selling overseas 101: managing payment risk and financing the sale jerry watterworth regions bank...

Selling Overseas 101: Managing Payment Riskand Financing the Sale

Jerry WatterworthRegions Bank(561)361-5655

[email protected]

2The U.S. Commercial Service. Your Global Business Partner. The U.S. Commercial Service. Your Global Business Partner. export.govexport.gov 800.USA.TRADE 800.USA.TRADE

Managing Payment Risk and Financing the Sale

Getting Paid and Managing Risk– Methods of Payment– Credit Insurance– Foreign Exchange

Financing Options– Using Letters of Credit – Working Capital for the exporter– Programs for the foreign buyer– Forfaiting

Conclusions


Methods of Payment

Cash in advance– Wire transfer– Check or draft

• US vs. Foreign – Credit card


Methods of Payment

Instrument issued by a bank on behalf of a buyer (importer) in favor of a seller (exporter), promising payment upon presentation of documents in compliance with the letter of credit.

– Sight vs. Time (deferred payment)– Advised vs. Confirmed– Transferable LCs– Back-to-Back LCs

Letters of Credit


Regions Bank

Issuing / Opening Bank

Advising / Confirming Bank

Ap

plicati

on

Beneficiary

Seller

Exporter

Docu

men

ts

Contract

Goods

Docu

men

ts Letter of Credit (Sight/Time)

Documents

Applicant / BuyerImporter

L/C

Export Letter of Credit Process


Risks and Benefits:Letters of Credit

Importer– Assurance that the shipped goods are as ordered.– Payment is made after the shipment is out of exporter’s control

Exporter– Assurance that the payment will be made– Banks are in the middle of the process– Can use buyer’s credit to obtain goods


Methods of Payment

Payment process whereby a sight draft and the documents are sent by the exporter (or their bank) to an overseas collecting bank, and documents are released upon payment to the collecting bank. It is important that the collection form be properly completed and the documents presented with the sight draft.– Sight – Time (or deferred)

Collections/Documents Against Payment


Transaction between Buyer and Seller whereby documents are forwarded through bankingchannels for payment and/or acceptance.

Remitting Bank Presenting Bank

Cash

Documents

Cash Docs Cash D/P D/A

Seller Buyer

Documentary Collections


Risks and Benefits Collections

Importer– Relies on the exporter to ship goods as ordered– Payment is made before goods can be inspected

Exporter– Retains control of title to the goods until payment is made– Transaction is facilitated through banks– Collections are a simple and inexpensive payment

method, but less secure than letters of credit


Methods of Payment

Open account terms – ship the goods and wait for the

payment. Keep your fingers crossed…….

Options– Uninsured – Insured


Foreign Exchange

• To make or receive payments in currency other than one’s local currency

• To hedge against currency fluctuations

• To profit from currency fluctuations

• To buy and sell foreign assets

• Control costs and profit margins

• Reduce cost of currency conversions

• Minimize foreign exchange risks when borrowing in foreign currency

Benefits

Types of F/X Transactions:• Spot (present day)• Forward (agreement to buy or sell

currency in the future)• Flexible Window (Flexible Forward):

A forward contract with a window for currency delivery (i.e., 30 day window) rather than set date

• Options (the rights, not obligation, to buy or sell currency in the future)

Foreign Currency Accounts:• Accounts utilized to hold and manage control

of foreign currencies from anywhere in world

Foreign Loans• Lending in foreign currencies for companies

with expanded business overseas (can be collateralized by accounts receivables); payments are made in foreign currencies

F/X Transactions


Directing Methods of Payment

Be proactive - take control of the transaction Decide what your best alternatives are and prioritize them. Be clear - name a payment method as basis for the

transaction For L/C’s - use a letter of instruction, and request a

specimen copy of l/c prior to issuance For Drafts/Collections – check out the collecting bank

before shipment Request a review from BOTH your banker and freight

forwarder prior to shipment

Export 101

How to Finance the Sale

Financing Options– Using Letters of Credit – Foreign Receivables Financing– Working Capital for the US exporter– Programs for the foreign buyer– Forfaiting

Conclusions


Use the importer’s credit– Transferable letters of credit

• An export letter of credit which may be transferred, in whole or part, to another beneficiary/supplier

– Back-to-Back letters of credit• An export letter of credit used as collateral to issue another

new commercial letter of credit to a supplier– Letters of credit

• Sight• Time

– Carry the receivable and wait for payment– Discount the proceeds (Bankers Acceptance)

Trade Finance

Options


Ex-Im Bank is an independent agency of the United States– Established in 1934– Headquartered in Washington, DC– 8 sales offices

Mission: Support U.S. Exports to create and sustain U.S. jobs

What is Ex-Im Bank?


