INTERNATIONAL PAYMENT METHODS

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1 S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L INTERNATIONAL PAYMENT METHODS Broward Economic and Small Business Development Export Readiness Semiar February, 2012 Abby Martinez Vice President Trade Sales Specialist

2 S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L Agenda International Trade Risks Methods of Payment Export Financing Tools Contact Information

3 I N T E R N A T I O N A L T R A D E R I S K S 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

4 S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L Agenda International Trade Risks Methods of Payment Export Financing Tools Contact Information

5 M E T H O D S O F P A Y M E N T 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?

6 M E T H O D S O F P A Y M E N T Factors to Consider 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 Past experience.kyc

7 M E T H O D S O F P A Y M E N T Most Common Payment Methods Seller Most Protection Buyer Least Protection CASH IN ADVANCE LETTER OF CREDIT DOCUMENTARY COLLECTION OPEN ACCOUNT Least Protection Most Protection

8 L E T T E R O F C R E D I T C Y C L E 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

9 L E T T E R O F C R E D I T C Y C L E Types of Credits Confirmed 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 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

10 L E T T E R O F C R E D I T C Y C L E Types of Credits (continued) Payment - Sight 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 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

11 L E T T E R O F C R E D I T C Y C L E 8b. Payment sent 6. Documents sent 4. Advise LC 2. LC Application 9.Payment sent Documentary Letter of Credit Seller Exporter Beneficiary 1. Sales Contract 5. Shipment of Goods Buyer Importer Applicant Advising Bank Negotiating Bank Confirming Bank 3. Issue Letter of Credit 7. Documents sent 8a. Payment sent Issuing Bank 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

12 L E T T E R O F C R E D I T C Y C L E Bank s Liability 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

13 L E T T E R O F C R E D I T C Y C L E Managing 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

14 L E T T E R O F C R E D I T C Y C L E Managing Documents (continued) 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)

15 L E T T E R O F C R E D I T C Y C L E 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

16 L E T T E R O F C R E D I T C Y C L E 3. Documentary Collections 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) Exporter/Seller take direct importer/buyer risk

17 L E T T E R O F C R E D I T C Y C L E 4. Open Account 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 Insurance brokers can receive quotes from private and public sector carriers; help in administering the policy

18 S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L Agenda International Trade Risks Methods of Payment Export Financing Tools Contact Information

19 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 Export sales only

20 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 Medium term and Long term buyer financing via insurance/guarantee programs (capital equipment)

21 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 Super Delegated Authority $10MM; Fast Track up to $25MM

22 Ex-Im Bank Growth Opportunity

23 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 Competitive interest rates

24 L E T T E R O F C R E D I T O V E R V I E W JP Morgan Chase Global Trade - Key Contacts Global Trade Helpdesk: x2 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 Antonio Duncan 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.

25 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 assumed, without independent verification, the accuracy and completeness of all information available from public sources. This presentation is for discussion and informal educational purposes only and is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by J.P. Morgan. Neither this presentation nor any of its contents may be used for any other purpose without the prior written consent of J.P. Morgan. J.P. Morgan makes no representations as to the legal, regulatory, tax or accounting implications of the matters referred to in this presentation. Notwithstanding anything in this presentation to the contrary, the statements in this presentation are not intended to be legally binding. Any products, services, terms or other matters described in this presentation (other than in respect of confidentiality) are subject to the terms of separate legally binding documentation and/or are subject to change without notice. Neither J.P. Morgan nor any of its directors, officers, employees or agents shall incur any responsibility or liability whatsoever to the Company or any other party in respect of the contents of this presentation or any matters referred to in, or discussed as a result of, this document. J.P. Morgan is a marketing name for the treasury services businesses of JPMorgan Chase Bank, N.A. and its subsidiaries worldwide. J.P. Morgan is licensed under U.S. Pat Nos. 5,910,988 and 6,032,137. JPMorgan Chase & Co. All rights reserved

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