| A GUIDE TO EXPORTING SOLID WOOD PRODUCTS |
Payment options for export shipments: Listed below are five options normally used for receiving payment for exported goods. Once the seller has determined the risks its company can afford to take, it's time to evaluate the risks associated with the more common methods of payment. Ranked in order of risk from the seller's perspective, from the most secure to the least secure, the more common methods of payment are:
Cash in advance is typically considered the safest method of collecting payment for the seller. Cash in advance can take the form of a wire transfer or payment by check. An international wire transfer is the preferred method, because it allows for quick receipt of funds for the goods.
Collecting payment using an international check is a less attractive option than wire transfer because it can result in lengthy delays of final receipt of funds. If the foreign buyer pays by check, made payable in U.S. dollars and drawn on a U.S. bank, the collection process is the same as any U.S. check. If, however, the check is in a foreign currency or drawn on a foreign bank, the collection process becomes more complicated and can delay the availability of funds. There is also a risk that any check may be returned due to insufficient funds in the buyer's account. This can result in a charge-back and possible overdraft charges in the buyer's account.
An additional factor to consider is that advance payment creates cash flow problems and increases risks for the buyer. If the competition is willing to extend credit, the buyer may go elsewhere.
The percentage of trade conducted under this method is low.
A letter of credit (L/C) is a commitment or promise from the buyer's bank to pay the seller once the seller has met all the terms and conditions of the letter of credit. L/C's are irrevocable, which means that once the L/C is established it cannot be changed without the consent of all parties.
The L/C more evenly distributes risk between the seller and buyer. The seller is assured of payment when the conditions of the L/C are met and the buyer is assured of receiving the goods ordered. It is a commonly used method of payment, especially when the seller/buyer relationship is a new one.
The L/C is, however, not without disadvantages. If any discrepancies exist in the documents required by the L/C, the buyer has the option to approve the discrepancies and pay for the shipment or to reject the shipment. A rejected shipment means that the seller must quickly locate a new buyer, re-negotiate with the buyer, usually at a lower price, or pay for the shipment to be returned. An L/C also adds to the cost of the product and can tie up the buyer's working capital or credit line prior to final payment.
A word of advice: when using an L/C, the seller should always have its international bank and its freight forwarder carefully scrutinize the L/C. They can help you determine if the L/C is legitimate, if all the terms can be met, and all the necessary bases are covered.
There are four parties formally involved in the collection of payment using a L/C:
There are two types of letters of credit, the first one is an irrevocable letter of credit that is confirmed by a U.S. bank, and the second one is an irrevocable letter of credit confirmed by the foreign bank, but not the U.S. bank. The first type of letter of credit is preferred, because the U. S. bank accepts the responsibility to pay and the exporter receives payment as soon as the documents are presented to the bank. This also guarantees the seller that payment terms and conditions of the letter have been met.
For more information on L/Cs, consult Uniform Customs and Practices for Documentary Credits (ICC Publication No. 500) or a qualified international banker. Tradecorp offers guidance on their website at http://www.tradecorp.com/
Like the letter of credit, the standby letter of credit is a commitment or promise from the buyer's bank to pay the seller once the seller has met all the terms and conditions of the standby letter of credit. The difference is that the standby letter of credit is a guarantee of payment from the bank only if the buyer defaults on the payment. The buyer pays on open account or credit terms. Should the buyer default, the seller presents a sight draft and a written statement to the bank certifying that the buyer has failed to make payment on the shipment secured by the standby letter of credit and collects payment from the buyer’s bank. The use of a standby letter of credit adds a guarantee of payment at a lower cost than payment collection using a letter of credit.
To collect payment from a foreign buyer using documentary collection, the seller sends a draft or other demand for payment with the related shipping documents through bank channels to the buyer's bank. The bank releases the documents to the buyer upon receipt of payment or promise of payment. The banks involved in facilitating this collection process have no responsibility to pay the seller should the buyer default. Documentary collection carries the risk that the buyer will not or cannot pay for the goods upon receipt of the draft and documents. If this occurs, it is the burden of the seller to locate a new buyer or pay for return shipment.
