Buyer

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“Getting Paid for Your
Exports in a
Challenging Global
Economy”
Lansing, MI
Bill Richeson, CTP
Senior Vice President
International Division
PNC Bank
Ph: (616)771-8849
November 17,
2011 1
AGENDA
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Incoterms 2010
Foreign Exchange
Payment Methods
Letters of Credit at Financing Tools
Medium-Term Financing for Foreign Buyers
Export Credit Insurance
Examples and “War Stories”
Q&A
2
Pricing/Shipping Terms
• Known as Incoterms 2010
– Published by:
ICC Publishing Corporation
156 Fifth Avenue
New York, New York 10010
(212) 206-1150
Website: http://www.iccwbo.org
• A set of international rules, initially formulated in 1936 by
the International Chamber of Commerce (ICC) to define
& interpret a standard set of pricing/shipping terms for
international trade.
Know the Rules
3
Incoterms 2010
Rules for Any Mode or Modes of Transport
EXW =
FCA =
CPT =
CIP =
DAT =
DAP =
DDP =
Ex Works
Free Carrier
Carriage Paid To
Carriage & Insurance Paid To
Delivered At Terminal
Delivered At Place
Delivered Duty Paid
Rules for Sea and Inland Waterway Transport
FAS =
FOB =
CFR =
CIF =
Free Alongside Ship
Free On Board
Cost & Freight
Cost, Insurance & Freight
4
Foreign Exchange
• There is foreign exchange risk to someone in every
international transaction – even those payable in U.S.
dollars
• Four Basic Risks
- Fluctuation risk
- Transaction risk – cash flow risk
- Economic risk – operating risk vs. competitors
- Translation risk – accounting risk
You must quantify and manage this risk
Banks have tools and expertise to help you mitigate
these risks
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Foreign Exchange
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Common Uses of Foreign Exchange
Transactions – used to make or receive
payments in another currency
Precautionary hedges – to protect against
unexpected changes in exchange rates
Speculative positions – to profit from
expected changes in exchange rates
Foreign investments – to buy and sell
foreign assets
6
Payment Methods
7
There is a mismatch between
Buyer and Seller Goals
When do YOU want to get paid?
When do Buyers want to pay?
Now!
Later!
8
Payment Methods: 4 Methods
Lowest
Risk
Highest
Risk
Buyer (Importer) Perspective
• Open Account
• Documentary Collection
• Letter of Credit
• Cash In Advance
Best
Cash
Flow
Seller (Exporter) Perspective
• Cash In Advance
• Letter of Credit
• Documentary Collection
• Open Account
Worst
Cash
Flow
Buyer & Seller have Reversed Priorities!
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Choice of Methods
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(What Determines?)
Buyer-Seller Relationship
Buyer’s credit standing
Competition
Uniqueness of the product (custom made?)
Country conditions (political, economic)
Cash flow considerations
Transaction costs
Other
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Payment Methods: 4 Methods
• Cash in Advance
• Letter of Credit
• Documentary Collection
• Open Account
Terms
Favor
Seller
Terms
Favor
Buyer
11
Risk Evaluation and Mitigation
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High Risk – Cash-in-Advance or Confirmed LC
Moderate Risk – Advised or Confirmed LC
Low Risk – Documentary Collection (at sight)
Very Low Risk: Documentary Collection (Time) or, Open
Account (possibly with Credit Insurance)
• Lowest Risk – Open Account on extended terms
Make Decisions to Mitigate the Risks
Consider ALL risks, not just credit risks
12
Cash In Advance
• Buyer Pays
– Wire Transfer
– Check
– Draft
– Credit Card
• Seller Ships
– No risk for seller except order cancellation
– Foreign Import Regulations may prohibit
– Hard sell to buyer
– Consider the type of payment (Wire Transfer Best)
– Requires little to no credit understanding of the buyer
– KYC (Important)
13
Open Account
• Seller Ships
• Buyer Pays
– Wire Transfer
– Check
– Draft
– Credit Card
• Ship it and hope you get paid
• Foreign import regulations may prohibit
• Full Country & Buyer Credit Risk
• Consider payment type (wire transfer best)
• Requires extensive knowledge of the buyer
(underwriting, trade references, excellent reputation)
14
Letters of Credit
A versatile tool for closing the gap
that exists between buyers and
sellers.
15
Letters of Credit
• Definition:
- An undertaking issued by a bank for the account of the
applicant (buyer) to pay to the beneficiary (seller) the
value of the letter of credit, provided that the terms and
conditions evidenced by documents presented, are
complied with
In other words:
- A letter of credit substitutes a bank’s creditworthiness,
which is generally well known or easily ascertainable for
that of its customer, which may not be as well known
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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
– Performance
– Financial
– Trade-Related
17
Independence Principle
Buyer has an
obligation to the
Issuing Bank to pay
upon claim for
payment
Issuing Bank
Importer (Buyer)
Separate
Contracts
Advising/
Confirming bank
Exporter and Importer
have a sales contract
between them which
supports the
underlying transaction
Exporter (Seller)
Issuing Bank has the obligation to the Exporter
to pay if he has complied with all the terms and
conditions in the L/C
18
Sight LC Transaction Flow
Seller (Beneficiary)
Buyer (Applicant)
1
Sales Contract
Importer
(Buyer)
2
4
Issuing
Bank
Advising/
Confirming bank
Application
Foreign BANK
Exporter
(Seller)
LC Advised
3
PNC Bank
LC Issued
(Issuing Bank)
(Advising Bank)
19
Sight LC Transaction Flow
Seller
Buyer
5
(Applicant)
Shipment
Buyer pays
BEFORE receipt
of goods
$
8
8
$
6
Documents
8
Foreign BANK
$
PNC Bank
Payment Claim
7
20
Time LC Transaction Flow
Seller
Buyer
5
(Applicant)
Shipment
Payment
At
Maturity
$
8
6
8
Documents
$
6
Documents
8
Foreign BANK
$
Payment Documents
7
6
PNC Bank
Acceptance
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Advised Letters of Credit
Beneficiary:
• Bears credit risk of the issuing bank
• Bears full country risk of the transaction
• Responsible for ensuring compliance with Pro Forma
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
23
Confirmed Letters of Credit
• Eliminates issuing bank country and commercial risk
• If the issuing bank’s letter of credit is confirmed, the
confirming bank substitutes its own creditworthiness for
that of the issuing bank’s and takes on all duties and
responsibilities of an issuing bank
• Must be requested by issuing bank to confirm credit
• If the issuing bank is not deemed creditworthy, or if there
are country risk issues a bank may refuse to add
confirmation
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
Payment Method: Letter of Credit
Set it up right!
