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AGENDA
Incoterms 2010
Foreign Exchange
Payment Methods
Letters of Credit at Financing Tools
Medium-Term Financing for Foreign Buyers
Export Credit Insurance
Examples and War Stories
Q & A
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Pricing/Shipping Terms
Known as Incoterms 2010
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
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Incoterms 2010
Rules for Any Mode or Modes of Transport
EXW = Ex Works
FCA = Free Carrier
CPT = Carriage Paid To
CIP = Carriage & Insurance Paid To
DAT = Delivered At Terminal
DAP = Delivered At Place
DDP = Delivered Duty Paid
Rules for Sea and Inland Waterway Transport
FAS = Free Alongside Ship
FOB = Free On Board
CFR = Cost & Freight
CIF = Cost, Insurance & Freight
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Inco term
2010
Export-
Customs
declaration
Carriage to
port of
export
Unloading
of truck in
port of
export
Loading
charges in
port of
export
Carriage
(Sea
Freight/Air
Freight) to
port of
import
Unloading
charges in
port of
import
Loading on
truck in
port of
import
Carriage to
place of
destination
Insurance
Import
customs
clearance
Import
taxes
EXW Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer
FCA Seller Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer
FAS Seller Seller Seller Buyer Buyer Buyer Buyer Buyer Buyer Buyer
FOB Seller Seller Seller Seller Buyer Buyer Buyer Buyer Buyer Buyer
CFR Seller Seller Seller Seller Seller Seller Buyer Buyer Buyer Buyer
CIF Seller Seller Seller Seller Seller Seller Buyer Buyer Seller Buyer Buyer
CPT Seller Seller Seller Seller Seller Seller Seller Seller Buyer Buyer
CIP Seller Seller Seller Seller Seller Seller Seller Seller Seller Buyer Buyer
DAT Seller Seller Seller Seller Seller Seller Seller Seller Buyer Buyer
DAP Seller Seller Seller Seller Seller Seller Seller Seller Buyer Buyer
DDP Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller
Allocations of costs buyer/seller according to
Inco terms 2010
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Foreign Exchange
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
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Foreign Exchange
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
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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
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Payment Methods: 4 Methods
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!
Lowest
Risk
Highest
Risk
Best
Cash
Flow
Worst
Cash
Flow
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Choice of Methods
(What Determines?)
Buyer-Seller Relationship
Buyers credit standing
Competition
Uniqueness of the product (custom made?)
Country conditions (political, economic)
Cash flow considerations
Transaction costs
Other
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Payment Methods: 4 Methods
Cash in Advance
Documentary Collection
Terms
Favor
Seller
Terms
Favor
Buyer
Letter of Credit
Open Account
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Risk Evaluation and Mitigation
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
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Cash In Advance
Buyer Pays
Wire Transfer
Check
Draft
Credit Card
Seller Ships
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
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Open Account
Seller Ships
Buyer Pays
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)
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Letters of Credit
A versatile tool for closing the gap
that exists between buyers and
sellers.
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Letters of Credit
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 banks creditworthiness,
which is generally well known or easily ascertainable for
that of its customer, which may not be as well known
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Letters of Credit
Two Common Types
Documentary / Commercial
Active payment instrument
Active financing tool
Standby
Passive payment instrument
Passive financing tool
Performance
Financial
Trade-Related
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Independence Principle
Importer (Buyer)
Buyer has an
obligation to the
Issuing Bank to pay
upon claim for
payment
Issuing Bank has the obligation to the Exporter
to pay if he has complied with all the terms and
conditions in the L/C
Exporter and Importer
have a sales contract
between them which
supports the
underlying transaction
Issuing Bank Exporter (Seller)
Separate
Contracts
Advising/
Confirming bank
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Sales Contract
(Issuing Bank) (Advising Bank)
Sight LC Transaction Flow
Buyer (Applicant)
Seller (Beneficiary)
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Application
Foreign BANK PNC Bank
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LC Advised
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LC Issued
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Importer
(Buyer)
Issuing
Bank
Exporter
(Seller)
Advising/
Confirming bank
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Shipment
Documents
Payment Claim
Buyer pays
BEFORE receipt
of goods
Sight LC Transaction Flow
5
$
Buyer
Seller
(Applicant)
Foreign BANK PNC Bank
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7
$
8
6 $ 8
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Time LC Transaction Flow
Shipment
Payment Documents
Payment
At
Maturity
5
$
Buyer
Seller
(Applicant)
Foreign BANK PNC Bank
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$
8
6 $ 8 Documents
6 Documents
Acceptance
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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
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Role of the Advising Bank
Verify the authenticity of the Letter of Credit, thereby
protecting the beneficiary from fraud
Advocate for the beneficiary
No conflict of interest
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
Eliminates issuing bank country and commercial risk
If the issuing banks letter of credit is confirmed, the
confirming bank substitutes its own creditworthiness for
that of the issuing banks 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
Confirmation eliminates:
Commercial credit risk of issuing bank
Country risk of issuing bank
Confirmed credit means payment obligation moves to
the confirming bank and its country
However:
Confirmation is location specific
Verify country of confirming bank
Confirmation by branch or subsidiary of issuing bank
May shift country risk
May not shift commercial
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Payment Method: Letter of Credit
Set it up right!
