Export Letter of Credit EssentialsPresented by:Scott Smithhisler, Global Trade Consultant
Agenda:  Welcome & Introductions Today we’ll strive to make  Custo...
Customer RelationshipsStrong relationships and underlying agreements are vital to successfully doingbusiness in internatio...
High Level Export Process & Team1. Customer Relationship Sales / Legal •  Customer selection •  Legal agreement ...
Export Credit PolicyCompeting in international markets requires companies to take “smart risks.”Having a sound export cred...
Standard Operating ProceduresConducting any business requires creating and maintaining standard operatingprocedures (SOP)....
Key SOP Topics – Title Passage & Consignment of GoodsCertain elements of the SOP are tied 1. How legal title passes from...
International Commercial (INCO) TermsINCO terms: Examples:  Define Buyer & Seller’s liabil...
International Trade Risks Commercial   Buyer history ...
Terms Options - Balancing Risk, Cost & Timing OPEN ACCOUNT DOCUMENTARY COLLECTION ...
Cash in Advance, Open Account & Documentary Collections CIA / Open Account Documentary Colle...
Letters of Credit ExplainedLetters of credit work through a   Buyer’s Bank substitut...
Letter of Credit - Pro’s & Con’s for Exporters Pros Cons  Eliminates buyer...
L/C Terminology  Issuing Bank •  Buyer selects; establishes loan/credit line to secure LCs  Advising Bank ...
Typical Letter of Credit Parameters Who, How Much and When Shipping & Goods  Parties involved ...
LC Parameters – Cont’d Trade Terms & Documents Additional Conditions  INCO Terms ...
Letter of Credit Process Flow Freight Forwarder Applicant / Buyer ...
Common Discrepancies & Implications Minor Major   Inconsistent spelling of parties’ ...
Solutions - PeopleMaintaining a highly skilled, passionate cross functional team working together toensure overall success...
Solutions – Process & ToolsThere are a variety of key process steps and tools that can provide the team withvisibility, he...
Alternative Solutions – Outsource ProvidersDepending on the size and the nature of your international business, externalpr...
Group Activity – Mock LC ScenarioThe Scenario: We work for NACM Exporters, Inc., makers of exceptional qualityWidgets sold...
Example Amendment RequestRe: URGENT / LC AMENDMENT NEEDED! Your PO 12345 / Our Confirmation 678910/ LC no. 123456789 dat...
Questions?Thank you for coming today!
AppendixExample Specialty Provider:Trade Technologies – Concepts & BenefitsExport Insurance & Financing Programs:Small Busi...
©2010 Trade Technologies, Inc. All rights reserved.26
Advising          ISSUED   Bank   ...
Goods  are   Beneficiary   Shipped     Trade  Prepares   Documents     ...
Automate as much of process as possible, including utilizing bank websites and third party software. ...
  Sell more internationally with less risk   Clean documents banked on time   Accelerated export ...
 New to Asia Market – Relied on Letters of Credit for Prompt and Certain Payment ...
RISK  MITIGATION  &  BUSINESS  FINANCING   Jeff  Deiss   Regional  Export  Finance	...
Risk  MiQgaQon  Tools  –  EXPORT  INSURANCE  •  Foreign  receivables  insurance  –  public  (Ex-­‐Im  Bank)  ...
Risk  MiQgaQon  Tools  –  FOREIGN  EXCHANGE  (FX)  RISK    •  Even  if  your  price  is  in  $’s,  you  a...
Business  Financing  Tools  –  LOAN  GUARANTEES    •  Lender-­‐driven  –  lender  makes  &  services  the  l...
Business  Financing  Tools  –  SBA  and  EX-­‐IM  BANK    •  US  SMALL  BUSINESS  ADMINSTRATION  (SBA)   ...
Business  Financing  Tools  –  SBA  and  EX-­‐IM  BANK    •  EXPORT-­‐IMPORT  BANK  OF  THE  US  (EX-­‐IM  ...
