Mitigating Risk Inherent in International Trade

AMCHAM: Doing business with Colombia

Wednesday 6th April & Tuesday 12th April, 2011

What type of issues are What type of issues are businesses facing in today’s businesses facing in today’s

environment? environment?

Today’s EnvironmentToday’s Environment

Reduced demand for products and services

Heightened risk in international trade as uncertainty of the credit risk of buyersAccounts Receivables

days on hand increasing as buyers try to stretch their credit limits

Why Trade Finance?Why Trade Finance?

Issue Consequences TF SolutionReduced demand

for products and

services

Need to look for new markets – overseas

Uncertainty involved in new trade relationships

*Use TF as a marketing tool

Eg Use LC to offer attractive terms

*Internet Merchant Services

Heightened risk of international trade in current climate

Even trade relationships that have been longstanding are more risky in current environment

*Trade in Goods: Letters of Credit

Documentary Collections

*Trade in Services:

Letters of Guarantee (Bonds), Standby Letters of Credit

Why Trade Finance?Why Trade Finance?

Issue Consequences TF Solution

Increasing Account Receivables days on hand

Lengthening operating cycle can cause strain on cash flow

*Pre/post Shipment Financing eg Discounting Receivables

*Discounting of Bankers Acceptance under Export LC

Risk profile of Methods of Risk profile of Methods of PaymentPayment

Open AccountDocumentary CollectionsLetters of CreditAdvance Payment

Advance PaymentDocumentary CollectionsLetters of CreditOpen Account

For the Exporter For the ImporterHIGH

LOW

Documentary CollectionsDocumentary Collections

• A method of payment used in international trade whereby the Exporter entrusts the handling of commercial and often financial documents to banks and gives the banks instructions concerning the release of these documents to the Importer.

• Banks involved do not provide any guarantee of payment.

Documentary CollectionsDocumentary Collections

Documentary Collections may be carried out in two different ways:

1. Documents Against Payment: Documents are released to the Importer only against payment. Also known as a Sight Collection or Cash Against Documents (CAD).

2. Documents Against Acceptance: Documents are released to the Importer only against acceptance of a draft. Also known as a Term Collection. (30, 60, 90 days)

Documentary CollectionsDocumentary Collections

Collecting/ Presenting Bank

Importer/

Drawee

Remitting BankExporter/

Drawer

GOODS

Exporter submits documents such as invoice & B/L

Sends documents together with collection instructions

Acts in accordance with collection instructions and releases documents

Letters of CreditLetters of Credit

Letters ofLetters of

CreditCredit

DocumentaryDocumentary

• Primary Source of Primary Source of PaymentPayment

• Meant to be Meant to be drawn/exerciseddrawn/exercised

StandbyStandby

• Secondary source of Secondary source of payment (in the event of payment (in the event of defaultdefault

• Not meant to be Not meant to be drawn/exerciseddrawn/exercised

Letters of Credit- DocumentaryLetters of Credit- Documentary

• a payment undertaking given by a bank (Issuing Bank/Drawee),

on behalf of a buyer (Applicant),

• to pay a seller (Beneficiary/Drawer) a given amount of money,

on presentation of specific documents representing the supply of goods,

• within specific time limits,

• documents must conform to terms and conditions set out in L/C (Banks obligation to ensure)

• and documents must be presented at a specific place.

Banks deal only in documents and not in goods

Letters of CreditLetters of Credit

Letters of Credit may be:

1. Sight : If payment is to be made at the time that documents are presented and there are no discrepancies

2. Term: If payment is to be made at a future fixed time from shipping date/invoice date

Confirmed Letters of CreditLetters of Credit

• Under a Confirmed Letter of Credit, a bank, called the Confirming Bank, adds its commitment to that of the Issuing Bank to pay the Exporter under the Letter of Credit provided all terms and conditions of the Letter of Credit are met. The Confirming Bank is usually located in the same country as the Exporter.

Letters of Credit: Issuanceetters of Credit: Issuance

Importer applies for Letter of Credit.

Request to advise & possibly confirm the Letter of Credit

Advise /Confirmation of the Letter of Credit.

Advising/ Confirming Bank

Issuing Bank

Exporter/ Beneficiary

Importer/Applicant

ContractNegotiations

Letters of Credit: Flow of etters of Credit: Flow of Documents & PaymentsDocuments & Payments

Issuing Bank

Exporter/ Beneficiary

Importer/Applicant

Doc

umen

ts

Advising/ Confirming Bank

GOODS

Documents

Documents

Standby Letter of CreditStandby Letter of Credit

• Form of guarantee / secondary source of payment• Default instrument issued to cover the non-

fulfillment of a customer’s obligation under an underlying contract or agreement relating to a trade related or financial transaction

• Banks in the US are not empowered to issue guarantees so they developed the SBLC to get around this

Bonds & GuaranteesBonds & Guarantees

– Bid/Tender– Performance– Advance payment– Customs– Immigration

Pre-Shipment FinancingPre-Shipment Financing

Advances made to a client based on export

orders (raw material financing)

- With recourse financing

- ECA supported (without recourse)

- LIBOR-based pricing for eligible borrowers

Post- Shipment FinancingPost- Shipment Financing

Advances made to an exporter after the shipment has been made based on satisfactory evidence of debt (foreign open a/c receivable financing)

- Buyer Credit or Supplier Credit

- ECA supported

- Int’l trade lines, LIBOR based pricing for eligible borrowers

Why Scotiabank Trade Finance?Why Scotiabank Trade Finance?

• International Bank – global reach into target markets (lower transaction costs across network)

• Network of correspondent banks

• 175 years in existence, presence in 50 countries

• Among Top 10 performing banks in the world- 2009

• Global Finance Magazine awarded Scotiabank “Best Trade Finance Bank –Canada” 2006, 2008, 2009 , 2010

Why Scotiabank Trade Finance?Why Scotiabank Trade Finance?

• Can leverage technology and expertise (Tradexpress Elite)

• Can offer a full range of services/creative tailored solutions

• Has access to cheaper international funding (high credit rating)

• Can offer training & support to its clients

For More Information: Joanna del Pino, Snr Manager, Trade Finance

625-3566 Ext 2050

joanna.delpino@scotiabank.com

THANK YOU