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International Methods of Payment and RiskManagementSilicon Valley BankSeptember 29, 2011

Speakers• Carla Winfield, CGBP, Sr. Global Trade Finance Advisor,Silicon Valley Bank• Matt Wysong, CICP, Global Trade Finance Advisor,Silicon Valley Bank

Overview• Managing the International Sales Order – Assessing Risk• Determining the International Method of Payment• International Methods Payments and How They Work• Summary

Managing the International Sales Order –Assessing RiskCarla Winfield

Top U.S. Export MarketsCountryPercentTurkey 51.0%Panama 36.3%South Africa 36.1%Argentina 35.1%Peru 33.8%Brazil 30.2%Thailand 29.0%Hong Kong 28.8%Taiwan 28.5%Egypt 26.8%

International Risks• Commercial risk (credit risk)• Political risk (country risk)• Foreign exchange risk

International Risks- Commercial RiskCommercial risk (credit risk)• Risk associated with the individual or institutionresponsible for payment (risk factors such as poorprofitability, lack of sales, cash flow problems, insolvency,etc.)

International Risks- Political RiskPolitical risk (country risk)• Inability of your customer to pay the receivable in full or ontime due to government action (risk factors such as, war ormilitary actions, revolution, changes in export- import laws,currency inconvertibility)

International Risks- Foreign Exchange RiskForeign exchange risk• The risk that the exchange rate will change unfavorably before thecurrency is exchanged.

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

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 severalmonths still make the sale profitable?• Can the sale only be made by extending credit?• If the shipment is made and not accepted can an alternativebuyer be found?

Tools to Assess Risk• Commercial Credit Risk Resources– Country Commercial Guides – export.gov– Coface North America– Graydon America– Dun & Bradstreet• Political Risk Resources– CIA World Factbook– Dun & Bradstreet International Risk and Payment Review– Coface North America

Determining the International Method ofPaymentMatt Wysong

Forms of Payment in International Trade• Cash in Advance• Letter of Credit• Documentary Collection• Open Account14

Method of Payment: Risk AssessmentHigh RiskSellerExporterRelies completelyon buyer to pay aspreviously agreed.OpenAccountBuyerImporterNo Risk.Low RiskRelies on buyer to paydraft on presentationor upon maturity.DocumentaryCollectionsRelies on exporterto ship goods asdescribed in documents.Risk of his own nonperformanceinadhering to all therequirements in the LC.Letter of CreditRelies on seller to shipgoods as describedin the documents.Low RiskNo risk.Cash inAdvanceRelies completelyon exporter to shipgoods as ordered.High Risk15

Documentary Collections• Documents controlling merchandise forwarded throughbanking 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 adocumentary collection basis when the buyer’s creditworthinessand country of domicile represent acceptable risks16

Documentary Collections - TenorSight or Documents Against Payment• The payment is made when the documents are received by thebuyer’s bank and the buyer agrees to pay.Tenor or Documents Against Acceptance (30, 60, 90 etc. days):• The documents are received by the buyer’s bank, the buyersigns draft or bill of exchange and agrees to pay at a specificfuture date.– Risk: The exporter is counting on the buyer’s ability to pay on thematurity date. Remember, the buyer has possession of themerchandise before payment is due.17

Documentary Collections – Benefits to Exporter• More competitive sales terms - gives exporter advantage overother sellers that are offering Cash in Advance or LC terms• Banks monitor the collection and automatically send outperiodic tracers• Slightly more secure for the seller than an open account.– Documents are controlled by agent banks until payment isobtained or the draft is accepted by buyer.• Less costly than an LC18

Documentary Collections – Benefits to Importer• Buyer can examine the related documents before remittingpayment• Less expensive than a letter of credit• Does not tie up lie of credit or cash like a letter of credit19

Documentary Collections Flow ChartExporter MerchandiseImporter Documentsa. Payment/AcceptancePayment b. Documents CollectionDetailsSeller’sBankPayment Documents &Collection LetterCollectingBank20

Benefits to Exporter• Issuing Bank’s credit replaces the buyer’s credit.• Eliminates foreign bank and country risk if confirmed by Silicon ValleyBank or any U.S. Bank.• Protects seller against order cancellation.• Provides seller with the highest degree of protection, short of cash inadvance.• Seller receives payment as quickly as possible.• Time LCs or usance credits offer a built-in financing mechanism.22

Benefit to Importer• Assures that payment will not be made until documentationevidencing shipment of the merchandise is submitted to the bankand found to be in compliance• Extended payment terms may be granted by permitting drafts drawnunder the LC to be payable at a future date• Importer can set up a shipping schedule that the seller must adhereto in order to be paid23

