E xport Overview

1. International Services Export Overview

2. The Exporter’s Objective Take control of the export process to: • Reduce/mitigate risks • Reduce costs • Accelerate payment • Increase export sales

3. Buyer’s & Seller’s Objective Both have a vested interest in closing the transaction, but... there is an inherent conflict in objectives.

4. Buyer’s Objective Buyer wants to delay payment as long as possible. Until… • Receipt and processing of goods • Sale of goods

5. Seller’s Objective Seller wants payment as soon as possible. At… • Contract signing or • at time of shipment

6. Export Documentation Documentation is the engine in global trade. It facilitates: • The movement of freight; • transfer of title; • processing of payment; and • customs clearance.

7. Role of the Freight Forwarder Exporter’s agent in moving shipment to buyer’s destination should be familiar with: • import rules & regulations of foreign countries; • U.S. Government export regulations and • trade documents.

8. Shipping Documentation • Before trying to handle all the documentation, the exporter should consider using a freight forwarder, a specialist in documentation. • Required documents will depend upon both U.S. Government requirements and those of importer’s country.

9. Common Shipping Documents • Commercial invoice • Packing list • Ocean Bill of Lading • Certificate of origin • Insurance certificate • Inspection certificate • Consular invoice

10. Incoterms • Most commonly used pricing terms that deal with the relation between seller and buyer under the sales contract, especially the seller’s delivery obligation • Deal with a number of obligations imposed upon the parties and with the distribution of risk between them • Critical to the success of the transaction • Incoterms are published by the International Chamber of Commerce • When using Incoterms, refer to them as Incoterms 2010 (Incoterms 2010 as of 1/1/2011)

11. Methods of Payment • Cash in advance • Letter of credit • Documentary collection • Open account

12. Exporter/Seller Least Risk Most Risk Documentary Collections LettersOfCredit Open Account Cash In Advance Importer/Buyer Most Risk Least Risk Payment Methods

13. Cash in Advance Cash In Advance

14. Cash in Advance • Will definitely limit market penetration • But … it eliminates any credit & country risk • Can be very expensive to buyer leading to potential loss of customer by requiring prepayment for goods • May require exporter to provide a performance bond

15. Letters of Credit

16. What is a Letter of Credit? A letter of credit is a financial instrument • It evidences a Bank’s commitment to pay money to a specified party provided certain conditions are satisfied

17. Letter of Credit – Definition • Transfers credit risk from the buyer to the buyer’s bank • A letter of credit is a written undertaking issued by a bank to pay, in favor of a third party (beneficiary), on behalf of the bank’s customer (applicant). • Letters of credit are documentary in nature. The bank’s promise to pay is contingent solely upon presentation of compliant documents, as specified in the credit terms.

18. Mitigating Risk of Fraud Secure communications via: S.W.I.F.T. (Society for Worldwide Interbank Financial Telecommunication) • Membership limited to financial institutions • Standardized formats with character limitations • Authentication keys exchanged between member banks for secure transmissions

19. Precepts of Letters of Credit • Letters of credit are separate transactions from the sales contract or agreement on which they may be based • Banks are not responsible for the accuracy, content or the validity of the documents • Both issuing and advising banks deal in documents and not the goods or services to which the documents relate

20. Parties Involved in a Letter of Credit • Applicant (Buyer) • Issuing bank (Buyer’s bank) • Beneficiary (Seller) • Advising bank (Seller’s bank)

21. Types of Letters of Credit Commercial • Irrevocable • Confirmed • Transferable Standby • Used in lieu of bank guarantees • Financial standbys • Performance

22. Payment Terms “At sight” terms • Payment due at presentation of conforming documents at the issuing and/or confirming bank’s counter Usance terms • Draft presented for payment at “x” days from Bill of Lading date (or other clearly specified time period)

23. Letter of Credit Issuance Process – Step 1 Buyer Purchase Order • Buyer applies for letter of credit at his bank • Bank makes credit decision to issue letter of credit in same manner as approving a loan • Bank issues letter of credit based on approved application Letter of Credit Application Buyer’s Bank

24. Letter of Credit Issuance Process – Step 2 • Issuing bank forwards letter of credit to correspondent bank located in seller’s country • Advising bank authenticates letter of credit, forwards to seller Seller Buyer’s Bank Letter of Credit Seller’s Bank Letter of Credit

25. Seller’s Bank Buyer Documents Goods Seller Seller Letter of Credit Payment Process – Step 1 • Seller ships merchandise to buyer • Seller prepares specified shipping documents to submit to bank for payment

26. Letter of Credit Payment Process – Step 2 • Seller presents documents to the advising/processing bank • Bank examines documents carefully to determine compliance with letter of credit terms • If documents comply, advising/processing bank informs issuing bank of presentation, obtains reimbursement per credit terms, pays seller Seller Buyer’s Bank Seller’s Bank Notify Documents

27. Letter of Credit Sample

28. Discrepancies Discrepancies occur when there is non-compliance with the terms of the letter of credit and/or when the documents are inconsistent with each another.

