Getting Paid Risk Mitigation and Foreign Currency Considerations

1. Getting PaidRisk Mitigation and Foreign Currency Considerations

2. Global Trade SME have expanded their markets, sales and product lines: • U.S. merchandise exports totaled a record $781 billion for the first six months of 2013. • Exports from New York State increased $2.8 billion to $45.7 billion for the first six months of 2013 after falling $3.4 billion in 2012. Top markets for NYS Goods and Services (as of June 2013): • Hong Kong • China • Canada • Switzerland • UK • Israel

3. Global Trade Risks...What should you consider? Foreign Exchange Risk Currency fluctuations Access and convertibility Government actions Credit Risk Commercial Risk Contract Risk Financing Risk Country Risk Political Risk Transfer Risk

4. Foreign Exchange Risk Transaction Exposures Translation Exposures Economic Exposures

5. Volatility (EUR/USD)

6. FX products to manage exposure Spot Transaction Forward Contract Option

7. Wall Street Reform & Consumer Protection Act Commonly known as Dodd-Frank was signed into law in July 2010 Promotes the financial stability of the United States by improving accountability and transparency in the financial system, Ends “too big to fail” Ends bailouts, and Protects consumers from abusive financial services practices… Requirements: In order to qualify as an ECP (Eligible Contract Participant) a corporation, partnership, proprietorship, organization, trust or other entity must have a Net Worth in excess of $1 million or Total Assets in excess of $10 million

8. Risk Evaluation…Who Can Help Evaluate Risk? Sources of Information: Bank Reference Trade References Financial Statements International Credit Agencies U.S. Dept. of Commerce Credit Insurance Agencies Economist Intelligence Unit (EIU) On sight visits

9. The Methods of Payment Documentary Collection A bank intermediates to exchange a payment, or promise of payment, for title to the goods being shipped. Provides buyer and seller payment / shipment protection Open Account Seller ships the goods in advance of payment and relies on buyer paying after receiving goods. Cash In Advance Buyer pays in advance of shipment of goods. Buyers don’t prefer this option because they are out of cash well before they receive goods or services. Letter of Credit A trade finance instrument issued by a buyer’s bank in favor of their supplier. L/C substitutes a bank’s creditworthiness for the buyer’s. L/Cs are a specialized instrument that guarantee payment for a shipment of goods or services from one party to another.

10. Choice of Methods…What Determines? Buyer-Seller Relationship Buyer’s Credit Standing Competition Uniqueness of the Product Country Conditions Cash flow Considerations Risk Tolerance

11. Global Trade –Exporters and Importers – Mars and Venus? High Risk! Low Risk Open Account Documentary Collection Letter of Credit Cash in Advance Low Risk High Risk! Exporter’s Objectives Shorten payment terms Ship on time Reduce country & credit risk Reduce DSO (days sales outstanding) Best outcome = get paid for merchandise before shipment Importer’s Objectives Extend payment terms Get merchandise on time Reduce transportation costs Extend DPO (days payables outstanding) Best outcome = pay for goods after they are received

12. Payment Methods…Open Account and Cash in Advance Exporter Importer High Risk Low Risk Open Account Documentary Collection Letter of Credit Cash in Advance High Risk Low Risk Bank acts upon instructions from buyer/importer to transfer funds overseas exporter; bank plays no fiduciary or intermediary role at all except to settle the transaction. Holds the most risk for both parties Excellent alternative for buyers and sellers who have a good working relationship and history, and where country risk is not a concern. This is the lowest cost payment vehicle for international trade.

13. Requires presentation of sight or time draft and shipping documents for payment Title and control of merchandise remains with the collecting bank until drafts are paid or accepted Allows corporations with several locations to have uniform reporting and processing Allows exporter to maintain some control Less protection than commercial letter of credit Bank acts as intermediary, protecting the interests of both parties; however, the bank takes no credit risk Payment Methods…Documentary Collections Exporter Importer High Risk Low Risk Open Account Documentary Collection Letter of Credit Cash in Advance Low Risk High Risk

14. Exporter Importer High Risk Low Risk Open Account Documentary Collection Letter of Credit Cash in Advance Low Risk High Risk Payment Methods…Letters of Credit Bank substitutes its credit for that of the buyer removing commercial credit risk of the buyer which assures exporter of payment. Requires exporter to provide documents called for in detail and in accordance with shipping instructions as agreed to by both parties Provides assurance of strict compliance with purchase order information and provides both parties with additional financing alternatives Standard payment vehicle for international shipments to risky countries, or where buyer and seller have little or no history of doing business together

15. Summary…Comparison of Payment Methods

16. THANK YOU! FOLLOW UP QUESTIONS? Lynne K. Gruel 716-664-7840 Lynne.K.Gruel@KeyBank.com