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Transcript of 1 Daniel W. Holt Small Business Administration 704-333-4886 Dan. [email protected].
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On Your Mark….Every morning in Africa, a gazelle wakes up.It knows it must run faster than the lion or it will be killed.Every morning a lion wakes up.It knows it must outrun the gazelle or starve.It doesn’t matter if you’re a gazelle or lion.When the sun comes up, you better start running!
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Building a Global Reach to Run a Global Race
The Intermodal Global Supply Chain
1970 – 1 million containers2000 – 20 million containers2020 – 50 million containers2050 – 100 million containers
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The Pace QuickensChanging U.S. Economy1970…International trade is 7%2000…International trade is 27%
2050…International trade up to 50%
Changing U.S. Life StylesLocal Economy of 19th Century—93% of Work Force
Employed in AgricultureGlobal Economy of 21st Century—3% of Work Force
Employed in Agriculture
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The Global Marketplace of the 21st Century – Looking Ahead
(% of World GDP)
EU 34%
Japan 12%
China 4%
India 2%
US 28%
Other 20%
EU 15%
Japan 4%
China 28%
India 17%
US 26%
Other 10%
2004 2050
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Countries Ranked by Population: 2000Country Population• 1 China 1,262,474,301• 2 India 1,002,708,291• 3 United States 282,338,631 • 4 Indonesia 224,138,438 • 5 Brazil 175,552,771• 6 Russia 146,001,176• 7 Pakistan 141,553,775• 8 Bangladesh 130,406,594 • 9 Japan 126,699,784• 10 Nigeria 123,749,589
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Types of Exporters
• Direct
• Indirect
• Trading Company
• Export Management company
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Sheep/Goats
If you can’t do it here- you can’t do it there.
What is your export credit policy?
What Incoterm do you quote?
Who is your freight forwarder?
Letter of Credit?
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• Do you have a passport?
• Business Plan?
• Pricing
• Banker
• What country?
• What is your HS number?
• Credit Insurance
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DOMESTIC RISK
• BANKRUPT
• DOES NOT WANT TO PAY
• CAN NOT PAY
• PRODUCT DISPUTE
• WENT OUT OF BUSINESS
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International Trade
ExporterExporter(Seller)(Seller)
ImporterImporter(Buyer)(Buyer)
I want to sell.
I want to buy.
Country Border
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International TradeSome Things are Different
• Language
• Currency
• Banking
• Credit Terms & Risk
• Transportation / Packaging
• Insurance - Shipping - War
• Government Requirements - Each Country
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International TradeSome Things are Different
• Language
• Currency
• Banking
• Credit Terms & Risk
• Transportation / Packaging
• Insurance - Shipping - War
• Government Requirements - Each Country
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FOREIGN RISK
• THE MONEY IS NO GOOD
• THERE WAS A COUP
• A BRIBE IS NEEDED FOR CUSTOMS
• DOCUMENTS ARE NOT CLEAN
• FOREIGN BANK HOLDS MONEY
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COUNTRY RISK
• The first consideration will ALWAYSALWAYS be country risk.
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COUNTRY RISK
• If the deal is in a country that is too risky, the customer can never be good.
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Political Risk
• Transfer risk- shortage of foreign exchange
• Political risk- events that prevent payment– moratorium on external debt– legal discharge of debt– war– cancellation of import license
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Customer Risk
• Is the customer about to go bust?
• Can the customer pay on our credit terms?
• Is our goods “special”?
• Is this the first sale?
• Is the order more that the last order?
• Do we have a credit application?
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CONTROLS
• BANK
• CREDIT REPORTING AGENCIES
• INSURANCE
• RESEARCH
• LETTER OF CREDIT
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CONTROLS
• CASH IN ADVANCE
• FREIGHT FORWARDER
• GOOD BUSINESS CONTROLS
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What is the HS number?
• It’s like a Social Security Number, uniquely explains your product. Helps others who are not familiar with your product.
• HS is a Product Classification.
• A Harmonized System is used because Customs officials worldwide don’t speak the same language.
• With everyone using the same “songbook,” we can watch the flow of goods in and out of countries.
