International Trade 101 Session 3 How to Finance

International Trade 101 Session 3: How to Finance the Sale

Financing your Sale o Financing Options - Using Letters of Credit - Foreign Receivables Financing - Working Capital for the US exporter - Programs for the foreign buyer - Forfeiting o Conclusion

Managing Payment Risk and Financing the Sale o Getting Paid and Managing Risk - Methods of Payment - Credit Insurance - Foreign Exchange o Financing Options - Using Letters of Credit - Working Capital for the exporter - Programs for the foreign buyer - Forfeiting o Conclusion

Methods of Payment o Cash in advance - Wire transfer - Check or draft. US vs. Foreign - Credit card

Methods of Payment Letters of Credit o 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

Risks and Benefits: Letters of Credit o Importer - Assurance that the shipped goods are as ordered. - Payment is made after the shipment is out of exporter’s control o Exporter - Assurance that the payment will be made - Banks are in the middle of the process - Can use buyer’ credit to obtain goods

Methods of Payment Collections/Documents Against Payment o 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)

Documentary Collections Risks and Benefits o Importer - Relies on the exporter to ship goods as ordered - Payment is made before goods can be inspected o 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 o Open account terms - Ship the goods and wait for the payment. Keep your fingers crossed… o Options - Uninsured - Insured

Foreign Exchange This type of transaction has its benefits. However, because of its complexity, it does bear some risks. Thus, at this point, I rather recommend to sell in US Dollar.

Directing Methods of Payment o Be proactive-take control of the transaction o Decide what your best alternatives are and prioritize them o Be clear – name a payment method as basis for the transaction o For L/C’s – use a letter of instruction, and request a specimen cop of l/c prior to issuance o For Drafts/Collections – check out the collecting bank before shipment o Request a review from BOTH your banker and freight forwarder prior to shipment

Trade Finance Options o Use the importer’s credit - Transferable letters of credit. An export letter of credit which maybe 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 - Letter of credit. Sight. Time - Carry the receivable and wait for payment - Discount the proceeds (Bankers Acceptance)

What is Ex-Im Bank? o Ex-Im Bnk is an independent agency of the United States - Established in 1934 - Headquartered in Washington, DC - 8 sales offices o Mission: Support U. S. Exports to create and sustain U. S. jobs

Trade Finance Options: Ex-Im Bank Programs o Programs for the Exporter - Pre-export working capital (can include foreign accounts receivable financing) - Post-export Foreign Receivable Financing o Programs for the Foreign Buyer - Short-Term Buyer Credit Financing - Medium-Term and Long-Term Buyer Financing via insurance/guarantee programs

Pre and Post Export Financing Programs to Assist the US exporter o Working Capital Guarantee (Pre-export Financing) o Borrower: - Domestic Exporter o Eligibility: - 50% US content or added value required o Mitigation: - Covers exporter performance risk o Advance Rates: - Export related A/R (advance rate up to 90%) - Inventory must be pre-sold (advance rate up to 75%)

Programs to Assist US Exporter continue…. o Export Credit Insurance (Post-Export Financing) o Borrower: - Domestic Exporter o Eligibility - 50% US content or added value required o Mitigation: - Protects against foreign buyer commercial and political risks o Advance Rates: - Export related A/R (advance rate up to 95%) o Coverage: - Covers 95% commercial and 100% political risk

Export Factoring o Export factoring is a complete financial package. It combines export working capital financing, credit protection, foreign A/R, and collection services - It offers 100% protection against the foreign buyer’s inability to pay – with no deductible or risk sharing

Export Forfeiting o Forfaiting is a method of trade finance that allows exporters to obtain cash by selling their medium-term foreign A/R at a discount on a “without recourse” basis. - Similar to factoring, forfaiting virtually eliminates the risk of nonpayment from the buyer.

Programs to Assist the US Exporter continue… o Benefits o Expand international sales and market share o Expand collateral base o Allows customer to obtain supplier discounts o Improve cash flow o Mitigate foreign commercial and political risks

Pre & Post Export financing (Working Capital Guarantee) o Profile: - A US exporter of automotive parts wants to grow its business by expanding its products lines and entering new foreign markets. o Need: - The company needs working capital to maintain inventory and offer terms to attract foreign buyers. o 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 receivable.

Foreign Buyer Credit Financing Program to Assist the Foreign Buyer o Short-Term Buyer Financing o Borrower: - Foreign Importer o Type of Loan: - Revolving Line of Credit o Tenor: - Up to 360 Days o Eligibility: - 50% US content or added value required on goods and/or services financed o Coverage: - Up to 98% of commercial and political risk

Programs to Assist the Foreign Buyer continue… o Medium-Term Buyer financing o Borrower: - Foreign Importer o Type of Loan: - Term Loan o Tenor: - Up to 5 years o Eligibility: - Ex-Im financed portion must be 100% US content including products and/or services o Coverage: - Coverage is 100% of the remaining 85% to be financed

Programs to Assist the Foreign Buyer continue… o Benefits o Improves cash flow for both importer and exporter o Reduces foreign commercial and political risks for the exporter and the Bank o Increases competitive position by financing at interest rates that are lower than what is available in most foreign countries

Papa Omar Diop International Trade & Assistance Center Columbus State Community College Tel: 614 -287 -3850 Fax: 614 -287 -6311 E-mail: pdiop@cscc. edu sbdcfreeadvice. ning. com