Documentary collections are best considered when shipping by ocean freight. This is because the ocean bill of lading (b/l) is a negotiable document and acts as title to the goods. The steamship company will not release the shipment from the port unless the buyer has the original b/l, and the buyer cannot get the original b/l unless they pay the bank. In the case of air shipments, the b/l is not a negotiable document, does not act as title to the goods, and the benefit of using a documentary collection is lost.
Under an open account, collection of payment is the same as cash in advance, wire transfer, or check. The difference is in the timing of collection. The exporter bills the buyer, who is expected to pay under agreed terms at a future date. Open account is a low-risk method of payment for the buyer and many large companies will only buy on open account. Due to the high risk involved for the seller, the seller must be confident that the buyer is well established, has a long and favorable payment record, has good credit, and is legally able to convert currency into U.S. dollars. Collection on delinquent payments under open account is difficult and costly due to the lack of documents and banking channels.
Additional Methods of Payment
If the foreign distributor is unable to sell the goods, the exporter must pay for the return shipment or dispose of the remaining items overseas. This method of payment is extremely risky for the exporter and is generally not used by U.S. companies.
Countertrade and Barter--Countertrade or barter may be necessary when selling to companies that cannot obtain convertible currency. In countertrade, the "buyer" agrees to undertake specified initiatives that compensate and benefit the "seller." Barter is the exchange of goods or services between two parties without using currency. These two methods of payment should be considered only in exceptional circumstances when extreme creativity is needed by an experienced exporter to complete the sale.
The simplest currency of payment for U.S. exporters is U.S. dollars. When quoting prices and requiring payment in U.S. dollars, exporters are placing the burden and risk of foreign currency conversion on the buyer. On the other hand, some U.S. exporters knowledgeable about foreign exchange find it profitable to accept payment in other currencies. If the shipment's value is large enough, say U.S. $50,000 or more, it may be possible to hedge against the foreign exchange risk. Experienced international bankers can offer advice on foreign exchange risks and offer suggestions on how to hedge against those risks.
Source: Firstar Bank
1._____ Is the L/C irrevocable?
2._____ Has the credit been confirmed, if requested?
3._____ Is the type of credit (revolving, transferable, etc.) as agreed?
4._____ Is the amount of the credit sufficient to cover all costs permitted by the terms of the contract? Are the Incoterms correct? Have the terms "about" or "approximately" been included?
5._____ Is the credit available with your bank, freely negotiable, or available with any bank, or is it restricted to the issuing bank or any other designated bank?
6._____ Are the descriptions of the goods and unit prices, if any, in accordance with the sale contract? Have the terms "about" or "approximately" been included, if requested?
7._____ Are transshipment and partial shipments allowed, if necessary?
8._____ Are the points of dispatch/taking in charge/loading on board of the goods, as the case may be, and of discharge/final destination as agreed?
9._____ Do the shipping and expiry dates and the period for presentation of documents after issuance of the transport document allow sufficient time for processing the order, affecting shipment, and presenting the documents to the bank?
10._____ Are the provisions for insurance in accordance with Incoterms?
11._____ Can the necessary documents be obtained in the form required and in the time frame allowed by the credit?
12._____ Have any unacceptable conditions been added to the credit without your approval e.g. an inspection certificate to be provided by the buyer?
Source: Firstar Bank
Commercial Letter of Credit: Common Discrepancies Which Can Lead To Non-payment
1. Documents inconsistent with each other.
2. Description of goods on invoice differs from that in the credit.
3. Marks and numbers differ between the documents.
4. Absence of documents called for in the credit.
5. Incorrect names and addresses.
1. Amount does not match invoice.
2. Drawn on wrong party.
3. Not endorsed correctly.
4. Drawn payable on an indeterminable date.
1. Shipment made between ports other than those stated in the credit.
2. Signature on bill of lading does not specify on whose behalf it was signed.
3. Required number of originals not presented.
4. Bill of lading does not evidence whether freight is prepaid or collect.
5. No evidence of goods actually "shipped on board."
6. Bill of lading incorrectly consigned.
7. "To order" bills of lading not endorsed.