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Classifying your Product
Classify your good on WHAT IT IS, not on its end use, nor its destination (like Mexico or Malaysia.)•Example: A bolt by itself may be a part of a machine, but it is first and foremost a bolt, and it should be classified as such.•Example: Grass seed and fertilizer mix. Classify the mixture as being primarily grass seed, if it is.
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HHarmonized SystemSystem• The World HS number is 6 digits longThe World HS number is 6 digits long
• US schedule B number is 10 digits longUS schedule B number is 10 digits long
• The whole world only recognizes the The whole world only recognizes the first 6 digits (everybody has the same first 6 digits (everybody has the same songbook) songbook)
THE MORE NUMBERS,THE MORE NUMBERS,
THE MORE DESCRIPTIVETHE MORE DESCRIPTIVE
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Where to find the HS code:Where to find the HS code:The Harmonized Tariff Schedule of the US is online, but can be
purchased at the government bookstore
The U.S. Department of Commerce Schedule B Classification of Exports
U.S. Census Bureau:
• Durable Goods (Chapters 1-71): (301) 763-3259
• Non-Durable Goods (Chapters 72-97): (301) 763-3484
• Don't know: (301) 763-3047
Census On-line: www.census.gov/foreign-trade
- choose Schedule B Search Engine from tool bar
- or select Search and type in a key word(s) in capital letters
Remember: the US-specific number Schedule B is 10 digits long; the first 6 digits is a world recognized HS number
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Containers and Cases General Rules of Interpretation
• If a container is suitable for repetitive use, it must be classified on its own.
• Example: If you are exporting propane in a tank to Canada, you actually have to classify the propane in its own classification and the tank in its classification, because the tank itself is reusable in Canada.
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Containers and CasesGeneral Rules of Interpretation
• Full cartons of eggs are classified under eggs, 040700. Without the eggs, the carton is made of paperboard, 482370.
• A can of Coke falls under beverage, 220210.
• A violin case without the violin is HS 4202xx, but if shipped with the violin inside, it is HS 920210, a stringed musical instrument.
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The Role of the Ocean Transportation Intermediary (OTI)
The freight forwarder
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The Ocean Transportation Intermediary coordinates the various
parties involved in the cargo movement and the services provided
are based on the needs of the individual shipper.
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OTI
• OTI’s combine the former operations of International Freight Forwarders (IFF) and Non Vessel Operating Common Carriers (NVOCC)
• They are regulated by the Federal Maritime Commission (FMC)
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OTI’s Involvement
I. Provide Information
II. Prepare Documentation
III. Move the Shipment
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Provide Information
• Available Steamship Service
• Port Capabilities
• Packing Requirements
• Containerization Options
• Freight Charges:– Handling Fees– Port Fees, etc.
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Prepare Documentation
• Export Clearance
• Carriage
• Insurance
• Destination Clearance
• Banking
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Move the Shipment
• Secure (book) space on the carrier
• Arrange for container to be placed for loading
• Arrange for any required inspections, fumigations, etc.
• Secure the on-board carrier bill of lading
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OTI’s Receive Compensation From…
• Shipper– Documentation and Forwarding Fees
• Ocean Carrier– Brokerage (commission)
• Inland Carrier– Property Brokerage
• Insurance Provider– Markup of premium
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Freight Insurance Why insure ?
• Carrier’s limit of liability (COGSA & Warsaw Convention)
• Filing Claims is problematic and complicated– Insurance pays the claim and then files with the Carrier
– You may have to file suit against the Carrier to get his attention
– Carrier will try to keep you talking until claim is “Time Barred”.
– Irritation
• Use “declared value” to increase carrier liability ? Expensive & Insurance is cheaper and easier to use…..
• Usually required with Letters of Credit
• Cost is usually less than 2% of value of shipment……..(1.25% is average)
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CARGO INSURANCEInternational transportation is risky! $30 - $50 billion in worldwide lossesOcean carriers only cover up to $500 per
package, Airlines $20/kilo.General average can put a lien on
your cargo!
Buying insurance is a simple, straight-forward process, about $0.40/$100 of value.