1. Irrevocable
2. Issue Date, Expiry Date &
Location
3. Issuing Bank/Advising Bank
4. Importer/Exporter
5. Value & Currency
6. Description of Goods/Services
7. Required Documents
8. Payment Terms
9. Incoterms
10. Port-To-Port Info
11. UCP 600
12. LC Fees - Who Pays?
13. Latest Ship Date
14. Presentation Date
15. Partial Shipments (Y/N)
16. Transshipments (Y/N)
17. Paying Bank
18. Drawee Bank
19. Reimbursing Bank
20. Confirming Bank
20 Points of Negotiation in Structuring your LC
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Reducing Cost and
Accelerating Payment
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
Have the LC confirmed/payable at PNC Bank
In some cases, discount
Consult with PNC Bank
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What to do When the LC Arrives
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 dont understand
If incorrect, reject the LC immediately
If necessary, request the buyer amend the Letter of
Credit
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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
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Documentary Collections
Disguised open account transactions
Less secure than letters of credit
More secure than open account
Benefits
Dont encumber buyers line of credit
Very inexpensive
Effective if properly structured
Use of correct Incoterms
Role of banks and freight forwarders
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Shipment
Buyer pays BEFORE receipt of goods
Sight Collection (D/P)
2
Documents 2
Documents 3
4
$
4 $ 4 $
Documents
4
Foreign BANK PNC Bank
Buyer Seller
Buy/Sell
Agreement
1
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Buyer pays AFTER receipt of goods
Time Collection (D/A)
Documents 2
Documents 3
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$
6 $
6 $
Documents
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Foreign BANK PNC Bank
Payment at Maturity
5 Acceptance
Buyer Seller
Shipment
2
Buy/Sell
Agreement
1
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Documentary Collection
Transaction Flow
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.
Correspondent wires funds to National City
National City pays seller
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Payment Method Variations
CIA Variation
50% in advance, balance with order
100% upon shipment
LC Variation
Transfer
Assignment
Financing
Open Account Variation
Insured
Performance guaranty (Standby LC)
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Medium-Term Financing
PNC is largest provider of Medium-term (typically up to 5 years)
Financing to Foreign Buyers of Capital Goods under Eximbanks
Buyer Finance Program
Financed amount is the lesser of 85% of the sales contract or 100%
of the U.S. content of the sales contract
Up to 30% of related local costs in the foreign country may be
eligible for financing
Repayment is through semi-annual installments of P & I
Interest floating or fixed each six months
Eximbank fees may be financed as part of the credit
Seller is paid out when shipment documentation is presented to
PNC Bank; PNC receives payment directly from foreign buyer
Program is at no cost to Seller; PNC needs introduction to Foreign
Buyer from Seller
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Export Credit Insurance
Covers the risk of buyer nonpayment for commercial risks (e.g.
bankruptcy) and certain political risks (e.g. war or the inconvertibility
of currency) from qualified foreign buyers
Does NOT cover product quality/service disputes
Provides 90-95% commercial, 95-100% political coverage against
buyer payment defaults
Premiums are only paid on actual shipments
Available through the U.S. Eximbank and other private insurers
Can improve cash flow by allowing you to include insured foreign
receivables in your borrowing base by assigning the policy to a
commercial bank
For Eximbank coverage, minimum 50% U.S. content required
Use an insurance broker!!!!
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Examples and War Stories
Trust Gone Awry on a Documentary Collection
When the credit markets freeze up
If it sounds too good to be true, it probably is
In general, Possibly trust, but verify
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Bill of Lading or blading for short, it is a
document signed by or on behalf of the master
of a carrying vessel, certifying that the goods
have been received on board in good order for
transportation and delivery as specified in the
document.