Business  Financing  Tools  –  SBA  LOAN  GUARANTEES    •  SBA  InternaQonal  Trade  Loan  (ITL)   –  90%	...
Business  Financing  Tools  –  SBA  LOAN  GUARANTEES    •  SBA  Export  Working  Capital  Program  (EWCP)   ...
Business  Financing  Tools  –  SBA  LOAN  GUARANTEES    •  SBA  Export  Express   –  Similar  to  ITL,  b...
Business  Financing  Tools  –  EX-­‐IM  BANK  LOAN  GUARANTEES  •  EX-­‐IM  Working  Capital  Program   –  ...
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NACM LC Class Feb2012

Export Letter of Credit Essentials
Published on: Mar 3, 2016
Source: www.slideshare.net


Transcripts - NACM LC Class Feb2012

  • 1. Export Letter of Credit EssentialsPresented by:Scott Smithhisler, Global Trade Consultant
  • 2. Agenda:  Welcome & Introductions Today we’ll strive to make  Customer Relationships Export L/Cs more about people, processes and tools,  High Level Export Process & Owners and less about chance.  Export Credit Policy  Standard Operating Procedures  Trade Risks  Payment Terms Options  Letters of Credit – What & How  Discrepancies and Implications  Solutions – People, Process & Tools  Group Activity – LC Scenario & Key Decision  Q&A
  • 3. Customer RelationshipsStrong relationships and underlying agreements are vital to successfully doingbusiness in international markets and long term growth.What do your customer relationships look like?  Distributor: Has exclusive rights to sell your product in one or more countries  Dealer: Similar arrangement but sells other competing brands  Licensee: Has the right to use your trademark and manufacture products under certain restrictions  Retailer: Buys directly from you and sells to consumers  Affiliate: An operation fully owned by your company
  • 4. High Level Export Process & Team1. Customer Relationship Sales / Legal •  Customer selection •  Legal agreement 2. Pricing •  Credit terms according to Merchandising / Finance risks & policy •  Product offering 3. Order Fulfillment •  Prices consider INCO terms Customer Service / Credit •  Quote to Customers •  Customer purchase order •  Collaboration & changes •  Credit check •  Proforma Invoice (includes 4. L/C Receipt required LC specifics) Credit •  Review •  Request amendments 5. Shipping •  Release product for shipment Customer Service / Logistics •  Shipment Planning •  Shipment 6. Payment & Delivery •  Transport & other documents Credit / Finance / Customer •  Draw on LC & monitor •  Documents to Customer •  Payment to seller •  Customs clearance at destination •  Happiness! Let’s do more of this!
  • 5. Export Credit PolicyCompeting in international markets requires companies to take “smart risks.”Having a sound export credit policy that enables sustainable growth while ensuringreceivables are managed effectively is critical for success. Policy Main Elements:   Approval by Sr. Leadership in Finance, Sales & Operations   Customer selection criteria and credit application approval process   Credit limits and terms to be assigned against criteria   Customer credit strength   Customer history & performance   Geopolitical risk rating   Order value   Override approvers & limits
  • 6. Standard Operating ProceduresConducting any business requires creating and maintaining standard operatingprocedures (SOP). This is especially important when a business model, such asExport Sales, involves a cross functional team. SOP Main Elements:  Approval by Sr. Leadership in Finance, Sales & Operations  Clear description of the end-to- end process and supporting job functions  Delineation of roles and responsibilities and communication required  Metrics and reporting  Guidelines for on-going training