1. Irrevocable
2. Issue Date, Expiry Date &
Location
3. Issuing Bank/Advising Bank
4. Importer/Exporter
5. Value & Currency
6. Description of Goods/Services
7. Required Documents
8. Payment Terms
9. Incoterms
10. Port-To-Port Info
11. UCP 600
12. LC Fees - Who Pays?
13. Latest Ship Date
14. Presentation Date
15. Partial Shipments (Y/N)
16. Transshipments (Y/N)
17. Paying Bank
18. Drawee Bank
19. Reimbursing Bank
20. Confirming Bank
20 Points of Negotiation in Structuring your LC
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Reducing Cost and
Accelerating Payment
• Set up the LC correctly – negotiating all points
• Check with your bank on S.W.I.F.T arrangements prior
to LC opening
• Avoid discrepancies
– Use LC template
– Get copy of LC application before issuance
• Have the LC confirmed/payable at PNC Bank
• In some cases, discount
• Consult with PNC Bank
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What to do When the LC Arrives
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Read the letter of credit very carefully
Ensure you can comply with the terms (all 20+ points)
Send copy of LC to freight forwarder
Ask about anything you don’t understand
If incorrect, reject the LC immediately
If necessary, request the buyer amend the Letter of
Credit
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The Letter of Credit as a
Financing Tool
• The protections afforded both parties in a letter of
credit transaction provide each additional benefits
as well
• One of these is the ability to use the credit already
evidenced by the letter of credit itself to lower
Trade Cycle cash flow financing costs for both
Buyer and Seller
29
Documentary Collections
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Disguised open account transactions
Less secure than letters of credit
More secure than open account
Benefits
– Don’t encumber buyer’s line of credit
– Very inexpensive
– Effective if properly structured
• Use of correct Incoterms
• Role of banks and freight forwarders
30
Sight Collection (D/P)
Buyer
Buy/Sell
Agreement
1
Shipment
2
4
$
Seller
4
4
Documents
$
2
Documents
4
$
Foreign BANK
PNC Bank
3
Documents
Buyer pays BEFORE receipt of goods
31
Time Collection (D/A)
Buyer
Buy/Sell
Agreement
1
Shipment
2
$
5
Documents
5
6
Seller
Payment at Maturity
Acceptance
6
$
2
Documents
6
$
Foreign BANK
PNC Bank
3
Documents
Buyer pays AFTER receipt of goods
32
Documentary Collection
Transaction Flow
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Seller ships
Seller presents documents to National City
National City sends documents to a correspondent
Correspondent bank releases documents against:
– Payment (if Documents against Payment – D/P)
– Acceptance (if Documents against Acceptance – D/A)
– Note: D/A terms represent more risk to the seller.
• Correspondent wires funds to National City
• National City pays seller
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Payment Method Variations
• CIA Variation
– 50% in advance, balance with order
– 100% upon shipment
• LC Variation
– Transfer
– Assignment
– Financing
• Open Account Variation
– Insured
– Performance guaranty (Standby LC)
34
Medium-Term Financing
• PNC is largest provider of Medium-term (typically up to 5 years)
Financing to Foreign Buyers of Capital Goods under Eximbank’s
Buyer Finance Program
• Financed amount is the lesser of 85% of the sales contract or 100%
of the U.S. content of the sales contract
• Up to 30% of related local costs in the foreign country may be
eligible for financing
• Repayment is through semi-annual installments of P & I
• Interest – floating or fixed each six months
• Eximbank fees may be financed as part of the credit
• Seller is paid out when shipment documentation is presented to
PNC Bank; PNC receives payment directly from foreign buyer
• Program is at no cost to Seller; PNC needs introduction to Foreign
Buyer from Seller
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Export Credit Insurance
• Covers the risk of buyer nonpayment for commercial risks (e.g.
bankruptcy) and certain political risks (e.g. war or the inconvertibility
of currency) from qualified foreign buyers
• Does NOT cover product quality/service disputes
• Provides 90-95% commercial, 95-100% political coverage against
buyer payment defaults
• Premiums are only paid on actual shipments
• Available through the U.S. Eximbank and other private insurers
• Can improve cash flow by allowing you to include insured foreign
receivables in your borrowing base by assigning the policy to a
commercial bank
• For Eximbank coverage, minimum 50% U.S. content required
• Use an insurance broker!!!!
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“Examples and War Stories”
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Trust Gone Awry on a Documentary Collection
When the credit markets freezed up
“If it sounds too good to be true, it probably is…”
In general, “Possibly trust, but verify…”
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Contact Information
• Bill Richeson, CTP
Senior Vice President
International Division
PNC Bank
Phone: (616)771-8849
e-mail: [email protected]
SWIFT: PNCCUS33ENJ
Global Client Care Center: 800-682-4689
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