Getting Paid – An Exporter’s View Building Sales with Credit & Finance

1. Getting Paid – An Exporter’s ViewBuilding Sales with Credit & Finance T Glyndwr Powell, FICM MIEx Senior Trade Finance Manager Fairfax Gerrard Group

2. Terms & conditions • Agreement • Applicable Law • Delivery • Payment

3. Agreement / Contract • Where is it • What does it say • Is it signed • Is it registered and enforceable • Is it in writing • FRENCH Law Models everything must be in writing

4. Shipping Terms • Title • Title passes when the parties agree it will pass • Otherwise title passes ON DELIVERY • Risk • Risk passes on delivery • Delivery Point • Group E - Departure • Group F - Main Carriage Unpaid • Group C - Carriage Paid • Group D - Arrival

5. Shipping Terms POINTS TO NOTE: SEA SHIPMENT - FOB CFR CIF ANY METHOD - EXW, FCA, CFR, CIP, DDU, DDP CFR, CIP, CIF, CFR risk passes on loading! Losses are buyers problem! USE THE APPROPRIATE TERMS C&F, FRANCO, FOB (USA types) ARE NOT INCOTERMS Free guide from SITPRO

6. Payment Terms Place of payment • Place determines who jurisdiction over payment • Generally you want place of payment as place where your account is Payment Clause • Wording should mention place, account details, currency, ‘in full, free of all deductions’ • Late payment penalty clause- interest

7. Security & Risk Mitigation • Credit Limits • Insurance • Guarantees & Bonds • Debentures, PGs and Cross Guarantees • Letters of credit • Title & Consignee

8. Payment Terms: Major used • Cash in advance • Letters of credit • Cash against documents • Bills of exchange • Open account

9. Common Reasons for Delay

10. Common Reasons for Delay

11. Collecting Overdue Debts • Collection Agents • Two kinds - broad cover and specific knowledge • Can be expensive (10-25%) • Personal recommendation very desirable • Legal Action • Very slow, Very expensive • Lawyers should be debt collection specialists not general council • Insolvency • Hope

12. Case Studies • Algeria Government Buyer Finance • Non Ferrous Metals Finance • Power and Water Project • Subsidiary Stock and Receivables • Distributor Floor Planning

13. Algerian Government Buyer Finance Scenario • Seller had a highly profitable niche market selling to government and public sector buyers for hard currency • It wished to increase turnover dramatically • It did not wish to dramatically increase its balance sheet exposure to a risky market • It identified extended terms would result increased purchase • Willingness to accept Open account and Draft terms would also win business from competition who insisted on L/Cs • Delay rather than default was the main risk

14. Algerian Government Buyer Finance Solution • Seller offered credit terms of a mix of Net90, 90 day Drafts and LCs • For bigger contracts, seller offered 540 day LCs • Seller mitigated risk with political risk insurance • Seller mitigated cashflow by arranging an invoice discounting facility

15. Algerian Government Buyer Finance Benefits • Annual turnover was increased from $4m to $11m over 5 years • Seller maintained market presence whilst others were leaving • Bad debt provision reduced from £250k to £35k • DSO reduced from 270 days to 45 days • Margins were maintained and discounting reduced • Balance sheet exposure reduced • Customers VERY happy to deal with seller. Easy to buy from!

16. Non Ferrous Metals Finance Scenario • Company sold scrap metal to India and China on Cash Against Documents terms • Buyers took on average 45 days to pay from shipment to arrival in UK bank • Seller paid for goods FOB • Seller was doing maximum business possible against own funds • Seller had no bank facilities • Accepting CAD terms was an advantage over competitors who insisted on Cash or LCs • Value in balance sheet was DEBTORS

17. Non Ferrous Metals Finance Solution • Invoice discounting facility was arranged with bank • Credit and political risk insurance was put in place

18. Non Ferrous Metals Finance Benefits • Seller increased turnover by 100% • Accelerated cash enabled seller to buy more, at better prices and take advantage of market opportunities • Seller was able to maintain CAD Terms and not require LCs

19. Power and Water Project Scenario • Client was procurement agency. • Caribbean Government needed to upgrade electricity and water supplies • Imminent elections • Installation work by the local Ministry of Works. • The total contract value US$13million • ECGD cover US$8million • 15% payable on signature • Their existing bankers were unable to fund the commercial loan. • Contract subject to provision of Commercial finance

20. Power and Water Project Solution • International Bank with operations in the Caribbean provided government the commercial loan • ECGD element ($8m) over seven years • Commercial element ($5m) over 5 years. • In addition, on signature of the term sheet and payment of the commitment fee, US$1.5million could be drawn down to enable the urgent works to start and the 15% down payment made.

21. Power and Water Project Benefits • Urgent work started immediately • Additional work included as finance was available • Government established local capacity to build water and electricity systems • Power and light provided to significant portion of local populace

22. Subsidiary Stock and Receivables Scenario • Turkish parent established subsidiary in USA to market packaged product to US supermarket chains. • Initial funding was through equity, parent working capital and parent bank lines. • Substantial growth opportunity if stock funding could be arranged • Highly seasonal sales (50% of turnover in October to December) • Finance rates in USA considerably cheaper than Turkey

23. Subsidiary Stock and Receivables Solution • Bank identified who would finance • Receivables • Stock in USA warehouse • Stock in transit • Risk mitigants put in place to cover credit risks and potential losses to inventory

24. Subsidiary Stock and Receivables Benefits • $4.5m working capital loan arranged • Finance 5% cheaper than in Turkey • Orders for $10m of additional business taken for Q4 – 2004. • Next 3 years growth secured • Buyer confidence in surety of future funding

25. Distributor Floor Planning Scenario • Local market had shortage of available product. • Delivery not price main driver for winning order • Distributor had limited access to finance and hard currency, limiting growth potential • Shortage of spares limited annuity revenue (HIGHLY PROFITABLE) • No show room stock for demos or copy-shop market

26. Distributor Floor Planning Solution • Manufacturer addressed three issues separately • Stock of spares and supplies • Show room stock and copy centre machines • Stock of machines for sale • Show room stock and copy centre machines sold on 3 year lease • Spares and supplies sold on 180 day letter of credit • Machine stock sold on 360 day terms payable in 4 quarterly instalments from hard currency offshore account • Transfer and insolvency risk covered through credit insurance • Finance arranged with finance partner

27. Distributor Floor Planning Benefits • Manufacturer doubled turnover • Higher net margin achieved • Service and maintenance base secured • Distributor won significant market share • Distributor increased local profitability with copy service revenue and had demo machines • Increased customer confidence

28. Further Information Glyn Powell Fairfax Gerrard Group Limited 45-47 Station Road Gerrards Cross Buckinghamshire SL9 8ES Tel: 017530887955 Fax: 01753 882634 Mob: 07734 329160 E-mail: gpowell@fairfaxgerrard.co.uk Website: www.fairfaxgerrard.co.uk