??
  • Cash Flow Needs
    • Do you need fast payment?
    • Can you afford to offer terms?
  • Relationship with Buyer
    • New versus Long Term
    • Unreliable Financials?
  • Costs/Margins
    • Financing cost vary substantially
    • The longer the financing period the higher the cost
  • General International Experience
    • Are you new to the market?
    • Do you have an experienced Intl Credit Staff?
cash in advance
Cash in Advance
  • Benefits
    • Lowest Risk for Exporter
    • Little or no cost for either party
    • No risk of order cancellation
  • Potential Stumbling Blocks
    • All risk born by buyer
    • No way for buyer to ensure proper docs arrive with shipment
    • Loss of orders to the competition?
slide9

Letters of Credit

Exporter’s Perspective

  • Pre-export guarantee
  • Ability to sell in higher risk markets
  • Protection from order cancellation
  • Reliance on issuing bank’s credit standing instead of buyer’s credit standing
  • Ability to offer extended terms as a selling tool and still get paid upon shipment through ‘discounting’
  • Cost
  • Perceived “hassle factor” or unfamiliarity
slide10

Letter of Credit

Importer\'s Perspective

  • Documentary evidence that the goods have shipped
  • Assurance that the goods will be shipped on time
  • Assurance that documents needed for customs clearance will be provided
  • At a minimum, payment is deferred until the goods are shipped and the documents are presented
  • Ability to request deferred payment while still allowing shipper to be paid on sight basis
  • Cost
  • Credit Line Availability for Importer
playing by the rules
Playing by the Rules
  • International Chamber of Commerce
  • The ICC produces and revises:
    • Incoterms
    • Uniform Customs and Practice for Documentary Credit (UCP 500)
      • standard list of guidelines governing LC processing and interpretation
      • recognized by banks in most countries

http://www.iccbooks.com/

incoterms 2000 and modes of transportation
Incoterms 2000 and Modes of Transportation
  • Departure
    • EXWEx Works
  • Main Carriage Unpaid
    • FCA Free Carrier
    • FAS Free Alongside Ship
    • FOB Free On Board
  • Main Carriage Paid
    • CFR Cost and Freight
    • CIF Cost, Insurance and Freight
    • CPT Carriage Paid To
    • CIP Carriage and Insurance Paid To
  • Arrival
    • DAF Delivered At Frontier
    • DES Delivered Ex Ship
    • DEQ Delivered Ex Quay
    • DDU Delivery Duty Unpaid
    • DDP Delivery Duty Paid
incoterms
Incoterms
  • Incoterms affect:
    • costs
    • type of transport document
    • control of transport document and timing of title transfer
    • insurance provisions
slide14

Negotiating Terms in the Letter of Credit

  • Always negotiate the contents of a letter of credit with your trading partner BEFORE it is issued. Amendments can be costly and delay sales.
  • Your bank should work with you from the initial stages of a transaction to ensure that the letter of credit is structured to meet your needs and lower your risks.
confirmations of export letters of credit
Confirmations ofExport Letters of Credit
  • What??
    • A second bank, usually in the exporter’s country, guarantees the obligation of the issuing bank, providing an extra layer of protection
    • Chinese Banks do not allow confirmations - Document Purchase Program
  • When??
    • If your company is financially conservative as a policy
    • If the country or the issuing bank is considered risky
    • If the dollar amount is unusually large
    • Contact your int’l banker first!
slide16

Instructions to Buyer for a Letter of Credit

Customer

P.O. Number

Please incorporate the following provisions into the letter of credit:

1.

Type of Credit

Use the KISS Rule!

__ Confirmed ____Unconfirmed, irrevocable letter of credit in favor of:

______________________________________________________________

and available with:

U.S. Bank National Association Telex: TRT 192179 USB INTL MPS

Minneapolis, MN SWIFT: USBKUS44

2.

Amount

U.S.$ __________ or _________________ (named foreign currency)

3.

Available at:

b) __ Time - at ____ days, ___ sight __ from B/L

a)_____ Sight

Sight and time drafts must be drawn on U.S. Bank

c)_____ Deferred Payment at ___ days sight / date

4.

Incoterm

_______ named place: ______________

5.

Documents

We are prepared to furnish the following documents:

1.

2.

3.

6.

Expiration Date

________________

7.

Latest Ship Date

________________

All banking charges

in the U.S. are for the account of the _ seller ___ buyer

8.

9.

Special Conditions

1.