  • 7. Key SOP Topics – Title Passage & Consignment of GoodsCertain elements of the SOP are tied 1. How legal title passes from seller toto managing export risks & product buyerflow.   Physical movement of goods   Transport documents (e.g. cargoAs such, they should be considered receipt, waybill, bill of lading)in the export credit policy anddecision making. 2. Transport Documents   Bill of Lading (B/L) = Negotiable Title   Cargo Receipts, Truck Bills & Waybills = Non-Negotiable Receipts 3. Consignment of the Goods   Open Consignment = “To Order” Title passes via endorsement   Straight Consignment = “To” No endorsement required; can help expedite delivery
  • 8. International Commercial (INCO) TermsINCO terms: Examples:  Define Buyer & Seller’s liabilities & responsibilities Any Mode of Transport  Indicate a named place EXW, Named Place of Delivery (EXW = Ex Works)  Depict what the selling price   Seller is responsible for warehouse includes services and export packing  Are specific to either sea/   Buyer arranges for loading at point of inland waterway transport origin through delivery to final destination or other modes Ocean Transport CIF, Port of Destination CIF = Cost, Insurance & Freight   Seller is responsible for transport to destination port and insurance   Buyer arranges for pick up at local dock, arranges clearance and pays duty
  • 9. International Trade Risks Commercial   Buyer history   Credit reporting limited   Financial standards may differ   Potential for loss during transit Geopolitical Government stability and consistency   Economic   Foreign exchange rate fluctuations   Foreign Bank solvency   Sovereign risk Legal   Contract enforceability   Goods recoverable   Customs & Tax regulations change
  • 10. Terms Options - Balancing Risk, Cost & Timing OPEN ACCOUNT DOCUMENTARY COLLECTION LETTER OF CREDIT CASH IN ADVANCE
  • 11. Cash in Advance, Open Account & Documentary Collections CIA / Open Account Documentary Collections  Checks, wire transfers, automated   Buyers Bank holds documents clearing house, credit cards, drafts, required for Customs clearance until money orders, cash payment is made  One party has all the leverage   Can ensure release of goods in exchange for payment  Mitigate risk using a combination of steps and/or timing   Credit risk related to buyer •  Down payment and open   Buyer decides whether to pay account for the balance   Demurrage, spoilage, price changes •  Down payment to secure order and other risks remain with seller with remainder due at shipment time   Works best with trusted customers and when geopolitical risk is low •  Full payment due at shipment time
  • 12. Letters of Credit ExplainedLetters of credit work through a   Buyer’s Bank substitutes its creditseries of formal agreements worthiness for that of the buyer •  Contract   Typically goods cannot be Seller •  Purchase Order •  Confirmation Buyer obtained by buyer until payment is made   Credit risk is with buyer’s bank and country of domicile   Works well for higher risk •  LC Application transactions •  FX & Export Financing •  Loan / Collateral •  LC Advice / Confirmation •  Documents & Payment •  Documents & Payment •  FX & Trade FinancingSeller’s Bank •  Correspondents •  Credit Line for Buyer’s Bank confirmations
  • 13. Letter of Credit - Pro’s & Con’s for Exporters Pros Cons  Eliminates buyer credit risk and   Guarantee is contingent on strict ensures prompt payment compliance with terms & conditions  High degree of Exporter control   Order fulfillment systems may not support LC or trade documentation  Confirmations eliminate bank/ requirements, so automation may be country risk limited  Rules are well defined and   Heavy reliance on carriers, predictable (e.g. subject to UCP600) forwarders and other 3rd parties for LC compliance  Usance (term) LCs offer cost effective trade financing option; could be   Complexity of LCs and related rules competitive advantage require high degree of expertise  “Irrevocable” means terms and   Visibility limited and monitoring is conditions can only change if buyer, time consuming seller and bank agree.
