“Financing Tools to Help You
Increase Exports and Avoid
Pitfalls”
Lansing, Michigan
Bill Richeson, SVP
Global Trade & Supply Chain Solutions
International Division
National City Bank
March 24, 2009
Agenda
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Global Trade Overview
Trade Concepts, Payment Procedures and Risks
Pricing Terms
Foreign Exchange
Payment Methods
Letters of Credit
A Fundamental Reality
Using the Letter of Credit as a Financing Tool
Documentary Collections
Export Credit Insurance & Other Financing Options
Examples and “War” Stories
Questions & Answers
Global Trade Overview
Classification of Countries
Industrialized
Countries
30 Countries
Emerging
Countries
200 Countries
Definitional Differences
Industrialized Countries
 Mature Economies
Emerging Countries
 Newer Economic Systems
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Convertible Currencies
Stable Political Systems
Higher Per Capita Standard
of Living
Low Perceived Political and
Economic Risks
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Looking for Expanded
Markets
Provider of Investment
Capital
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Non-convertible Currencies
Political Uncertainties
Lower Per Capita Standard
of Living
High Perceived Political and
Economic Risk
Capital Shortage - Reliance
on Foreign Investments
General Patterns of Trade
Industrialized Countries
 Market Determines
Exchange Rates
 Invoice in Local Currencies
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Open Account Terms
Prevalent
Inter-company Shipment
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Emerging Countries
 Fixed Exchange Rates
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Invoice in Dollars
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Letters of Credit or
Collections
Direct Sales to Buyer
General Feeling of Low Risk
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External Credit Guarantee
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Insurance is Nice to Have
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Insurance Prevents Baldness
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Buyer Creditworthiness is
Key
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Country Creditworthiness is
Key
– Buyer Credit Limits
– Payment Terms Relaxed
– Country Limits
– Payment Terms Tight
Trade Concepts,
Payment Procedures
and Risks

General Trade Concepts: Starting
Right!
Know your customer
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Know their country
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Know their “credit” bank
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Understand the Trade Cycle
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Understand Terminology
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Understand Transaction Risks
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Understand Ground Rules
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Work with your bank
Terminology
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Transaction Parties
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Seller – Exporter – Shipper – Beneficiary (Bene)
Buyer – Importer – Account Party – Applicant
Issuing Bank – Opening Bank
Advising – Confirming Bank
Negotiating – Paying – Reimbursing Bank
Supporting Parties
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Carrier
Freight Forwarder
Customs House Broker
Insurer
Attorney
Risk Awareness
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Credit Risk
 Performance Risk
 Country Risk
 Currency Risk
 Transportation Risk
 Regulatory Risk
 Transaction Structure Risk
 Fraud
Identify & Understand the Risks
Risk Evaluation
Sources of Information:
 Your bank – Bank credit reference
 Export Import Bank – Country Limitation Schedule
 Credit Agencies (D&B, Veritas, etc.)
 Internet
 U.S. Dept. of Commerce
 Trade references
Measure the Risks
Pricing/Shipping Terms

