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Completing the Deal Mitigate risk and accelerate cash flow. TRADE AND SUPPLY CHAIN. Title. PREPARED FOR:. DATE:. Agenda. Payment methods Letters of Credit Documentary collections Foreign Exchange Correspondent Banks UCP 600/URC 522 Patriot Act. Financial Risk of Export Sales.

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Completing the Deal Mitigate risk and accelerate cash flow


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    1. Completing the DealMitigate risk and accelerate cash flow TRADE AND SUPPLY CHAIN Title PREPARED FOR: DATE:

    2. Agenda • Payment methods • Letters of Credit • Documentary collections • Foreign Exchange • Correspondent Banks • UCP 600/URC 522 • Patriot Act

    3. Financial Risk of Export Sales • Payment Risk • Buyer • Country • Currency

    4. Exporter Least Secure Most Secure Payment Risk Ladder Importer Most Secure Least Secure OPEN ACCOUNT ADVANCE PAYMENT

    5. Bridging the GapBeyond advance payment and alternatives to Open Account TRADE AND SUPPLY CHAIN Title PREPARED FOR: DATE:

    6. Letters of Credit

    7. What is a Documentary Letter of Credit (LC)? • A payment instrument that is: • A written undertaking by a bank • Initiated by the buyer • A promise of payment for a stated amount at a stated time • Against presentation of documents in compliance with the terms and conditions stated in the credit

    8. When do I ask for an LC? • You should ask for an LC if the: • Buyer is a new customer • Buyer has slow prior payment history • Transaction size is larger than normal for this buyer • Transaction exceeds your (seller’s) internal credit guidelines

    9. What is LC Confirmation? • When a bank, other than the Issuing Bank, adds its undertaking to pay under the LC • A promise of payment of a stated amount at a stated time • Against presentation of documents in compliance with the terms and conditions stated in the credit

    10. When do I ask for a confirmed LC? • As the beneficiary, ask for a confirmed LC if: • There is doubt of the Issuing Bank’s ability to pay (e.g., bank risk, country risk or exchange controls) • Payment is required on presentation of documents • The buyer requests extended payment terms • Hold or discount receivable

    11. Applicant Only has to pay against LC compliant documents Enables business with certain suppliers Beneficiary Bank risk instead of buyer risk Assurance of payment (if documents comply) Benefits of Documentary Letters of Credit Applicants and beneficiaries benefit from readily available bank financing. Other benefits include:

    12. Applicant Must have an import facility (or cash cover) in place Must ensure documents accurately reflect goods shipped Beneficiary Issuing Bank standing and/or risk, country risk Workability of terms and conditions - compliance Negatives of Documentary Letters of Credit Documentary Letters of Credit create additional transaction cost for applicants and beneficies. Additionally:

    13. What is a Standby Letter of Credit? • A payment instrument that is: • A written undertaking by a bank • Initiated by the buyer • A promise of payment in the event of Applicant’s non-performance • Against presentation of complying document

    14. When do I ask for a Standby LC? • Standby LC should be used: • To secure an “open account” relationship • Frequent shipments • Smaller amounts • Where the value reflects average receivable amount • Payment is required on presentation of documents • For customers with good payment history

    15. Exporter Least Secure Most Secure Payment Risk Ladder Importer Most Secure Least Secure OPEN ACCOUNT LETTER OF CREDIT CONFIRMED LC ADVANCE PAYMENT

    16. Documentary Collections

    17. What is a Documentary Collection (DC)? • A payment mechanism initiated by the exporter, using bank services to collect payment from the importer. • Bank acts as an agent • Bank does NOT underwrite buyer risk

    18. When do I offer Documentary Collections? • You should offer documentary collections for: • Existing customers with good payment history • Smaller transactions • Where it is industry practice • Situations where required by government regulation

    19. Exporter Least Secure Most Secure Payment Risk Ladder Importer Most Secure Least Secure OPEN ACCOUNT COLLECTION - DA COLLECTION - DP LETTER OF CREDIT CONFIRMED LC ADVANCE PAYMENT

    20. Also consider

    21. Understand your exposure to Foreign Exchange • Exports may generate foreign currency due to: • Competitive pressures to sell in the buyer’s currency • Overseas manufacturing or subsidiaries • Leading to • Accounts receivable • Incoming wire transfers

    22. How do I manage foreign currency exposure? • Issue / Receive Letters of Credit and Documentary Collections in a foreign currency (Euro, RMB etc.) • Spot contract – for immediate need (i.e., foreign currency payment for incoming wire) • Forward contract – for future receipt of foreign currency (i.e., receivable due)

    23. What are correspondent banks? • International banks have relationships with banks in other countries (correspondent banks) to provide: • Infrastructure to complete international transactions • Representation for buyers/sellers • Secure means of communication between banks (SWIFT)

    24. International Regulations • UCP 600: International rules governing letters of credit • Definitions and terms • URC 522: International rules for documentary collections

    25. Be aware of U.S. laws • Banks are subject to: • The Bank Secrecy Act • The Patriot Act • These laws impact your business • Correspondent bank relationships • OFAC (Office of Foreign Assets Control) screening of counterparties/trading partners

    26. Sourcing or Selling Overseas • When sourcing or selling overseas, be sure to consider: • Financial risks and how to mitigate them • Financing your counterparty and/or your company

    27. For more information, contact: Syed Murtaza Global Trade and Receivable Finance HSBC Bank USA Ph: 212-525-2108 Email: syed.a.murtaza@us.hsbc.com