INTERNATIONAL PAYMENT METHODS
Broward Economic and Small Business Development Export Readiness Semiar
February, 2012
Abby Martinez Vice President
Trade Sales Specialist
International Trade Risks
Regulations (OFAC, anti money laundering…) Commercial
Insolvency
Protracted periods of non-payment Political Wars Insurrections Boycotts Tariffs Expropriations
Central Bank’s failure to provide foreign exchange Governmental subsidies
Credit
International Trade Risks
International Trade Risks
Contact Information Export Financing Tools
Methods of Payment
Assessing What’s Right For You
How much risk is your company willing to take?
How well do you know your customer?
What payment terms are typical for your industry?
What is your competition offering?
What is the nature of the order?
What is the political and economic situation in the Buyer’s country?
Buyer’s credit standing Seller’s ability to fulfill order Law of supply and demand Political risks
Amount and Tenor Competition
Financing requirement of buyer and seller Cost of bank services
Most Common Payment Methods
Seller
Most Protection
Least Protection Most Protection
2. Documentary / Commercial Letter of Credit
Instrument issued by importer’s bank, in favor of exporter, payable against presentation of specified documents to the issuing bank. May incorporate or facilitate pre- & post-shipment financing.
For the payment of goods and/or services
Designed to be drawn on when product is shipped and documentary conditions are met
Typically used for cross-border transactions, but can be used domestically
Offers the most protection to the SELLER
Banks deal in documents only. BUYER’s recourse for problems with goods is the contract with the SELLER
Documents presented under an LC must comply with its terms and conditions, otherwise there is no obligation to honor
SELLER can rely on the creditworthiness of bank instead of BUYER
Constitutes a definite undertaking of confirming bank. Independent of the issuing bank’s obligation
Removes Issuing Bank risk
Reduces Country risk (political, economic, FX)
Confirmation expedites payment
Payment obligation moves to
beneficiary’s domicile
Types of Credits
Confirmed Unconfirmed/Advised
No obligation to ―pay‖ at sight or ―accept‖ and pay at maturity time drafts. Further, no obligation to pay at maturity credits that provide for
―deferred payment‖
Purpose: Authenticate issuer’s credit
Payment effected when documents are
presented which are in compliance with the terms and conditions of the credit
Payment may or may not occur immediately
If payable in the US
If payable in a foreign country
LC terms may contain special provisions
about timing
Types of Credits (continued)
Payment - Sight Payment - Time
Acceptance:
Payment made at some specified time after presentation of conforming document(s)
Provides short term financing—up to 12
months tenor
Defined in LC
Requires draft drawn on a bank
Can be xxx days from B/L date or other event
Can be xxx days from Sight (as defined by
accepting bank)
Negotiable instrument
Accepting bank obligated to pay at maturity
Can be discounted to exporter for earlier
payment Deferred:
Like an acceptance, but there is no draft
Some countries have a draft tax
Commitment to pay on a specified date
Not a negotiable instrument
Documentary Letter of Credit
A Letter of Credit replaces risk of BUYER with risk of Issuing Bank
It assures the SELLER that he will be paid provided that documents presented comply with its terms and conditions
A Confirmed Letter of Credit is the undertaking of two Banks: the Issuing Bank and the Confirming Bank. Both are equally liable to pay the beneficiary
2. LC Ap pl ic at io n 1. Sales Contract
3. Issue Letter of Credit
4. Ad vi se L C 5. Shipment of Goods 6. Doc ume nt s se nt 7. Documents sent 8a. Payment sent
All Parties Deal In Documents and Not in Goods
Determination of Compliance on the Basis of Documents Alone Issuing/Confirming Bank’s Obligation
Beneficiary’s Entitlement to Settlement Against Complying Documents Settlement of Discrepant Documents
To avoid document problems, check the LC as soon as it is received
Design a letter of credit instruction form for your buyers
–
Provides buyers with your company’s required LC terms and
conditions
–
Can be customized for different countries, product and regions
–
May be detailed or contain only key data element
Provide the LC instruction form to Match LC Terms to Contract/Sales Terms Post your LC instructions on your company’s website
Exporter should be able to prepare/obtain all documentation easily
No buyer controlled documents!