Known as Incoterms 2000
– 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
International Chamber of Commerce
(ICC)
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Uniform Customs & Practices (UCP) Pub. 600
– Rules that govern letters of credit
– Often referred to as the “silent” terms to the letter of credit
because they are incorporated into the letter of credit by
reference.
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Uniform Rules for Collections (URC) Pub. 522
– Rules that govern documentary collections
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ICC Publication 525 (Rules for Reimbursements)
 ISP 98 Rules for Standby Letters of Credit
Know the Rules
Export Regulations
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Shippers Export Declaration (SED)
– Government required document stating the type of export
license used to determine if the merchandise is authorized for
shipment. (Required for all exports with a value greater than
$2,500)
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RESOURCE: Bureau of Export Administration – U.S.
Dept. of Commerce. (www.bxa.doc.gov)
Office of Foreign Asset Control (OFAC)
– Anti-boycott language prohibitions
– Blocked Countries/Specially Designated Individuals
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RESOURCE: Office of Foreign Asset Control
(www.treas.gov/ofac)
Know the Rules
Logistics
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Talk to your freight forwarder to understand:
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Costs
Transportation Connections
Packaging Requirements
Risks of using certain carriers/forwarders
Differences in documentation
Loss potential (regardless of Insurance or Incoterms)
Know Whom to Ask
Role of the Freight Forwarder
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Pre-Shipment
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Packaging
Freight quotes
Import documentation requirements
Export documentation
Shipment
– Transportation
– Document handling
– Insurance
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Post-Shipment
– Tracking
– Arrival handling
Pricing Terms
Incoterms 2000
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Departure Group
– Ex Works = Warehouse/Factory
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Main Carriage Unpaid Group
– FCA = Free Carrier
– FAS = Free Along Side Vessel
– FOB = Free On Board Vessel
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Main Carriage Paid Group
– CFR/CPT = Cost & Freight to arrival port
– CIF/CIP = Cost, Insurance & Freight to arrival Port
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Arrival Group
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DAF = Delivered at Frontier
DES = Delivered Ex Ship
DEQ = Delivered Ex Quay
DDU = Delivered Duty Unpaid
DDP = Delivered Duty Paid
Foreign Exchange
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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
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
Payment Methods
There is a mismatch between
Buyer and Seller Goals
When do you want to get paid?
When do buyers want to pay?
Now!
Later!
Payment Methods: 4 Methods
Lowest
Risk
Highest
Risk
Buyer (Importer) Perspective
• Open Account
• Documentary Collection
• Letter of Credit
• Cash In Advance
Seller (Exporter) Perspective
• Cash In Advance
• Letter of Credit
• Documentary Collection
• Open Account
Buyer & Seller have Reversed Priorities!
Best
Cash
Flow
Worst
Cash
Flow
Choice of Methods
(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
Payment Methods: 4 Methods
• Cash in Advance
• Letter of Credit
• Documentary Collection
• Open Account
Terms
Favor
Seller
Terms
Favor
Buyer
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
Cash In Advance
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Buyer Pays
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Wire Transfer
Check
Draft
Credit Card
Seller Ships
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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)
Open Account
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Seller Ships
Buyer Pays
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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)
Letters of Credit
A versatile tool for closing the gap
that exists between buyers and
sellers.
Letters of Credit
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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
Letters of Credit
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Two Common Types
– Documentary / Commercial
• Active payment instrument
• Active financing tool
– Standby
• Passive payment instrument
• Passive financing tool
– Performance
– Financial
– Trade-Related
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
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
LC Issued
(Issuing Bank)
(Advising Bank)
Sight LC Transaction Flow
Seller
Buyer
5
(Applicant)
Shipment
Buyer pays
BEFORE receipt
of goods
$
8
8
8
Foreign BANK
$
Payment Claim
7
$
6
Documents
Time LC Transaction Flow
Seller
Buyer
5
(Applicant)
Shipment
Payment
At
Maturity
$
8
6
8
Documents
8
Foreign BANK
$
Payment Documents
7
Acceptance
6
$
6
Documents
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
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Verify the authenticity of the Letter of Credit, thereby
protecting the beneficiary from fraud
Advocate for the beneficiary
– No conflict of interest
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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
Confirmed Letters of Credit
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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
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Confirmation eliminates:
– Commercial credit risk of issuing bank
– Country risk of issuing bank
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Confirmed credit means payment obligation moves to
the confirming bank and its country
However:
 Confirmation is location specific
– Verify country of confirming bank
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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.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Irrevocable
Issue Date, Expiry Date &
Location
Issuing Bank/Advising Bank
Importer/Exporter
Value & Currency
Description of
Goods/Services
Required Documents
Payment Terms
Incoterms
Port-To-Port Info
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
UCP 600
LC Fees - Who Pays?
Latest Ship Date
Presentation Date
Partial Shipments (Y/N)
Transshipments (Y/N)
Paying Bank
Drawee Bank
Reimbursing Bank
Confirming Bank
20 Points of Negotiation in Structuring your LC
Documents often requested