  • 14. L/C Terminology  Issuing Bank •  Buyer selects; establishes loan/credit line to secure LCs  Advising Bank •  Has correspondent relationship with Issuing Bank; authenticates LC and passes to seller •  Seller selects (communicates in order confirmation LC instructions)  Confirming Bank •  Seller selects; has credit line established for Issuing Bank  Negotiating Bank = Bank that examines your documents & claims funds (advising or confirming bank)  Reimbursement Bank •  Nominated by Issuing Bank according to offshore account holdings  Applicant = Buyer  Beneficiary = Seller
  • 15. Typical Letter of Credit Parameters Who, How Much and When Shipping & Goods  Parties involved   Partial / Transshipments  Key dates:   Port / Airport of departure   LC Issuance   Date & Place of Expiry   Port / Airport of destination   Latest date of shipment   Description of Goods   Period for presentation   No need for line item detail  Currency / Amount   Simpler the better!  Availability (e.g. with any bank by negotiation)   Invoice must match LC description  Tenor  Who pays the Bank charges   All other documents must be consistent  Who pays for shipping & provides marine insurance
  • 16. LC Parameters – Cont’d Trade Terms & Documents Additional Conditions  INCO Terms   Documents dated prior to LC not acceptable  Required Documents   Commercial Invoice   Special language to appear on   Packing List invoice   Insurance Certificate   Restriction on House Airwaybills   Certificate of Origin   Inspection Certificate   Third party documents not allowed   Transport Document Question: Are there conditions that make compliance difficult? Questions: Are the documents and other terms as requested? Can we comply?
  • 17. Letter of Credit Process Flow Freight Forwarder Applicant / Buyer 6 Shipment Goods 7 Transport Docs START HERE 1 & 2 Seller / Beneficiary Purchase Order & Confirmation 12 3 L/C DocumentsApplication to Buyer 9 5 L/C Claim Reimbursing Bank 10 Payment 11 Export Documents 8 LC & Letter of Credit Documents Issuing Bank 4 Advising Bank
  • 18. Common Discrepancies & Implications Minor Major   Inconsistent spelling of parties’   Letter of credit expired names on documents   Late presentation of documents   Merchandise description on   Late shipment invoice not per LC   Partial or transshipment effected   Documents inconsistent with one contrary to LC terms another   Bills of Lading not clean   Insurance omits coverage required in LC What happens now?   Insurance issued after ship date   Guarantee no longer applies   Documents will be sent on   Bills of Lading not endorsed “approval”   Fees & Delays What do we do?   If there is time documents can be resubmitted with corrections
  • 19. Solutions - PeopleMaintaining a highly skilled, passionate cross functional team working together toensure overall success is fundamental for international growth.  Maintain a working environment that fosters open communication & shared accountability  Hire people with international trade, logistics or trade finance experience  Invest in ongoing training across your organization  Consider outsourcing certain functions as needed   Freight Forwarders   Specialty Providers  Your Partners are part of the team (e.g. outsource providers & your Bank)
  • 20. Solutions – Process & ToolsThere are a variety of key process steps and tools that can provide the team withvisibility, help address problems proactively and increase the odds of success.Process: Tools:  Document end-to-end steps & timing;   Automate wherever possible continually improve the process utilizing third party websites  Maintain policies & procedures   Maintain & monitor credit limits and terms systematically  Communicate detailed LC requirements in order confirmation   Provide visibility to order placement & confirmation activity to Export Credit   Automatic LC required details on invoice & other documents   Systematic tracking •  LC balance (amount & quantity) •  LC latest ship date, presentation period and expiration •  Late payments
  • 21. Alternative Solutions – Outsource ProvidersDepending on the size and the nature of your international business, externalproviders can act as an extension of your operation or help optimize results.Freight Forwarders: Specialty Providers:  Serve as travel agents for   Minimize risk by providing international trade expertise & software  May specialize in certain service   Reduce costs by accelerating areas, modes of transport or payments, doing document markets preparation and avoiding fees  Help transport goods  Can help product flow and reduce cost (e.g. consolidation of cargo, routing options)  Need to ensure services fit your needs and compare prices
  • 22. Group Activity – Mock LC ScenarioThe Scenario: We work for NACM Exporters, Inc., makers of exceptional qualityWidgets sold around the world. We recently agreed to fill an order from ourcustomer, ABC Company in Singapore. The agreed plan is to ship $200K worth ofWidgets per month by vessel for three months for a total of $600K. Activity:   Review example LC specifics we required in our Pro Forma Invoice   Review LC received differences (highlighted in yellow)   Make the key decision as a group: Do we release our product for shipment or do we require an amendment first? Considerations:   Customer relationship / mutual trust   Policy   Risk trade offs (e.g. inventory, production timing, the sale)   Contingency plans – other buyers?
