Mitigating Risk Inherent in
International Trade
AMCHAM: Doing business with Colombia
Wednesday 6th April & Tuesday 12th April, 2011
What type of issues are
businesses facing in today’s
environment?
Today’s Environment
Reduced demand for
products and services
Accounts Receivables
days on hand
increasing as
buyers try to
stretch their credit
limits
Heightened risk
in international
trade as
uncertainty of
the credit risk of
buyers
Why Trade Finance?
Issue
Consequences
TF Solution
Reduced
demand
for products
and
services
Need to look for new
markets – overseas
Uncertainty involved in
new trade relationships
*Use TF as a marketing tool
Eg Use LC to offer attractive
terms
*Internet Merchant Services
Heightened
risk of
international
trade in current
climate
Even trade relationships
that have been
longstanding are more
risky in current
environment
*Trade in Goods: Letters of Credit
Documentary Collections
*Trade in Services:
Letters of Guarantee (Bonds),
Standby Letters of Credit
Why Trade Finance?
Issue
Consequences
Increasing Account Lengthening
Receivables days on operating cycle can
hand
cause strain on cash
flow
TF Solution
*Pre/post Shipment Financing
eg Discounting Receivables
*Discounting of Bankers
Acceptance under Export LC
Risk profile of Methods of
Payment
For the Exporter
HIGH
For the Importer
Advance Payment
Documentary
Collections
Letters of Credit
Open Account
Open Account
Documentary
Collections
Letters of Credit
Advance Payment
LOW
Documentary Collections
• A method of payment used in international trade
whereby the Exporter entrusts the handling of
commercial and often financial documents to
banks and gives the banks instructions concerning
the release of these documents to the Importer.
• Banks involved do not provide any guarantee of
payment.
Documentary Collections
Documentary Collections may be carried out in
two different ways:
1. Documents Against Payment: Documents are
released to the Importer only against payment. Also known
as a Sight Collection or Cash Against Documents (CAD).
2. Documents Against Acceptance: Documents are
released to the Importer only against acceptance of a draft.
Also known as a Term Collection. (30, 60, 90 days)
Documentary Collections
Exporter/
Drawer
Exporter submits
documents such
as invoice & B/L
Remitting Bank
Sends documents together
with collection
instructions
GOODS
Acts in accordance with
collection instructions
and releases documents
Importer/
Drawee
Collecting/ Presenting
Bank
Letters of Credit
Letters of
Credit
Documentary
Standby
• Primary Source of
Payment
• Secondary source of
payment (in the event of
default
• Meant to be
drawn/exercised
• Not meant to be
drawn/exercised
Letters of Credit- Documentary
•
•
•
•
•
a payment undertaking given by a bank (Issuing Bank/Drawee),
on behalf of a buyer (Applicant),
to pay a seller (Beneficiary/Drawer) a given amount of money,
on presentation of specific documents representing the supply of
goods,
within specific time limits,
documents must conform to terms and conditions set out in L/C
(Banks obligation to ensure)
and documents must be presented at a specific place.
Banks deal only in documents and not in goods
Letters of Credit
Letters of Credit may be:
1. Sight : If payment is to be made at the time that
documents are presented and there are no
discrepancies
2. Term: If payment is to be made at a future fixed
time from shipping date/invoice date
Confirmed Letters of Credit
• Under a Confirmed Letter of Credit, a bank, called
the Confirming Bank, adds its commitment to that of
the Issuing Bank to pay the Exporter under the Letter
of Credit provided all terms and conditions of the
Letter of Credit are met. The Confirming Bank is
usually located in the same country as the Exporter.
Letters of Credit: Issuance
Exporter/
Beneficiary
Advise
/Confirmation
Advising/
of the Letter of
Credit.
Confirming Bank
Request to advise
& possibly
confirm the Letter
of Credit
Contract
Negotiations
Importer/
Applicant
Importer applies for
Letter of Credit.
Issuing Bank
Letters of Credit: Flow of
Documents & Payments
Documents
Advising/
Confirming Bank
Documents
Exporter/
Beneficiary
GOODS
Documents
Importer/
Applicant
Issuing Bank
Standby Letter of Credit
• Form of guarantee / secondary source of payment
• Default instrument issued to cover the nonfulfillment of a customer’s obligation under an
underlying contract or agreement relating to a trade
related or financial transaction
• Banks in the US are not empowered to issue
guarantees so they developed the SBLC to get
around this
Bonds & Guarantees
–
–
–
–
–
Bid/Tender
Performance
Advance payment
Customs
Immigration
Pre-Shipment Financing
Advances made to a client based on export
orders (raw material financing)
- With recourse financing
- ECA supported (without recourse)
- LIBOR-based pricing for eligible borrowers
Post- Shipment Financing
Advances made to an exporter after the shipment
has been made based on satisfactory evidence of
debt (foreign open a/c receivable financing)
- Buyer Credit or Supplier Credit
- ECA supported
- Int’l trade lines, LIBOR based pricing for eligible
borrowers
Why Scotiabank Trade Finance?
• International Bank – global reach into target markets
(lower transaction costs across network)
• Network of correspondent banks
• 175 years in existence, presence in 50 countries
• Among Top 10 performing banks in the world- 2009
• Global Finance Magazine awarded Scotiabank “Best Trade
Finance Bank –Canada” 2006, 2008, 2009 , 2010
Why Scotiabank Trade Finance?
• Can leverage technology and expertise (Tradexpress Elite)
• Can offer a full range of services/creative tailored solutions
• Has access to cheaper international funding (high credit
rating)
• Can offer training & support to its clients
For More Information:
Joanna del Pino, Snr Manager, Trade Finance
625-3566 Ext 2050
joanna.delpino@scotiabank.com
THANK YOU