1. Insurance document presented of a type other than that required by the credit.
2. Shipment is under insured.
3. Insurance not effective for the date in the transport documents.
4. Insurance policy incorrectly endorsed.
1. Late shipment.
2. Late presentation of documents.
3. Credit expired.
Source: Firstar Bank
In addition to defining the terms of payment, provisions should be included for late payments, partial payments and remedies for non-payment. The terms of payment should consider the use of letters of credit.
Options for Financing Export Operations
Foreign Credit Insurance Association (FCIA) --The Foreign Credit Insurance Association (FCIA) is a private entity serving the international marketplace. The Association writes a wide range of credit insurance and political risk coverages for experienced exporters. Great American Insurance Company, the Association's principal, is a large, privately held, multiline insurer founded in 1872.
FCIA offers a wide variety of policies for short-term sales (up to 180 days, exceptionally 360 days) and political risk insurance (policy periods up to 2 years). Both multibuyer and single buyer policies are available and there are no restrictions on content or sourcing of insured products. Multibuyer coverages include flexible premium options and short claim waiting periods.
The widely used Multi-Buyer Export policy is generally written to cover shipments during a one-year period and insures a reasonable spread on an exporter's sales. It enables the exporter to make quick credit decisions, so as to provide faster service to overseas buyers. The exporter can obtain financing and offer competitive credit terms to attract and retain buyers around the globe, even in high risk markets. Coverage is generally 95 percent for political and commercial risk, and the policy has a deductible similar to other forms of insurance.
The policy is subject to limits of liability. The aggregate limit represents the insurer's maximum liability under the policy. Exporters make their own credit decisions for shipments up to the amount of a discretionary credit limit (DCL). For larger amounts, a special buyer credit limit (SBCL) is available upon application to FCIA.
For additional information, contact the FCIA Management Co. at 40 Rector Street, 11th Floor, New York, NY 10006. Tel. (212) 306-5000, Fax. (212) 306-5218, Internet http://www.fcia.com , or your insurance broker.
Export-Import Bank of the United States
The Export-Import Bank (Ex-Im Bank) of the United States is the U.S. Government agency that facilitates the export financing of U.S. goods and services. Ex-Im Bank helps U.S. exporters compete against foreign governments’ subsidized financing in overseas markets. Ex-Im Bank offers four major export finance support programs: loans, guarantees, working capital guarantees, and insurance.
Lending Programs -- Ex-Im Bank's loans provide competitive, fixed interest rate financing for U.S. export sales of capital equipment and services. Ex-Im Bank extends loans to foreign buyers of U.S. exports at low, fixed interest rates according to the Organization for Economic Cooperation and Development arrangement.
Guarantee Program -- Guarantees provide repayment protection for private sector loans to creditworthy foreign buyers of U.S. goods and services. The guarantees provide coverage for both political and commercial risks.
Working Capital Guarantee Program -- Ex-Im Bank also offers guarantees to lenders to support pre-export financial needs. The Working Capital Guarantee Program can help small- and medium-sized exporters obtain the financing they need to produce and market goods for sale abroad.
Insurance -- The Ex-Im Bank insurance program offers insurance policies to protect U.S. exporters and banks against the political and commercial risk of nonpayment by foreign debtors. Special policies exist for small and environmental businesses.
Inquiries should be directed to Ex-Im Bank Business Development Group, 811 Vermont Avenue, NW, Washington, DC 20571 Tel. (800) 565-EXIM, Fax (202) 565-3380, between 7:30am-5pm or http://www.exim.gov
Overseas Private Investment Corporation (OPIC)
OPIC is a U.S. Government corporation that promotes U.S. investment in less developed countries. OPIC's finance program is oriented towards medium to long-term investments that involve significant developmental benefits. The program provides insurance coverage for U.S. investments against expropriation, inconvertibility of local currency, or losses resulting from war, revolution, or civil disorders. OPIC does not handle export financing directly but may assist in financing complementary projects, such as a distribution yard for U.S. wood products. Insurance on letters of credit may also be obtained in the absence of FCIA or other commercial insurance. The insurance covers 90 percent of the investment plus attributable earnings. For additional information, contact OPIC, 1100 New York Ave., NW, Twelfth Floor, Washington, DC 20527 Tel. (202) 336-8799 for automated information, (202) 336-8700 for automated fax information, (202) 336-8400 for general injuries, Website: http://www.opic.gov
Small Business Administration (SBA)
The U.S. Small Business Administration (SBA) was created in 1953 as an independent agency of the federal government to aid, counsel, assist, and protect the interests of small business concerns, to preserve free competitive enterprise, and to maintain and strengthen the overall economy of our nation. Small business is critical to our economy, to building America's future, and to helping the United States compete in today's global marketplace.