  • 23. Example Amendment RequestRe: URGENT / LC AMENDMENT NEEDED! Your PO 12345 / Our Confirmation 678910/ LC no. 123456789 dated Feb. 20, 2012Dear Mona, (our Customer Contact)Thank you for your time on the phone this morning and for your understanding and help. As wediscussed, the following amendment is needed in order for us to release your order for shipment.1. Field 31D - Extend expiration to June 15, 20122. Field 59 - Beneficiary’s address changed to read “52 Lois Lane…”3. Field 43P - Partial shipments are now allowed.4. Field 44C - Delete latest date of shipment5. Field 46A - Under documentary requirement 3 Certificate of USA Origin, delete “/Chamber of Commerce”6. Field 48 – Delete period for presentation. Add special condition “Documents presented later than 21days after ship date but within the validity of this credit is acceptable.”Please kindly request these changes with your bank as soon as possible and advise once theamendment is issued. Once the amendment is received by our bank, we will expedite your orderand inform you of shipping details timely.Very best regards,John SmithExport Credit Manager
  • 24. Questions?Thank you for coming today!
  • 25. AppendixExample Specialty Provider:Trade Technologies – Concepts & BenefitsExport Insurance & Financing Programs:Small Business Administration
  • 26. ©2010 Trade Technologies, Inc. All rights reserved.26
  • 27. Advising          ISSUED   Bank      SENT  TO  BENEFICIARY   Le#er  of  Credit   Beneficiary   Advice        COPY  TO  TRADE  TECHNOLOGIES   COPY     TRADE  TECHNOLOGIES    REVIEWS  &  INFORMS   BENEFICIARY  OF  INCONSISTENCIES     LC  Review  and   Upload       AMENDMENTS  IF  ANY  REQUESTED  &  RECEIVED         TRADE  TECHNOLGOGIES  UPLOADS  TO  BENEFICIARY’S  FILES  27 ©2010 Trade Technologies, Inc. All rights reserved.
  • 28. Goods  are   Beneficiary   Shipped     Trade  Prepares   Documents      Trade  Banks   NegoQaQng   Documents   Bank  28 ©2010 Trade Technologies, Inc. All rights reserved.
  • 29. Automate as much of process as possible, including utilizing bank websites and third party software.   Reduces errors, delays and costs   Distributes information across organization   Provides visibility and control   Data for reports fuels constant improvement29 ©2010 Trade Technologies, Inc. All rights reserved.
  • 30.   Sell more internationally with less risk   Clean documents banked on time   Accelerated export receivables collection cycle  PROFITS        RISKS     Significant reductions in labor costs spent on preparing documents and tracking payments   Reduced courier expense due to automated document delivery/ presentation and third party data exchange   Reduced discrepancy and other fees   In-depth reporting for all completed transactions   24/7 audit-ready all-inclusive document/data storage30 ©2010 Trade Technologies, Inc. All rights reserved.
  • 31.  New to Asia Market – Relied on Letters of Credit for Prompt and Certain Payment  DSO reduced by over 60%  Discrepancies virtually eliminated  Asia Customers increased by 10X31 ©2010 Trade Technologies, Inc. All rights reserved.
