Basics of Export Finance
Practical Application
Chris Pilkington
Manager, International Division
FirstMerit Bank
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Challenges and Risks in Export
•  Getting Paid
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Country Risk
Customer Credit Risk
Bank Risk
Foreign Exchange Transaction Risk
Shipping Risk – Marine Cargo Insurance
•  Protectionism and Bureaucracy
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Duties and Fees
Quotas and Visa’s
VAT, Withholding and other taxes
Anti-Terrorism Programs
Packaging, labeling, certifications(CE)
“Covert” Protectionism
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Payment Methods
• Cash in Advance
• Letter of Credit
• Documentary Collection
• Open Account
Terms
Favor
Seller
Terms
Favor
Buyer
Moving Money Around the World – Cash in
Advance or Open Account
•  Wire Transfers (Telegraphic Transfer, TT, Cable)
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Two day settlement or less
Good funds as soon as received
SWIFT
No global clearing house, large banks maintain
accounts with other large banks. Clearing banks for
each currency are listed in various bank directories.
•  Collecting foreign checks/drafts
–  With the exception of Canada, extremely costly and
time consuming. Can take weeks to process the
check.
–  A customer may be given provisional credit, but you
won’t know for weeks if the check cleared properly.
–  In general, never accept a paper item for an
international transaction, use a wire transfer.
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Moving Money Around the World – Cash in
Advance or Open Account
•  Unfortunately fraud is running rampant
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Overpayment fraud
Forged items
Hacked emails or right fax programs
Vendor bank change scams
Numerous others
•  Credit Card is quite acceptable for international
transactions.
–  Charge back rules are slightly different than domestic
transactions, but not onerous.
–  Not aware of large scale fraud
–  Should have some knowledge of your customer, not a
total stranger
–  Buyers in many countries can’t make a USD purchase
with a credit card due to capital controls
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Credit Insurance
•  Available from Export-Import Bank of the United
States and several private insurers.
•  In general, Eximbank is best for newer and small to
medium-size exporters. Minimum cost is much
lower than private insurers. Policies are standard.
•  Private insurance can be better for larger exporters
as policies are custom written.
•  Can cover default by a customer for commercial or
political reasons.
•  Can take several months to make a claim and
receive a settlement.
•  Trade disputes always an issue.
Dealing in Foreign Currencies
•  Before we talk about FX, remember this only
applies in developed countries. Many large markets
cannot pay in their local currencies. (India, China
are changing slowly)
•  Are there in-market competitors for your product?
•  Do other competitors offer local currency pricing?
•  If your company is not open to dealing in other
currencies, it will restrict your exporting
opportunities.
•  Most times, exporters overestimate the risk and
difficulty in managing the risk. A simple “forward
contract” is all most exporters need.
•  Quoting properly is the hardest part!
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Documentary Collections
•  Letters of Credit will cost the two parties several
hundred dollars minimum for any size transaction.
•  A lower cost alternative is a Documentary
Collection.
•  The banks protect the title documents until the
payment has been made, or draft/promissory note
has been signed.
–  Works best with Ocean shipments and Bills of Lading
–  Air Waybills are not title documents
•  There is non-acceptance risk
–  You ship the goods around the world and the buyer
doesn’t pick them up.
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Letters of Credit
§  Two Common Types
§  Documentary / Commercial
§  Active payment instrument
§  Active financing tool
§  Standby
§  Passive payment instrument
§  Passive financing tool
§  In Exports – Seller provides to the buyer
§  Bid Bond
§  Advance Payment Guarantee
§  Performance/Warranty Bond
Advised Letters of Credit
Beneficiary:
•  Bears credit risk of the issuing bank
•  Bears full country risk of the transaction
•  Responsible for ensuring compliance with
expectations
Advising Bank:
•  Responsibility limited to authentication
•  Has no payment obligation
•  Advocate for beneficiary
Role of the Advising Bank
•  Verify the authenticity of the Letter of Credit,
thereby protecting the beneficiary from fraud
•  Advocate for the beneficiary
–  No conflict of interest
•  Other benefits of using your bank
–  Commitment to Customer Service
–  Relationship Pricing
–  Consistency in Processing
If you want more protection the next step is to consider
having the letter of credit confirmed
Confirmed Letters of Credit
•  Confirmation eliminates:
–  Commercial credit risk of issuing bank
–  Country risk of issuing bank
•  Confirmed credit means payment obligation moves to
the confirming bank and its country
However:
•  Confirmation is location specific
–  Verify country of confirming bank
•  Confirmation by branch or subsidiary of issuing bank
–  May shift country risk
–  May not shift commercial
What to do When the LC Arrives
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Read the letter of credit
Compare to your Letter of Credit Instructions
Ensure you can comply with the terms
Send copy of L/C to your freight forwarder
Ask about anything you don’t understand
If incorrect:
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Stop Shipment
Stop Manufacturing
Contact the Buyer Immediately
If necessary, request the buyer amend the Letter
of Credit
•  Case Study
•  Questions???
Chris.Pilkington@firstmerit.com
614-429-7440
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