Issuing Bank should name a U.S. Reimbursing Bank

2. ___________________________________________________________

3. ___________________________________________________________

4. ___________________________________________________________

5. ___________________________________________________________

Your compliance with the above provisions is appreciated and will avoid unnecessary amendment fees.

application process
Application Process
  • Buyer requests a line of credit from his bank (or utilizes an existing line)
  • LC is initiated / authorized only by Buyer
  • The LC is a legal contract between the Buyer and the Issuing Bank
  • The application for the LC is an extension of the purchase order
  • Application can be filled out on paper or electronically
  • LC is issued by the Issuing Bank, usually via SWIFT
sellers review of the lc
Sellers review of the LC
  • Review Procedures
    • Review application or a draft of the LC before issuance, if possible
    • When LC is advised, review against Instructions to Buyer, P.O. or other docs
    • Ask int’l banker and forwarder to review
    • Route internally
    • Use a checklist
  • Amendment Procedures
    • Contact Buyer with instructions
slide21

LC Checklist

Customer Name ____________________________________

LC #____________________________

Advising Bank’s Ref # _______________________________

Advising Bank Contact/Phone _______________________________________________

PO # ___________________________

THE LC TERMS

1. What is the full amount of the LC? _____________________________

2. Does the LC request confirmation? _____________________________

3. What is the tenor of the LC? _____________________________

(Period from issuance to expiration)

4. What is the tenor of the draft? _____________________________

(Payment terms - i.e. sight, 30 days from B/L, etc.)

5. What are the relevant dates? Are they all acceptable?

issuance: __________

latest ship date: __________

presentation period: __________

expiration: __________

7. What is the Incoterm? _____________ named place ______________

Does it agree with:

Transport document? ________________________

Freight charges collect or prepaid? ________________________

Ports of loading and discharge? ________________________

Insurance requirements? ________________________

8. Are the other docs acceptable/appropriate? ________________________

9. For what charges are we responsible? ________________________

10. Has the LC been circulated through sales, treasury / credit, production, traffic, etc. and to your forwarder?

11. Comments / issues / amendments req\'d? ____________________________________________________________________________________________________________________________

Checked by: __________________________ Date: ___________________

amendment procedures
Amendment Procedures
  • Requires the agreement of the applicant, beneficiary, issuing and advising banks
  • Buyer must request
  • Authorized signer at Buyer’s company must approve (sign for) an amendment
presenting documents
Presenting Documents
  • Can be done by exporter or forwarder or trade documentation firm
  • Do not automatically send documents back to the advising bank
  • Present documents to your preferred Export L/C Bank whenever possible. This bank will provide better service and usually better rates.
  • Field 41D: What does “Available With” mean??
    • “Any Bank” vs restricted
lc examination process
LC Examination Process
  • The Examining Bank, on behalf of the exporter, examines documents, corrects documents or assists with discrepancies
    • WHY??
    • The job of the examining bank (and a forwarder who presents documents) is to protect their client - the exporter - by finding and correcting any discrepancies to make a clean presentation to the Issuing Bank, thus ensuring prompt payment
    • Same Day versus 7 day document examination
common discrepancies in documents
Common Discrepancies in Documents
  • General (Hard) Discrepancies
    • LC expired
    • Late presentation
    • Late shipment
    • Missing documents
  • Specific Documentary Discrepancies
    • Document language not per LC
    • Number of originals/copies not per LC
    • Documents not signed, if necessary
    • Mathematical errors or inconsistencies
    • Quantities, dollar amounts, weights, etc., incorrect
  • Tip of the Day: Use a Bank that corrects documents in-house

whenever possible and teaches you to avoid future discrepancies

lc payment process
LC Payment Process
  • Seller’s bank makes claim for payment when documents are clean
  • Seller’s bank waits for Issuing Bank’s agreement to pay on discrepant (uncorrectable) documents
  • Timing of payment based on:
    • Tenor of draft
      • Sight
      • Time
        • Number of days, sight
        • Number of days, date
    • Reimbursement Instructions
      • Payable in the U.S.
      • Payable only at the counters of the issuing bank
  • Seller instructs paying bank where to deposit funds
banker s acceptances
Banker’s Acceptances
  • With a time draft, the “drawer bank” creates a “BA”
  • Accepting bank may agree to discount the BA and pay the seller immediately
  • Ask the accepting bank for a quote on the BA rate prior to discounting
  • Who should pay for acceptance and discount??
  • Amt of draft X disc’t rate X # days / 360

Example: $77k draft, 90 day BL terms, disc’t rate estimated by bank at 6.5%

$77,000 x 6.5% x 80/ 360 = $1,101

typical lc fees
Typical LC fees
  • Importer typically pays for:
    • issuance (credit line fees)
    • amendments
    • exam. of docs by their bank
    • misc. courier/cable fees
  • Exporter typically pays for:
    • advising
    • amendments
    • exam. of docs by their bank
    • any acceptance or discount fees if on time draft
  • Who pays fees is stipulated in LC
    • Consequences of applicant paying all fees
  • Save money!
    • Understand/agree on all LC terms in advance; understand your bank’s pricing; present clean documents; understand time draft benefits for both parties; reduce time spent working on LCs.
slide31

3. Issuing Bank sends the LC to Advising Bank, usually via SWIFT. After authenticating the LC, the LC is sent to beneficiary.

slide34

Seller

6. If documents comply w/ LC terms, Examining Bank claims reimbursement from Issuing Bank. If they confirmed the LC, the Examining/Confirming Bank pays the Exporter.

