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Daniel W. Holt Small Business Administration 704-333-4886 Dan.Holt@mail.doc

Daniel W. Holt Small Business Administration 704-333-4886 Dan.Holt@mail.doc.gov. 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.

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Daniel W. Holt Small Business Administration 704-333-4886 Dan.Holt@mail.doc

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  1. Daniel W. Holt • Small Business Administration • 704-333-4886 • Dan.Holt@mail.doc.gov

  2. 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!

  3. Building a Global Reach to Run a Global Race The Intermodal Global Supply Chain • 1970 – 1 million containers • 2000 – 20 million containers • 2020 – 50 million containers • 2050 – 100 million containers

  4. The Pace Quickens Changing U.S. Economy 1970…International trade is 7% 2000…International trade is 27% 2050…International trade up to 50% Changing U.S. Life Styles Local Economy of 19th Century—93% of Work Force Employed in Agriculture Global Economy of 21st Century—3% of Work Force Employed in Agriculture

  5. The Global Marketplace of the 21st Century – Looking Ahead(% of World GDP) 2004 2050

  6. Countries Ranked by Population: 2000 Country 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

  7. Four Common Misconceptions about Exporting • You have to be Big to Export – While large companies do the greatest volume of international trade, smaller companies are also taking advantage of opportunities in foreign markets. Surveys show that 60% of US firms now exporting successfully have fewer than 100 employees. • To Export You Must Have a Big Export Department – The size of the company’s export department depends upon the method by which the products are marketed. • Direct Exporter – sells to a company or agency in a foreign country and ships the product to the overseas destination. • Sporadic Exporter – sells in small quantities, and marketing and shipping responsibilities can be handled by one employee in addition to his regular duties. • Indirect Exporter – sells through an intermediary company in the US., and requires no more specialized staff than is necessary for domestic sales. • To Export You Must Have Substantial Volume – Due to many smaller companies actively involved in international trade is a testament to the fact that large volume is not a necessity for exporting. If a US company devotes even 10% of its production capacity to foreign markets then it can expect to build substantial and permanent trade in foreign markets. • You Must be Fluent in Foreign Languages to Export – Knowledge of a foreign language is not essential to exporting. On the few occasions when correspondence and documents are not in English, many translation sources are available.

  8. DOMESTIC RISK • BANKRUPT • DOES NOT WANT TO PAY • CAN NOT PAY • PRODUCT DISPUTE • WENT OUT OF BUSINESS

  9. Country Border International Trade I want to buy. I want to sell. Importer (Buyer) Exporter (Seller)

  10. International TradeSome Things are Different • Language • Currency • Banking • Credit Terms & Risk • Transportation / Packaging • Insurance - Shipping - War • Government Requirements - Each Country

  11. International TradeSome Things are Different • Language • Currency • Banking • Credit Terms & Risk • Transportation / Packaging • Insurance - Shipping - War • Government Requirements - Each Country

  12. Risk • Risk is a neutral term. It does not mean you will win or lose. • High risk - small margin = bad • High risk - good return= maybe

  13. Merchandise APRIL 24, 1996 AT _SIGHT_____________ ABC CO. AMOUNT XYZ CO. ABC CO. There are risks! ALL EXPORTS Importer (Buyer) (Seller) INSURANCE Documents (4) (6)

  14. 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)

  15. CARGO INSURANCE International transportation is risky! • $30 - $50 billion in worldwide losses • Ocean 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.

  16. I don’t need no stinking marine insurance

  17. 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

  18. COUNTRY RISK • The first consideration will ALWAYSbe country risk.

  19. COUNTRY RISK • If the deal is in a country that is too risky, the customer can never be good.

  20. 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

  21. 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?

  22. CONTROLS • BANK • CREDIT REPORTING AGENCIES • INSURANCE • RESEARCH • LETTER OF CREDIT

  23. CONTROLS • CASH IN ADVANCE • FREIGHT FORWARDER • GOOD BUSINESS CONTROLS

  24. Risk Comparison INTERNATIONALMETHODS OF PAYMENT INTERNATIONAL METHODS OF PAYMENT Trade Terms Exporter Risk Importer Risk Open Account Documentary Collection(Time) Documentary Collection (Sight) Letters of Credit (Time) Letters of Credit (Sight) Payment in Advance High Low

  25. Questions to Ask Before Selecting the Payment Method Risk Comparison • Can your business afford the loss if it is not paid? • Will extending credit and the possibility of waiting several months for payment still make the sale profitable? • Can the sale be made only by extending credit? • How long have the buyers been operating, and what is their credit history? • Has your business sold successfully to the buyer before? • Are there reasonable alternatives for collecting if the buyer does not pay? (Does the buyer’s country have the legal and business infrastructure for settling disputes fairly and swiftly?) • If shipment is made but not accepted, can alternative buyers be found?