• Programs for the Exporter

• Pre-export working capital (can include foreign accounts receivable financing)

• Post-export Foreign Receivable Financing

• Programs for the Foreign Buyer

• Short-Term Buyer Credit Financing

• Medium-Term and Long-Term Buyer Financing via insurance/guarantee programs

Trade Finance Options:Ex-Im Bank Programs


Borrower:Domestic Exporter

Eligibility:• 50% US content or added

value required

Mitigation:• Protects against foreign

buyer commercial and political risks

Advance Rates:• Export related A/R advance

rate up to 95%

Coverage:• Covers 95% commercial

and 100% political risk coverage on financed receivable

Export Credit Insurance(Post-Export Financing)

Borrower:• Domestic Exporter

Eligibility:• 50% US content or

added value required

Mitigation:• Covers Exporter

performance risk

Advance Rates:• Export related A/R

advance rate up to 90%• Inventory must be pre-sold

advance rate up to 75%

Coverage:• Covers 90% of the loan’s

principal and accrued interest

Working Capital Guarantee(Pre-Export Financing)

Pre and Post Export Financing

• Expand international sales and market share

• Expand collateral base

• Allows customer to obtain supplier discounts

• Improves cash flow

• Mitigates foreign commercial and political risks for the Exporter and/or the Bank

Benefits

Programs to assist the US Exporter


Profile:

• A US exporter of automotive parts wants to grow its business by expanding its product lines and entering new foreign markets.

Need:

• The company needs working capital to maintain inventory and offer terms to attract foreign buyers.

Solution:

• A Working Capital Guarantee supported by Ex-Im Bank. With the guarantee, the US exporter obtained a line of credit supported by export inventory and foreign receivables.

Pre & Post Export Financing(Working Capital Guarantee)


Foreign Buyer Credit Financing

Borrower: • Foreign Importer

Type of Loan:• Term Loan

Tenor:• Up to 5 years

Eligibility:• Ex-Im financed portion must

be 100% US content including products and/or services

Coverage:• Coverage is 100% of the

remaining 85% to be financed

Product:• Capital goods and related

services financing

Medium-Term Buyer Financing

• Improves cash flow for both importer and exporter

• Reduces foreign commercial and political risks for the Exporter and the Bank

• Increases competitive position by financing at interest rates that are lower than what is available in most foreign countries

BenefitsShort-Term Buyer

Financing (FIBC)

Borrower: • Foreign Importer

Type of Loan:• Revolving Line of Credit

Tenor:• Up to 360 Days

Eligibility:• 50% US content or added

value required on goods and/or services financed

Coverage:• Up to 98% of commercial

and political risk

Product:• Consumer durable goods, bulk

agricultural and capital goods

Programs to Assist the Foreign Buyer


Profile:

• A naval unit in the Dominican Republic wanted to buy 2 new ships and refurbish 4 existing ships to strengthen drug interdiction and reduce illegal immigration. The total cost of the project was $26 million.

Need:

• The US supplier did not have the capacity to extend financing under its own facilities.

Solution:

• A Medium Term Guarantee from Ex-Im Bank allowed the DR Government to obtain 5-year financing for this project.

Medium Term

Buyer Credit


Trade Finance Options - Forfaiting

Forfaiting is the discounting of international trade receivables on a non-recourse basis.

Tenors may range from a few months to several years (typically 3 to 5 years).

Sums involved may range from a few hundred thousand to millions.

Pricing is usually a fixed rate basis, and is based on the country and foreign bank risk.

Converts a term sale into a cash transaction, and improves cash flow

100% financing, and no US-content requirements


Financing Needs Summary

Assess and address your working capital needs:– Meet with your bank to explore your financing options– Explore LC Tools (time LCs, transferable LCs, Back-to-

Back LCs)– Explore government assistance programs

• Florida Export Finance Corporation, or other State agencies• Small Business Administration (SBA)• Export Import Bank of the U.S. (Ex-Im Bank)

– Financing for the exporter or the foreign buyer– Consider Credit Insurance– Explore Discounting Receivables


Selling Overseas 101:

Managing Payment Risk and Financing the Sale

Jerry Watterworth

Regions Bank

(561) 361-5655