29. Consequences of Discrepancies • Expensive and are typically for exporter’s account • Can delay payment: when documents must be presented on approval basis, buyer may delay the payment approval • Can void the protection of the letter of credit; risk of non-payment as buyer may elect not to approve payment altogether (e.g., late shipment may not allow the buyer to resell goods) • If the buyer is having financial problems, the issuing bank may try to find any discrepancies to void the letter of credit

30. Common Discrepancies • Seller’s invoice exceeds letter of credit amount • Documents presented after letter of credit has expired • Documents are not presented within the specified presentation period • Late shipment • Missing documents • Absence of required signatures • Documents inconsistent with letter of credit or with each other

31. What To Do When There Are Discrepancies • Correct or present new documents • Have Advising/Processing Bank contact Issuing Bank for approval to accept discrepancies • Have Advising/Processing Bank send documents to Issuing Bank for approval

32. The Letter of Credit: Confirm or Not? Yes, when: • Unfamiliar with credit risk of Issuing Bank or country – If confirmed by a U.S. bank, the country/political and credit risks are transferred to U.S. bank – Letters of credit are only as good as the banks that issue/confirm them No, when: • Letter of credit is issued by an investment grade bank • Country risk is acceptable

33. Documentary Collections

34. Definition • Presentation of ‘financial’ and ‘commercial’ documents on a collection basis by the seller’s bank (i.e. the Remitting Bank) to the bank (i.e. the Collecting Bank) nominated to make presentation to the buyer as per the collection instructions. • The seller draws the ‘financial’ document on the buyer, which stipulates the tenor of the underlying commercial transaction. • Documents are typically released against: – Payment (D/P, Documents against Payment) – Acceptance (D/A, Documents against Acceptance)

35. D/P – Documents Against Payment Documents are presented on a sight basis and are released to the buyer when payment has been made. Payment must be made in ‘good funds’, which can take the form of ‘available funds’ in their account or a FedWire transfer.

36. Collection Letter, Draft, Title Documents Remitting Bank Collecting Bank Title Documents Drawer/Seller Drawee/Buyer Documentary Collections – D/P Goods

37. D/A - Documents Against Acceptance Documents are presented on a time basis and are released to the buyer when the buyer has accepted the ‘financial’ document for payment at a future date. This act of acceptance by the buyer represents their promise to pay as per the tenor of the transaction.

38. Collection Letter, Draft, Title Documents Collecting Bank Remitting Bank Title Documents Drawer/Seller Drawee/Buyer Documentary Collection Time Draft – D/A Accepted Draft Goods

39. Documentary Collections Risks • Documents are sent to the wrong department/branch of foreign bank & released to buyer without payment • Time drafts are subject to buyer’s credit risk

40. Documentary Collections Risks Because the importer is not obliged to take up the documents, Buyer can: • Stall (until shipment arrives) • Try to negotiate a lower price • Refuse the shipment (timing, credit, character or country risks)

41. Documentary Collection Summary • Banks have no liability to pay or accept the drawers/sellers draft • Banks act only as collecting agents

42. Open Account

43. Open Account • Common in both domestic & international commerce • Seller ships the goods to the buyer and separately mails the title documents and invoice calling for payment within a stipulated period of time

44. Open Account • Advantage to buyer who is able to receive goods, sell them and possibly collect A/R prior to paying seller • Risks to seller: – buyer credit risk – buyer country risks (e.g., commercial/exchange, controls/FX, volatility/turmoil)

45. Export Credit Insurance • Protects the exporter from • commercial non-payment risks (buyer insolvency, bankruptcy or protracted commercial default) • political risk that results in non-payment (unrest, currency inconvertibility, withdrawal of import license) • Allows exporters to sell on open account (the riskiest payment method) • Increases exporter competitive edge • Does not protect against quality issues and shortages

46. Some Practical Advice

47. Practical Advice (continued) Exporters • Focus on your documents. Keep them simple, relevant and free of discrepancies. • Address the country and credit risks involved – Are they relevant? – Are you comfortable with the risks? – If not, can they be mitigated or eliminated?

48. Practical Advice (continued) Remember: Time = Money Finally, consult with your banker — your partner and ally in the trade transaction.

49. BB&T Contact Information Joe Pearson AVP, International Business Development Officer BB&T International Services 803-251-1607 JMPearson@bbandt.com www.BBT.com BB&T, Member FDIC.