  26. Basic collection terms or Accounts Receivable methods • Cash in Advance • Open Account • Documentary Collection • Letter of Credit

  27. International Methods of Payment Cash In Advance • Time of Payment: prior to shipment. • Buyer Pays • Wire Transfer • Check • Draft • Credit Card • Goods available to Buyer: upon delivery • Risk to Seller: no risks • Risks to Buyer: loses use of funds until goods arrive. Seller may not ship goods as ordered or at all. • No Credit Approval Required

  28. International Methods of Payment Open Account • Time of Payment: upon payment of invoice. • Goods available to Buyer: upon delivery. • Risk to Seller: completely relies on Buyer to pay invoice when due. • Risks to Buyer: no risks. • Recommended for sales to long-standing customers with satisfactory payment history

  29. Agreement (1) B/L (3) Merchandise (5) (2) Importer (Buyer) APRIL 24, 1996 AT _SIGHT_____________ ABC CO. AMOUNT XYZ CO. ABC CO. Documents (4) (6) Open Account Merchandise (Seller)

  30. Documentary Collections Sight Draft or DocumentsAgainst Payment • Time of Payment: upon presentation of the draft • Goods available to Buyer: after payment if ALL Ocean Bills of Lading are included with the documents and after the cargo has arrived. • Risk to Seller: possible non-payment of the draft. • Risk to Buyer: has assurance of shipment, but Seller may not ship goods as ordered. Must pay to get title to goods. • Not recommended for sales on extended terms

  31. Documentary Collections Time Draft or DocumentsAgainst Acceptance payable at XX days (i.e., 30/45/60 – per sales agreement) after sight, after bill of lading Date, or after invoice date. • Time of Payment: at maturity of draft. • Goods available to Buyer: upon acceptance of the draft by the Buyer and after the cargo has arrived. • Risk to Seller: possible non-payment of the draft AND Buyer has the cargo. • Risk to Buyer: accepts draft before getting title to goods. Seller may not ship goods as ordered.

  32. B/L (3) Merchandise (2) Importer (Buyer) (Seller) (6) (7) APRIL 24, 1996 AT _SIGHT_____________ ABC CO. (5) AMOUNT XYZ CO. ABC CO. (8) Documentary Collection Export U.S. Bank Foreign Collecting Bank

  33. B/L (3) Merchandise (2) Importer (Buyer) (Seller) APRIL 24, 1996 AT _SIGHT_____________ ABC CO. AMOUNT XYZ CO. ABC CO. COPY OF TRANSMITTAL LETTER Direct presentation (4) Documentary Collection ExportDIRECT COLLECTION OPTION U.S. Bank

  34. Commercial Letter of Credit THE PURPOSE OF A LETTER OF CREDIT IS TO ALLOW STRANGERS TO DO BUSINESS.

  35. APRIL 24, 1996 AT _SIGHT_____________ ABC CO. AMOUNT XYZ CO. ABC CO. Agreement (1) Letter of Credit Exporter B/L (6) Merchandise Merchandise (5) (13) Importer (Buyer) (Seller) (2) Apply for LC (7) (9) LC Advised (12) LC/ Docs Draft (10) (4) (3) Letter of Credit Docs/Draft (8) (11) U.S. Bank Foreign Issuing Bank

  36. Do you need a confirmed export credit? • What is it? • The advising or negotiating bank, or another bank in the seller’s country, may add its “confirmation.” A confirmation is the bank’s commitment of payment of the transaction in the event that the issuing bank fails to pay on behalf of the applicant. • When a bank is asked to add their confirmation they undertake a credit decision based on factors such as the time period of the LC, amount, and political, economic and other risks associated with the country of the issuing bank, as well as commercial and credit risks associated with the issuing bank. • If a letter of credit is not confirmed, it is merely “advised” to the beneficiary without any payment obligation on the part of the advising bank.

  37. Do you need a confirmed credit? • Consider the reputation and financial strength of the issuing bank. • What about the political and economic environment in the country of issue? • What about foreign currency controls in the country of issue that might impact the issuing bank’s ability to pay upon receipt of conforming documents? • Do national laws in the country of issuance prohibit confirmation? • What is your quality/relationship with the buyer?

  38. Daniel W. Holt Small Business Administration 704-333-4886 Dan. Holt@mail.doc.gov

  39. Cash Cycle Inventory Raw material Receivables Cash

  40. Cash Cycle Inventory Raw material Receivables Cash

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