Export OverviewInternational Services

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The Exporter’s Objective

Take control of the export process to:

Reduce/mitigate risks Reduce costs Accelerate payment Increase export sales

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Buyer’s & Seller’s Objective

Both have a vested interest in closing the transaction, but...

there is an inherent conflict in objectives.

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Buyer wants to delay payment as long as possible. Until… Receipt and processing of goods Sale of goods

Buyer’s Objective

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Seller wants payment as soon as possible. At…

Contract signing or at time of shipment

Seller’s Objective

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Documentation is the engine in global trade. It facilitates:

The movement of freight; transfer of title; processing of payment; and customs clearance.

Export Documentation

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Role of the Freight Forwarder

Exporter’s agent in moving shipment to buyer’s destinationshould be familiar with:

import rules & regulations of foreign countries; U.S. Government export regulations and trade documents.

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Before trying to handle all the documentation, the exporter should consider using a freight forwarder, a specialist in documentation.

Required documents will depend upon both U.S. Government requirements and those of importer’s country.

Shipping Documentation

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Commercial invoice Packing list Ocean Bill of Lading Certificate of origin Insurance certificate Inspection certificate Consular invoice

Common Shipping Documents

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Most commonly used pricing terms that deal with the relation between seller and buyer under the sales contract, especially the seller’s delivery obligation

Deal with a number of obligations imposed upon the parties and with the distribution of risk between them

Critical to the success of the transaction

Incoterms are published by the International Chamber of Commerce

When using Incoterms, refer to them as Incoterms 2010 (Incoterms 2010 as of 1/1/2011)

Incoterms

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Cash in advance Letter of credit Documentary collection Open account

Methods of Payment

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Payment Methods

Open Account

Documentary Collections

LettersOf

Credit

Cash In Advance

Exporter/Seller Most RiskLeast Risk

Importer/Buyer Least RiskMost Risk

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Cash In AdvanceCash in Advance

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Will definitely limit market penetration But … it eliminates any credit & country risk Can be very expensive to buyer leading to potential

loss of customer by requiring prepayment for goods May require exporter to provide a performance bond

Cash in Advance

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Letters of Credit

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A letter of credit is a financial instrument

It evidences a Bank’s commitment to pay money to a specified

party provided certain conditions are satisfied

What is a Letter of Credit?

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Transfers credit risk from the buyer to the buyer’s bank

A letter of credit is a written undertaking issued by a bank to pay, in favor of a third party (beneficiary), on behalf of the bank’s customer (applicant).

Letters of credit are documentary in nature. The bank’s promise to pay is contingent solely upon presentation of compliant documents, as specified in the credit terms.

Letter of Credit – Definition

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Secure communications via:

S.W.I.F.T. (Society for Worldwide Interbank Financial Telecommunication)

Membership limited to financial institutions

Standardized formats with character limitations

Authentication keys exchanged between member banks for secure transmissions

Mitigating Risk of Fraud

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Letters of credit are separate transactions from the sales contract or agreement on which they may be based

Banks are not responsible for the accuracy, content or the validity of the documents

Both issuing and advising banks deal in documents and not the goods or services to which the documents relate

Precepts of Letters of Credit

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Applicant (Buyer) Issuing bank (Buyer’s bank) Beneficiary (Seller) Advising bank (Seller’s bank)

Parties Involved in a Letter of Credit

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Commercial

Irrevocable

Confirmed

Transferable

Standby Used in lieu of bank guarantees Financial standbys Performance

Types of Letters of Credit

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“At sight” terms Payment due at presentation of conforming documents at the

issuing and/or confirming bank’s counter

Usance terms Draft presented for payment at “x” days from Bill of Lading date

(or other clearly specified time period)

Payment Terms

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Letter of Credit Issuance Process – Step 1

Buyer applies for letter of credit at his bank

Bank makes credit decision to issue letter of credit in same manner as approving a loan

Bank issues letter of credit based on approved application

Buyer

Letter of Credit

Application

Buyer’s Bank

Purchase Order

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Letter of Credit Issuance Process – Step 2

Issuing bank forwards letter of credit to correspondent bank located in seller’s country

Advising bank authenticates letter of credit, forwards to seller

Buyer’s Bank

Letter of Credit

Seller’s Bank

Letter of Credit

Seller

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Letter of Credit Payment Process – Step 1

Seller ships merchandise to buyer Seller prepares specified shipping documents to submit to

bank for payment

Seller’sBank

Documents Seller

Buyer Goods Seller

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Letter of Credit Payment Process – Step 2

Seller presents documents to the advising/processing bank

Bank examines documents carefully to determine compliance with letter of credit terms

If documents comply, advising/processing bank informs issuing bank of presentation, obtains reimbursement per credit terms, pays seller

Buyer’s Bank Notify

Seller’s Bank Documents

Seller

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Letter of Credit Sample

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Discrepancies occur when there is non-compliance with the terms of the letter of credit and/or when the documents are inconsistent

with each another.