Issuing Bank

Documents

ExaminingBank

slide35

Buyer

7. Issuing Bank examines documents, finds them in compliance and reimburses the Examining Bank. They debit the Importer’s account for payment and then deliver the docs to importer.

Documents

Issuing Bank

slide36

8. The exporter has been paid, the importer has their goods, the banks have been reimbursed, and the cycle is complete!

special types of lcs

Buyer (LC Applicant)

Drop ship?

$100,000 LC

Vendor (2nd Bene)

Seller (LC Bene)

$75,000 transfer

Special Types of LCs
  • Transferable LCs
    • First beneficiary (often, not always, an agent) transfers all, or a portion, of the LC to another party- usually a vendor
    • Why?? Provide a guarantee to the second vendor without using first beneficiary’s credit line
    • Both first and second beneficiaries present their own documents for payment
    • Typically, second beneficiary pays for any fees related to their draw(s)
special types of lcs38
Special Types of LCs
  • Assignments of Proceeds
    • Beneficiary has advising bank ‘assign proceeds’ from the LC to a second party - usually another vendor.
    • Why?? Provide a guarantee to the second vendor without using credit line.
    • Only the beneficiary draws on the LC. When the LC is paid, the bank automatically pays the ‘assignee’.
    • Assignee relies on ability of beneficiary to draw on the LC successfully.
    • Typically no cost to assignee.
documentary collection
Documentary Collection

Seller

Exporter ships goods and routes documents through banks

  • Seller retains title until payment or acceptance.
  • Buyer must agree to allow bank to pay seller on a sight draft, or accept a time draft prior to receiving title docs for Customs.
  • Used for customers with fair to good credit; low risk country; competitive sales reasons

Buyer

documentary collections the seller s perspective
Documentary CollectionsThe Seller’s Perspective
  • As a selling term
    • Fairly competitive payment term relative to cash in advance or LC
  • Benefits / Risks
    • Buyer could refuse the shipment
    • Incoterm Issues
    • Air shipment v. Ocean shipment
    • Time draft v. Sight draft
    • Stock item v. Custom manufactured
  • Cost / Convenience
    • Low cost
    • Easy documentation (often done by forwarder) by web software or paper
    • No examination of docs
  • Best Bet (lowest risk)
    • Sight drafts, ocean shipments
documentary collections the buyer s perspective
Documentary CollectionsThe Buyer’s Perspective
  • As a purchasing term
    • Strongly preferable to having to issue an import LC or provide cash in advance.
  • Benefits / Risks
    • Retain ability to refuse shipment
    • If a sight draft, no inspection of goods prior to payment
    • Control when and if payment is made, even on an accepted time draft
    • No meaningful examination of docs
  • Cost / Convenience
    • No credit line usage
    • Low processing costs
    • Can defer payment on sight drafts until ship arrives
open account
Open Account
  • Standard payment method for many industries
    • Reduced bank fees
    • Reduced paperwork / hassle
    • Intl customer do not tie up their credit lines
    • U.S. exporter has a long and satisfactory relationship with the buyer
    • Export Credit Insurance possible
  • Potential Stumbling Blocks
    • Lack of reliable, verifiable credit information
    • Longer DSO for most exporters
    • Credit risk
    • Less control over payment amounts
    • Order cancellation risk
    • Communication issues
l c best practices use the internet
L/C Best Practices - Use the Internet!
  • Bank Web-based Tools:
    • Same Day Electronic Advising of L/C’s and Amendments
    • Email Notification of all activity
    • Initiate Export Documentary Collections
    • Full Reporting Capability

-Outstanding balances on your LCs/Collections

-Transaction detail and history

-Monitor ship dates, expiration dates, fees, etc.

-Track and store information on payments, debits/credits

  • Outsourcing – Electronic Documentation Services and/or Software
    • Interfaces with bank’s on-line system Export Letters of Credit
    • Can use l/c to populate all required documents
    • Can present documents electronically to bank
make your life easier use the internet
Make your life easier...Use the Internet!
  • Why?
    • Create visibility throughout your company
      • include Credit, Treasury, Logistics, Sales, Accounting, etc.
      • Reduce time spent making copies, creating reports, etc. for several departments
    • Increase efficiency, accuracy, speed
      • E-mail clean copies of electronic LCs to forwarder/steamship line
      • Reduce cost related to Doc Prep/Presentation
    • Reduce Bank fees and Discrepancies
    • GET PAID FASTER!
wrap up jane s top ten
Wrap up - Jane’s Top Ten

1. Know your trading partner

2. Don’t issue an LC or ship under an LC until both parties agree on all terms

3. Importers, have your int’l banker review your terms. Ask about other possible options.

4. Exporters, make sure you negotiate favorable LC terms BEFORE the LC is issued. Ask your int’l banker and forwarder for their input.

5. Don’t forget the KISS theory

6. Prepare documents carefully

7. Keep UCP 500 and Incoterms Guide available

8. Get your money’s worth! Select forwarders and bankers with solid trade finance experience

9. Have your forwarders and bankers keep you up to date. Keep them accountable.

10. Use a web-based system for efficiency and accuracy

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