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Trade Finance 101

Trade Finance 101. Assessing Credit Risk T o Manage Your International Payments. Where to Start International Risks International Methods of Payment. Why We’re Here. Trade Agreements: Underlying Sales Contract. What merchandise will be purchased In what quantity At what price

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Trade Finance 101

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  1. Trade Finance 101 Assessing Credit Risk To Manage Your International Payments

  2. Where to Start International Risks International Methods of Payment Why We’re Here

  3. Trade Agreements: Underlying Sales Contract • What merchandise will be purchased • In what quantity • At what price • Shipping method (sea, air, rail, etc.) • When it will be shipped • Who will insured it (buyer or seller) • How and when payment will be made

  4. International Risk

  5. International Risks • Commercial risk (credit risk) Risk associated with the individual or institution responsible for payment (risk factors such as poor profitability, lack of sales, cash flow problems, insolvency, etc.) • Political risk (country risk) Inability of your customer to pay the receivable in full or on time due to government action (risk factors such as, war or military actions, revolution, changes in export- import laws, currency inconvertibility) • Foreign exchange risk Transaction, translation and economic exposure

  6. Questions to Ask Before Selecting Method of Payment • What’s our leverage with this buyer? • Can the business afford the loss if it is not paid? • Will extending credit and the possibility of waiting several months still make the sale profitable? • Can the sale only be made by extending credit? • If the shipment is made and not accepted can an alternative buyer be found?

  7. Resources to Determine Risk Commercial Credit Risk Resources • Public: • U.S. Department of Commerce “Doing Business In” Guides • http://export.gov/about/eg_main_016806.asp • Private: • Coface North America, www.coface-usa.com • Dun & Bradstreet, www.dnb.com • Graydon, www.graydonamerica.com Political Risk Resources • Public: • CIA World Factbook, www.cia.gov/cia/publications/factbook • Private • Dun & Bradstreet International Risk and Payment Review, www.dnbcountryrisk.com • Coface North American, www.coface-usa.com

  8. International Methods of Payment

  9. Forms of Payment in International Trade • Open Account • Cash in Advance • Documentary Collection • Letter of Credit

  10. Open Account High Risk Low Risk Relies completely on buyer to pay as previously agreed Documentary Collections No Risk Relies on exporter to ship goods as described in documents Relies on buyer to pay draft on presentation or upon maturity Letter of Credit Risk of his own non- performance in adhering to all the requirements in the LC Relies on seller to ship goods as described in the documents Cash in Advance Low Risk High Risk Relies completely on exporter to ship goods as ordered No risk Intl Methods of Payment: Risk Assessment Seller Exporter Buyer Importer

  11. Determining Terms of Payment *Confirmation by U.S. or Other World Class Bank Suggested

  12. Letter of Credit Usage Rare Yes Yes No, but may use Bankers Guarantee Yes Yes

  13. Open Account In an open account trade arrangement, the goods are shipped to a buyer without guarantee of payment. Quite often, the buyer does not pay on the agreed time. Unless the buyer's integrity is unquestionable, this trade arrangement is risky to the seller. • Seller has High Risk of non-payment on their invoices

  14. Cash in Advance The cash in advance is the safest term of payment for the seller, the Seller receives payment before merchandise is shipped to the buyer. • Seller has No Risk, receives payment on invoices before the product is shipped • Draw back to the Seller is that they may lose business because competitors are willing to agree to more flexible payment terms

  15. Documentary Collections • Documents controlling merchandise forwarded through banking channels • Documents surrendered when buyer: • Pays, or • Accepts seller’s draft • Not a guarantee of payment • A seller will usually agree to receive payment on a documentary collection basis when the buyer’s creditworthiness and country of domicile represent acceptable risks

  16. Commercial Letter of Credit • An Irrevocable commitment by a bank to pay a seller of merchandise when documents evidencing shipment are presented to issuing bank. • The issuing bank substitutes its credit for that of the buyer, thus assuring the seller that payment will be made by the bank provided that the terms and conditions of the L/C are met. • If the L/C is “confirmed” by a U.S. bank, the U.S bank undertakes to pay seller, thus eliminating the foreign bank and country risk associated with an unconfirmed L/C.

  17. Questions?

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