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I don’t need no stinking marine insurance
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Basic collection terms or Accounts Receivable methods
Cash in AdvanceOpen AccountDocumentary CollectionLetter of Credit
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AT _SIGHT_____________
ABC CO.
XYZ CO.ABC CO.
AMOUNT
APRIL 24, 1996(Seller)(Seller)
ImporterImporter(Buyer)(Buyer)
Agreement (1)Agreement (1)
B/L (3)B/L (3)
MerchandiseMerchandise
(2)(2)(5)(5)
(6)(6)
Documents (4)Documents (4)
Open Account
MerchandiseMerchandise
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Cash Against DocumentsAdvantages to Exporter
Low cost ($ 75.00)
Banks acting as collection agents
Relatively quick payment
Exporter controls goods
Credit insurance available
Disadvantages to Exporter Importer can refuse
documents/payment
No title document on air shipments
No guarantee of payment unless insured
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AT _SIGHT_____________
ABC CO.
XYZ CO.ABC CO.
AMOUNT
APRIL 24, 1996
Documentary Collection Export
Foreign Collecting BankForeign Collecting BankU.S. Bank (Centura)U.S. Bank (Centura)
ImporterImporter(Buyer)(Buyer)(Seller)(Seller)
B/L (3)B/L (3)
Merchandise (2)Merchandise (2)
(8)(8)
(6)(6)
(7)(7)
(5)(5)
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Commercial Letter of Credit
THE PURPOSE OF A LETTER OF CREDIT IS TO ALLOW STRANGERS TO DO
BUSINESS.
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AT _SIGHT_____________
ABC CO.
XYZ CO.ABC CO.
AMOUNT
APRIL 24, 1996
Letter of Credit Exporter
ImporterImporter(Buyer)(Buyer)(Seller)(Seller)
Agreement Agreement (1)(1)
B/L B/L (6)(6)MerchandiseMerchandise
Merchandise Merchandise (5)(5)(13)(13)
(10)(10)
(2)(2)
(9)(9)
Foreign Issuing BankForeign Issuing Bank
(12)(12)
(4)(4)
Docs/Draft Docs/Draft (8)(8)
(3) Letter of Credit(3) Letter of Credit
(11)(11)
Apply Apply for LCfor LC(7)(7)
LC/ LC/ Docs Docs DraftDraft
LC LC AdvisedAdvised
U.S. Bank U.S. Bank
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Does a Letter of Credit Guarantee Payment to the Exporter?
• L/C’s are CONDITIONAL • Almost 80% of L/C’s have discrepancies
• ONE discrepancy can void the L/C
• Exporters lack control
• Protect banks, not exporters
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INCO Terms 2000
International Commercial Terms
http://www.iccwbo.org/index_incoterms.asp
www.iccbooks.com
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Incoterms
Incoterms are used worldwide between a buyer and seller making all parties in the
transaction aware of each persons responsibility
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EXWORKS
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COST INSURANCE AND FREIGHT
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FOB – Free On Board
• Exporter pays crating, containerization, transportation, loading, and port charges. Goods cleared for export by seller.
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Freight does not need liberating!
• There are more terms than
FREE ON BOARD
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EXW …Ex Works
• Seller prepares goods and places them on the loading dock.
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DAF – Delivered At Frontier
Seller delivers freight, cleared for export to named port of import. (DAF Buffalo, NY)
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Export Credit Insurancefor
Managing risk, Improving Financing, and
Enabling Trade
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Insurance
• Risk protection: Exporter can offer Open Account terms with a payment guarantee against non-payment due to commercial and political risks
• Marketing Tool: Offer competitive credit terms directly to foreign buyers to meet/beat the competition and increase sales!
• Financing Aid: Assign policy proceeds (claim payments) to a lender as additional collateral
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Export Credit Insurancefor
Managing risk, Improve Financing, and Enabling Trade
Kathy EdwardsGlobal Business Solutions Corp.