Draft
 Transportation documents
 Commercial Invoice
 Insurance Policy or Certificate
 Packing List
 Invoice / Consular Invoice / Customs Invoice
 Certificate of Origin
 Weight Certificate
 Inspection Certificate
Your Freight Forwarder Can Provide Guidance On
Which Documents Are Required – By Country
A Fundamental Reality…
When dealing with letters of
credit, the only things that
count are the documents
Reducing Cost and Accelerating
Payment
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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
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Have the LC confirmed/payable at National City Bank
In some cases, discount
Consult with National City
Letter of Credit Fees
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Standard Fees:
– Advising fee
– Negotiation (Examination)
– Courier
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Optional Fees:
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Confirmation
Acceptance
Discount
Transfer
Assignment of proceeds
Steamship guarantee or air release
Letter of Credit Fees
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Fees to Avoid:
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Amendment Fees
Discrepancy Fees
Reimbursing bank fees
Copy Fees
Ancillary Fees:
– Faxes
– Communication charges
– Special processing
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
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
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
Sight Collection (D/P)
Buyer
Buy/Sell
Agreement
1
Shipment
2
4
$
Seller
4
4
Documents
4
$
Foreign BANK
3
Documents
Buyer pays BEFORE receipt of goods
$
2
Documents
Time Collection (D/A)
Buyer
Buy/Sell
Agreement
1
Shipment
2
$
5
Documents
5
6
Seller
Payment at Maturity
Acceptance
6
$
Foreign BANK
3
Documents
Buyer pays AFTER receipt of goods
6
$
2
Documents
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.

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Correspondent wires funds to National City
National City pays seller
Payment Method Variations

CIA Variation
– 50% in advance, balance with order
– 100% upon shipment
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LC Variation
– Transfer
– Assignment
– Financing

Open Account Variation
– Insured
– Performance guaranty (Standby LC)
Export Credit Insurance
&
Financing Options

Banks:
Financing Options for U.S.
Exporters
– Letters of Credit
– Documentary Collections
– Avals
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Other Private Sources:
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Accounts receivable financing
Factoring
Forfaiting
Credit Insurance
Countertrade
Government:
– Eximbank
– CCC / TDA / USAID
– OPIC
Trade Finance Products

Export working capital loans
– Loans to provide working capital during production cycle

Foreign receivable financing
– Loans and financial structures to finance export sales

Financial Institution Buyer Credit Facilities
– Short-term loans extended to foreign buyers for the purchase
of US goods

Medium term export sales finance
– Term loans up to five years in length to foreign buyers
Eximbank Programs

Pre-Shipment
- Working capital guarantee

Post-Shipment
- Short Term
* Small business insurance policies
* Single sale and portfolio policies
* Buyer policy
* Bank insurance policy
- Medium Term
* Small business policies
* Single sale
* Guarantees
* Loans
* Project finance
Working Capital Guarantee

Needed for:
- Pre-shipment financing

To be used when:
- There is a lack of collateral to acquire traditional bank financing
- Lender is unwilling to increase line of credit
- Company needs working capital to finance exports
- Banks will not lend against foreign A/R
- Company needs to increase availability
- Exporter wants to improve cash flow
 Benefits:
- Helps pay for raw materials
- Increases borrowing base (WIP included)
- Higher advance rates and lower collateral requirements
- Is relatively inexpensive
- Provides local bank with a 90% guarantee
Examples and “War” Stories

Cattle Triangle
 Poultry Equipment to Asia
 Cotton, Corn Germ
 Logs, Lumber, Veneer
 Meat
 “Know your Incoterms!”
 Understand bills of lading and consignee
 Be careful with acceptance certificate requirement
Contact Information

Bill Richeson
Senior Vice President
Global Trade & Supply Chain Solutions
National City Bank
Phone: (616)771-8849
e-mail: [email protected]
Global Client Care Center: 800-622-4685
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