Check with freight forwarder to make sure bills of lading can be prepared as per LC
Check with those responsible for document preparation (internal and external) to verify that all documents can be prepared as per LC
Dot your I’s and cross your T’s
– Set up internal ticklers (dates, tasks)
– Establish who is responsible for what (from order to ship to payment) – Provide copies of LC to all involved parties (internal and external)
Managing Documents (continued)
Keep documentation as simple as possible
LC should have only what is necessary
avoid presenting extra documents (not in LC)
Be aware of how long it may take to get documents from a third party
consularization, legalization bills of lading
inspection or other 3rd party certificates
Managing Documents (continued)
3. Documentary Collections
L E T T E R O F C R E D I T C Y C L E Payable at sight or under a time draft
Sight: collecting bank authorized to release documents only against payment from buyer/importer; payment made upon delivery of
documents to buyer’s bank
Time Draft: bank still acts as intermediary between supplier/exporter and buyer/importer; allows importer to hold on to cash longer; higher risk due to importer’s control over timing of payment; may discount time draft against guarantee from importer/buyer’s bank (aval)
Reduced Transaction costs (cheaper than LC)
4. Open Account
L E T T E R O F C R E D I T C Y C L E Most favorable for the buyer
Payment made as agreed between buyer and supplier
Recommended for sales with customers with satisfactory payment history (long standing relationship).
Export Credit insurance provides risk mitigation against both commercial and political risks
Does not cover product disputes
Makes foreign receivables eligible for financing with most banks; policy can be assigned to lender
International Trade Risks
Contact Information
Export Financing Tools
Who is Ex-Im Bank?
Independent agency of the US federal government
Established in 1934
Headquartered in Washington, DC
5 Regional sales offices
Mission: Support US Exports to create and sustain US jobs
Must be 51% or more U.S. content or added value
Ex-Im Bank programs
Pre-Export Working Capital (Export related inventory and export
related accounts receivables)
Post Export Receivable Financing (Credit Insurance)
Short Term Buyer Credit Financing
Ex-Im Bank – Export Working Capital
Asset –based lending program
Allows use of export related AR and export related inventory
(including raw materials, WIP, finished goods) for borrowing
purposes
Provides advance ratios of up to 90% on export related AR and up
to 75% on export related inventory
Can be used for issuance of SBLCs for warrantee and bid purposes
(only 25% cash collateral requirement)
At least 51% US content required
No military sales
Ex-Im Bank – Growth Opportunity
Ex-Im Bank – Medium Term program
Financing of capital equipment for 1-5 years
Allows for term financing to the foreign buyer
New or used equipment
JP Morgan Chase Global Trade - Key Contacts
Global Trade Helpdesk:
800-634-1969 x2 [email protected]
Transaction in place/ LC already issued: Has JP Morgan Chase received LC issued by buyer? Clarification of exotic terms and conditions in an LC. What is status of documents presented under the LC? Questions regarding Advice of Refusal of Documents (aka
discrepancy notification). Explanation of fees and interpreting detailed advise of credit.
Global Trade Specialists:
Abby Martinez 305-579-9488 [email protected]
Antonio Duncan 813-432-5642 [email protected]
Work prior to LC issuance: structuring LC terms and conditions when in initial negotiations, getting indicative fee quotation, reviewing buyer communications and responses to same.
Transaction in place/LC already issued: Review of LC for general overview. Clarification of exotic terms and conditions. Assistance with crafting correspondence with
counterparty regarding need for amendment to LC. General risk discussion and review.
This presentation was prepared exclusively for the benefit and internal use of the J.P. Morgan client to whom it is directly addressed and delivered (including such client’s subsidiaries, the “Company”) in order to assist the Company in its internal training programs. This presentation contains information which is confidential and proprietary to J.P. Morgan, which may only be used by the Company for its own internal training and may not be disclosed to any other person. In preparing this presentation, we have relied upon and
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