Discrepancies

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Expensive and are typically for exporter’s account Can delay payment: when documents must be presented on

approval basis, buyer may delay the payment approval Can void the protection of the letter of credit; risk of non-payment

as buyer may elect not to approve payment altogether (e.g., late shipment may not allow the buyer to resell goods)

If the buyer is having financial problems, the issuing bank may try to find any discrepancies to void the letter of credit

Consequences of Discrepancies

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Seller’s invoice exceeds letter of credit amount Documents presented after letter of credit has expired Documents are not presented within the specified presentation

period Late shipment Missing documents Absence of required signatures Documents inconsistent with letter of credit or with each other

Common Discrepancies

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Correct or present new documents

Have Advising/Processing Bank contact Issuing Bank for approval to accept discrepancies

Have Advising/Processing Bank send documents to Issuing Bank for approval

What To Do When There Are Discrepancies

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Yes, when: Unfamiliar with credit risk of Issuing Bank or country

– If confirmed by a U.S. bank, the country/political and credit risks are transferred to U.S. bank

– Letters of credit are only as good as the banks that issue/confirm them

No, when: Letter of credit is issued by an investment grade bank Country risk is acceptable

The Letter of Credit: Confirm or Not?

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Documentary Collections

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Presentation of ‘financial’ and ‘commercial’ documents on a collection basis by the seller’s bank (i.e. the Remitting Bank) to the bank (i.e. the Collecting Bank) nominated to make presentation to the buyer as per the collection instructions.

The seller draws the ‘financial’ document on the buyer, which stipulates the tenor of the underlying commercial transaction.

Documents are typically released against:

– Payment (D/P, Documents against Payment)

– Acceptance (D/A, Documents against Acceptance)

Definition

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Documents are presented on a sight basis and are released to the buyer when payment has been made.

Payment must be made in ‘good funds’, which can take the form of ‘available funds’ in their account or a FedWire transfer.

D/P – Documents Against Payment

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Documentary Collections – D/P

Remitting Bank

Collection Letter,

Draft, Title Documents

Collecting Bank

Drawee/Buyer

Drawer/Seller

Title Documents

Goods

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Documents are presented on a time basis and are released to the buyer when the buyer has accepted the ‘financial’ document

for payment at a future date.

This act of acceptance by the buyer represents their promise to pay as per the tenor of the transaction.

D/A - Documents Against Acceptance

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Documentary Collection Time Draft – D/A

Remitting Bank

Collection Letter,

Draft, Title Documents

Collecting Bank

Title Documents

Drawer/Seller

Drawee/Buyer

Goods

Accepted Draft

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Documents are sent to the wrong department/branch of foreign bank & released to buyer without payment

Time drafts are subject to buyer’s credit risk

Documentary Collections Risks

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Because the importer is not obliged to take up the documents, Buyer can:

Stall (until shipment arrives) Try to negotiate a lower price Refuse the shipment (timing, credit, character or country risks)

Documentary Collections Risks

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Banks have no liability to pay or accept the drawers/sellers draft Banks act only as collecting agents

Documentary Collection Summary

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Open Account

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Common in both domestic & international commerce

Seller ships the goods to the buyer and separately mails the title documents and invoice calling for payment within a stipulated period of time

Open Account

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Advantage to buyer who is able to receive goods, sell them and possibly collect A/R prior to paying seller

Risks to seller:

– buyer credit risk– buyer country risks

(e.g., commercial/exchange, controls/FX, volatility/turmoil)

Open Account

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Export Credit Insurance

Protects the exporter from– commercial non-payment risks (buyer insolvency,

bankruptcy or protracted commercial default)– political risk that results in non-payment (unrest, currency

inconvertibility, withdrawal of import license) Allows exporters to sell on open account (the riskiest payment

method) Increases exporter competitive edge Does not protect against quality issues and shortages

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Some Practical Advice

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Exporters Focus on your documents. Keep them simple, relevant and

free of discrepancies. Address the country and credit risks involved

– Are they relevant?

– Are you comfortable with the risks?

– If not, can they be mitigated or eliminated?

Practical Advice (continued)

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Remember: Time = Money

Finally, consult with your banker — your partner and ally in the trade transaction.

Practical Advice (continued)

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Joe Pearson

AVP, International Business Development Officer

BB&T International Services

803-251-1607

JMPearson@bbandt.com

www.BBT.com

BB&T Contact Information

BB&T, Member FDIC.