  • 32. RISK  MITIGATION  &  BUSINESS  FINANCING   Jeff  Deiss   Regional  Export  Finance  Manager   SBA  Office  of  Interna<onal  Trade   Portland,  OR   www.sba.gov/oit
  • 33. Risk  MiQgaQon  Tools  –  EXPORT  INSURANCE  •  Foreign  receivables  insurance  –  public  (Ex-­‐Im  Bank)   or  private  providers    •  Ex-­‐Im  Bank  insurance  on  foreign  A/R   –  100%  against  poli<cal  risk  (foreign  government  ac<on)   –  95%  against  commercial  risk  (buyer  ac<on)   –  “Express  Insurance”  –  a  policy  for  small  businesses  with  < $7.5  MM  in  annual  exports  on  their  export  A/R’s  –   streamlined  coverage  of  foreign  sales  up  to  $300,000  per   buyer;  up  to  10  foreign  accounts  may  be  covered.   –  Insurance  may  be  a  lower  cost  alterna<ve  to  L/C
  • 34. Risk  MiQgaQon  Tools  –  FOREIGN  EXCHANGE  (FX)  RISK    •  Even  if  your  price  is  in  $’s,  you  are  shi]ing  this  risk  to  the   BUYER  and  affec<ng  your  compe<<veness  •  You  want  to  remain  compe<<ve  as  US$  value  moves  against   foreign  currency  •  Techniques   –  Nebng   –  Forward  contract  (hedge)   –  Futures  contract   –  Currency  op<ons
  • 35. Business  Financing  Tools  –  LOAN  GUARANTEES    •  Lender-­‐driven  –  lender  makes  &  services  the  loan/line  of   credit;  lender  decides  if  guarantee  is  needed  and  selects   guaranteed  program  to  use  •  The  value  of  loan  guarantees     –  Insurance  and  incen<ve  for  your  lender   –  Enhanced  access  to  credit  for  business   –  Enhances  your  borrowing  base   –  Lenders  o]en  heavily  discount  their  advance  rate  when   foreign  sales  serve  as  collateral;  a  loan  guarantee  can   overcome  this  –  see  TRADE  FINANCE  GUIDE,  p.  16
  • 36. Business  Financing  Tools  –  SBA  and  EX-­‐IM  BANK    •  US  SMALL  BUSINESS  ADMINSTRATION  (SBA)   –  “Small  business”     –  Will  guarantee  loans  up  to  $5  million   –  Pre-­‐export  and  post-­‐export  financing;  general  business   financing  needs   –  No  US  content  requirement;  licensed  military  exports   allowed   –  Preferred  and  Express  Lenders,  plus  local  lenders
  • 37. Business  Financing  Tools  –  SBA  and  EX-­‐IM  BANK    •  EXPORT-­‐IMPORT  BANK  OF  THE  US  (EX-­‐IM  BANK)   –  Any  business  size     –  No  upper  loan  limit   –  Pre-­‐export  and  post-­‐export  financing   –  Export  must  have  majority  US  content;  military  exports   restricted   –  Delegated  Lenders  are  primary  users
  • 38. Business  Financing  Tools  –  SBA  LOAN  GUARANTEES    •  SBA  InternaQonal  Trade  Loan  (ITL)   –  90%  guarantees  on  term  loans  of  $5  million  or  less   –  Working  capital,  equipment,  real  estate,   refinancing     –  Financing  for  projects  that  improve  the   compe<<ve  posi<on  of  US  exporter
  • 39. Business  Financing  Tools  –  SBA  LOAN  GUARANTEES    •  SBA  Export  Working  Capital  Program  (EWCP)   –  90%  guarantees  on  1-­‐3-­‐year  revolving  lines     –  Up  to  $5  million   –  Working  capital     –  Financing  for  export  orders     –  Pre-­‐export  and  post-­‐export
  • 40. Business  Financing  Tools  –  SBA  LOAN  GUARANTEES    •  SBA  Export  Express   –  Similar  to  ITL,  but  streamlined  approvals   –  90%  guarantees  on  loans/lines  up  to  $350,000   –  75%  guarantees  on  loans/lines  up  to  $500,000   –  Working  capital,  equipment,  real  estate,   refinancing     –  Available  from  SBA  “Express”  Lenders  only
  • 41. Business  Financing  Tools  –  EX-­‐IM  BANK  LOAN  GUARANTEES  •  EX-­‐IM  Working  Capital  Program   –  90%  guarantees  on  1-­‐3-­‐year  revolving  lines     –  No  size  limit   –  Working  capital     –  Financing  for  export  orders     –  Pre-­‐export  and  post-­‐export

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