Parties of a Letter of CreditBuyer• Applicant of an LC• ImporterSeller• Beneficiary of an LC• Exporter24

Parties of a Letter of Credit ContinuedIssuing Bank• Opens or issues the letter of credit• Substitutes its credit-worthiness for that of the buyer• Provides a guarantee to the seller that if compliant documents arepresented, the bank will paid the seller the amount due. (note:documents must on their face comply with terms and conditionsstated in the letter of credit)25

Parties of a Letter of Credit ContinuedAdvising Bank• Located in the country of the beneficiary• Notifies seller the letter of credit has been opened and insures theletter of credit is valid• Forwards letter of credit to the beneficiary• Has no other obligation under the letter of credit• If the issuing bank does not pay the beneficiary, the advising bank isnot obligated to pay26

Parties of a Letter of Credit ContinuedConfirming Bank• Adds its understanding to pat to that of the issuing bank• Confirmation requested by beneficiary (if unsure of credit rating ofissuing bank or risk of the country)• Usually confirming bank is nominated by beneficiary and serves asadvising bank• Beneficiary has U.S. bank exposure• Must pay beneficiary:– If all conditions of letter of credit are satisfied– Whether or not issuing bank pays27

Parties of a Letter of Credit ContinuedNegotiating Bank• A bank which agrees to purchase an exporter's drafts submitted toit under an L/C, and makes payment of the proceeds to thebeneficiary.28

Letter of Credit Flow Chart – Prior to ShipmentExporter ContractImporter Advice Letter of Credit LC ApplicationAdvising/ConfirmingBank Original LC via SWIFTIssuingBank29

DocumentsLetter of Credit Flow Chart – Post ShipmentExporter MerchandiseImportera. Payment Paymenta. DocumentsNegotiatingBankb. Documentsb. PaymentIssuingBank30

Letters of Credit UsageCountry/ContinentAsia (excluding Japan)JapanLatin AmericaEuropeEastern EuropeMiddle EastRare L/C UsageYesYesYesNo, but Yes may use Bankers GuaranteeYesYesYesNo, but may use BankersGuaranteeYesRare31

Summary

Summary• Understand the risk factors when entering into a new market• Be proactive – negotiate the method of payment during the salesorder• If payment is to be made by a letter of credit, use a letter ofinstruction to communicate your terms and conditions for the letterof credit to the buyer, and request a draft copy of the letter of creditprior to issuance.• Consult with a bank with international trade finance experience earlyin the process33

Questions?

Biographies35

Carla WinfieldCarla Winfield is the senior international trade advisor for SiliconValley Bank in its Eastern Region. She is responsible for helpingclients mitigate their risk as they expand their business globally.Senior Global Trade Finance AdvisorSilicon Valley Bankcwinfield@svb.com617.630.4154Winfield has over 20 years experience in international bankingincluding trade services, trade finance, export compliance andglobal cash management. She was awarded the Certified GlobalBusiness Professional (CGBP) designation by NASBITEInternational during its inaugural session in 2006 and has taughttrade finance at the Massachusetts Export Center for the NASBITEInternational CGBP Certificate Preparation Course. A recognizedexpert in trade, she has made presentations to The MassachusettsTreasury Management Association, Massachusetts Export Center,national associations of exporters and importers and many bankpresentations on the subject of trade finance, export complianceand global cash management. Winfield has also been published inThe Journal of New England Technology.Her board experience, practical knowledge and technical expertiseallow her to develop innovative solutions for companies involved ininternational trade banking.36

Matt WysongMatt Wysong is a Global Trade and Foreign Exchange Advisor forSilicon Valley Bank. He is responsible for advising clients oninternational expansion, foreign accounts receivable financing,foreign exchange hedging and international risk mitigation.Global Trade Finance AdvisorSilicon Valley Bankmwysong@svb.com303.410.3431Prior to joining Silicon Valley Bank in 2008, Mr. Wysong was aRelationship Manger for Wells Fargo focusing on analyzing,negotiating and managing complex credit transactions forcommercial clients in the Rocky Mountain Region. He started hiscareer in industry as an account manager at Matchlogic, an e-Customer Relationship Management Solutions (eCRM) company.Mr. Wysong holds both a BS and MBA from the University ofColorado at Boulder, possesses a Series 6 license from the NationalAssociation of Securities Dealers, is a Certified International CreditProfessional from the FCIB, and has completed the Export-ImportBank Delegated Authority Underwriting Program.37

Disclosures©2011 SVB Financial Group. All rights reserved. Silicon ValleyBank is a member of FDIC and Federal Reserve System. SVB>,SVB>Find a way, SVB Financial Group, and Silicon Valley Bankare registered trademark.38