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What is Credit Insurance?• Risk mitigation insures accounts receivable
against non-payment
• Simplified source of payment
• Collateral
• Sleep Insurance
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What it is Not• A means to make a bad credit good
• Primary source of repayment
• Factoring
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Types of Coverage• Commercial Risks
– Insolvency of debtor
– Death
– Default of payment
• Political Risk Transfer risk– Government Moratorium preventing release of funds – war/revolution– currency inconvertibility– loss of import/export license (Contract Frustration)
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What is NOT covered??
• NOT COVERED
– Product disputes
– Sales to buyers not approved
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$27,000$29,400$30,000$33,000Estimated Premium on sales of $6 Mil
.45%.49%.50%.55%Premium Rate
$100,000$0$150,000$20,000Discretionary Credit Limit -DCL
$40,000$0$50,000$0Annual Deductible
95%90%90%90%Indemnity
$1.5 mil$3 mil$2 mil$1 milPolicy Limit
Quotes from Insurers
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Underwriting Philosophies• Underwriting the Insured
– Length of time in business
– Financial information
– Credit approval experience
– Losses
• Underwriting Buyers– Trade References– Credit reports– Financial information
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Underwriting the Insured
• Policyholder’s ability to assess and control risk
• Analysis of debtor risk and complete credit
files
• Discretionary credit limits
• Deductibles
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Underwriting Buyers
• Financial stability of debtor
• Analysis on book of receivables (Spread of
Risk)
• Low levels of discretion for policyholder
• Insurer’s expertise in the global
marketplace
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Advantages of Credit Insurance• Protection Against Bad Debt Loss
• Increased Sales
• Better Borrowing Position with Insured
Receivables
• Credit Information Resource
• Collection Services
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Credit Insurance as a Sales Aid
• Open account sales
• Better credit terms
• Develop new markets
• Less “Creative” sales terms from sales staff
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Increased Sales Volume - existing customer
Without credit insurance:With credit insurance:
• Credit limit: $ 50,000 $100,000
• 6 turns per year $300,000 $600,000
• Margin on sale 10% 10%
• Risk potential $ 50,000 $10,000
• Insurance Cost $0 $3,000 (0.5% of sales)
• Gross Income $30,000 $60,000
• Net “income” $57,000
• Differential income $27,000
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Increased Sales Volume - new customer
• Coverage: $50,000
• Terms: 60 days open account
• Annual sales: $300,000
• Margins: 10% ($30,000)
• Insurance cost: $1,500 (0.5% of sales)
• Risk sharing (Deductible): $5,000
• Minimum Differential Income $23,500
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Policy Assignment• Benefits of policy can be assigned to a
bank or lending institution
• Immediate availability of funds
• Pass cost of funds to importer
• Claims will be paid directly to the lender
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Replace Letters of Credit• Letters of Credit
– L/C’s do NOT guarantee payment– L/C’s require expertise– L/C may cost the sale if a competitor offers open account terms– L/C’s tie up buyers’ funds or credit facilities– Insurance eliminates high local interest costs– Insurance eliminate bank fees, amendment fees, and discrepancy fees– Insurance builds customer loyalty
• Documentary Collections– Cover risk with credit insurance
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Public Underwriters• Export-Import Bank of the United States
– Defined programs and costs
– Subject to US government policies
– Small business policies
– Short term, medium term, long term
– Single buyer or multi-buyer
– Pay as you go to improve cash flow
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Types of Credit Insurance
• Government Insured– Backed by the full faith and credit of the U.S.
Government
– If the importer defaults, it is the U.S. Government who collects, not the exporter
– Underwriters approve your buyers in advance so your buyers and their credit limits are set
– Very attractive for bank lending
– Pay for insurance as you use it – not in advance
– Terms available up to 360 days
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Private Insurers
• Insure domestic as well as foreign receivables• No U.S. content requirement • No requirement for exporter to provide credit
reports or trade references• Can insure shipments dispatched from other
countries• Premiums are paid upfront with minimum
premium of $ 5000
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Private Insurance Market Export & Domestic Coverage
• AIG
• Coface (f/k/a CNA)
• Euler Hermes ACI (f/k/a Euler ACI)
• Altradius Trade Credit Insurance (f/k/a Gerling NCM Credit Insurance)
• FCIA
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Kathy EdwardsGlobal Business Solutions
800-499-6065