Trade Finance 101

Assessing Credit Risk To Manage Your International Payments

Why We’re Here

Where to Start

International Risks

International Methods of Payment

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

International Risk

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

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?

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

International Methods of Payment

Forms of Payment in International Trade

Open Account

Cash in Advance

Documentary Collection

Letter of Credit

Intl Methods of Payment: Risk Assessment

Relies completelyon buyer to pay

aspreviously agreed

No Risk

Open Account

Relies on buyer to paydraft on presentation

or upon maturity

Relies on exporterto ship goods as

described indocuments

DocumentaryCollections

Risk of his own non-performance in

adhering to all therequirements in the

LC

Relies on seller to shipgoods as describedin the documents

Letter of Credit

No riskRelies completely

on exporter to shipgoods as ordered

Cash in Advance

High Risk

Low RiskHigh Risk

Low Risk

SellerExporter

BuyerImporter

Determining Terms of Payment

Cash in Advance

Letter of Credit

Collection

Open Account

Relationship New New Well Established Well Established

Type of Goods Custom-Made Custom-Made Stock Item Stock Item

Political Unstable* Unstable* Stable Strong

Economic Unstable* Unstable* Stable Strong

Timing of Cash, Flow & Deliveries

Yes Yes No No

*Confirmation by U.S. or Other World Class Bank Suggested

Letter of Credit Usage

Country/Continent L/C Usage

Japan

Asia (not including Japan)

South America

Europe

Eastern Europe

Middle East

Rare

Yes

Yes

No, but may use

Bankers Guarantee

Yes

Yes

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

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

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

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.

Questions?