Consignee
the buyers name
to order in the consignee space, and the
name and address of the agent underneath
to order, then the agent can endorse the
bill of lading to the buyer.
Functions:
First, it serves as a receipt for goods signed
by the shipping company (carrier) and given
to the shipper (consignor);
Second, its evidence of a contract of
carriage between the carrier and the
consignor;
Third, it conveys a document of title because
the legal owner of the bill of lading is the
owner of the goods it covers.
Process
The shipper fills in the form and sends it to the ship, then the officer of
the shipping company checks the goods and signs the Bill. The shipping
company sends the Bill of Lading to the exporter or his bank. These
negotiable Bills of Lading are used for payment. They are passed on to
the buyer or the exporters agents in the importing country. Then the Bills
of Lading together with other shipping documents are presented to the
shipping company when the ships arrives. The shipping company
compares the negotiable Bills of lading with their copy on the ship. Then
the buyer can obtain the goods from the ship.
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Different types
clean Bill of Lading()
foul or clause Bill of Lading()
__ if defects are unavoidable, what to do
shipped in apparent good order and
condition . It is issued when the good do
not show any defects on their exteriors at
the time of loading at the port of shipment.
This type is favored by the buyer and the
banks
If detects are found on the exteriors of
the goods, or the shipping company
does not agree to any of the statements
in the B/L, the bill will be marked as
unclean, foul, or packages in
damaged condition.
Different types
straight Bill of Lading
blank (open, bearer) Bill of Lading)
order Bill of Lading)
Straight bill of lading has a designated consignee. Under the bill only the named
consignee at the destination is entitled to take delivery of the cargo. As it is not
transferable, it is not commonly used in international trade and normally applies to
high-value shipments or goods for special purposes.
It means that there is no definite consignee of the goods.
There usually appear in the box of consignee words like
To bearer. Anyone who holds the bill is entitled to the
goods the bill represents. No endorsement is needed for
the transfer of the blank bill. Due to the exceedingly high
risk involved, this bill is rarely used.
It is widely used in international trade. It means that
the goods are consigned or destined to the order of a
named person. In the box of consignee, to order, to
order of shipper, or to order of the consignee is
marked. It can be transferred only after endorsement
is made.
Different types
on-board Bill of Lading
received-for-shipment Bill of Lading
direct Bill of Lading
transshipment Bill of Lading
It is issued by the shipping company after the goods are
actually shipped on board the designated vessel. Most bill of
lading forms are preprinted as shipped bill.
It means the goods are shipped from the port of
loading direct to the port of destination without
involving transshipment.
Different types :
through Bill of Lading
combined transport B/L
long form Bill of Lading
short form Bill of Lading
It is sometimes necessary to employ two or more carriers to get the goods
to their final destination. Usually the first carrier will sign the bill of lading.
Combined transport B/L is ideal for container movements. It differs from
through B/L in that combined transport is operated by only one carrier.
Long term B/L is more detailed with shipping
contract clause printed on the back of the
page.
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Different types
air waybill
A receipt for goods and a record of the existence of a contract of carriage
railway consignment note
liner waybill
charter-party bill of lading
The air waybill is the consignment note used for the carriage of goods
by air. It is basically a receipt of the goods for the dispatch and
evidence of the contract of carriage between the carrier and the
consignor.
Consignment note for rail transport serves as the
contract of carriage between the railway and consignor,
evidencing the receipt of the goods and the date of
acceptance for carriage for carrier. Unlike B/L, it is not a
document of title and is not transferable or negotiable.
Modes of International Cargo Transport
Sea/Ocean Transport
Rail Transport
Air Transport
Road Transport
Inland Waterway Transport
Container Transport
International Multimodal Transport
Parcel Post Transport
Carriage of goods can take place by
sea, rail, air, road, inland waterway, parcel post,
containers and multimodal transport
Sea transport (ocean transport)
Kinds of Vessels:
general cargo vessels
Oil tankers
Container vessels
Oil/Bulk/Ore (OBO) vessels
Ro/Ro vessels
LASH (lighter Aboard Ship)
Refrigerated ship
Timber ship
Commercial Vessel
Liner
Tramp
Freight
W = weight ton
M = measurement ton
Ad Val =price and value
W/M = weight ton or measurement ton
subject to the higher rate
W/M or Ad Val