SBA's Office of International Trade (OIT) works in cooperation with other federal agencies and public- and private-sector groups to encourage small business exports and to assist small businesses seeking to export. OIT's outreach efforts include sponsoring or supporting export training conferences and developing "how to" and market-specific publications for exporters. OIT directs and coordinates SBA's ongoing export initiatives, such as the Export Legal Assistance Network (ELAN) and SBA's Automated Trade Locator Assistance System (SBAtlas). The office actively markets SBA's loan guarantee programs to exporters.
Export Working Capital Program (EWCP)
In order to help small businesses export, SBA has developed the new Export Working Capital Program (EWCP). This program replaces the former Export Revolving Line of Credit, and provides short-term, transaction-specific financing. Exporters may use this program for pre-export financing of labor and materials, financing receivables generated from these sales, and/or standby letters of credit used as performance bonds or payment guarantees to foreign buyers. The EWCP provides repayment guarantees of 75 percent or $750,000 (whichever is less) to commercial lenders and offers exporters preliminary commitments (PCs) that encourage lenders to provide credit. To be eligible, the small business concern must have been in operation, though not necessarily exporting, for at least 12 months. The EWCP offers a simplified application form. Interest rates and fees are negotiable between the lender and the small business exporter.
International Trade Loan Program (ITL) – This program helps small businesses that are engaged or preparing to engage in international trade, as well as small businesses adversely affected by competition from imports. SBA can guarantee up to $1.25 million, less the amount of SBA's guarantee portion of other loans outstanding, to the borrower under SBA's regular lending program. Loans are made by lending institutions with the SBA guaranteeing a portion of the loan. The applicant must establish either that the loan proceeds will significantly expand existing export markets or develop new export markets, or that the small business is adversely affected by import competition. Proceeds may be used for working capital and/or facilities or equipment. Maturities of loans for facilities or equipment may extend to the 25-year maximum.
7(a) Regular Business Loan Program -- The SBA 7(a) Loan Guaranty program can fund the varied long-term needs of small businesses where necessary financing is unavailable on reasonable terms through normal lending channels. The program promotes small business formation and growth. SBA guarantees long-term loans to qualified firms. SBA's basic guaranty program makes loans available for many business purposes, such as real estate, expansion, equipment purchases, working capital, or inventory. Private lenders, usually banks, make loans which are guaranteed up to 75 percent of the loan by SBA. The borrower makes loan payments to the lender. SBA can guarantee up to $750,000.
Small Business Investment Companies (SBICs) – SBICs exist to provide equity capital, long-term loans, and management assistance to qualifying small businesses. They are privately owned and operated companies that use their own capital and funds borrowed from the SBA to provide financing to small businesses in the form of equity securities and long-term loans. SBICs invest in a broad range of industries. SBICs may invest in export trading companies provided all other eligibility requirements are met. For further information regarding the SBIC program, contact the Investment Division, U.S. Small Business Administration, 409 Third St., Washington, D.C. 20416; Tel. (800) 827-5722 from 9am to 5pm, Fax. (202) 205-6802, or at www.sba.gov
U.S. Export Assistance Centers (USEACs) – USEACs offer a full range of federal export programs and services under one roof. Clients receive assistance by professionals from the SBA, Department of Commerce, Ex-Im Bank, and other public and private organizations. It's a partnership that makes it easier for you to get the help you need to compete and succeed in the global marketplace. Each USEAC, located in 15 cities nationwide, is ready to meet your business needs with: export marketing and trade finance assistance at convenient one-stop locations, customized counseling that best suits your company's experience and commitment to exporting, and customer service that uses the latest technology to bring export assistance to your doorstep. For a list of USEAC’s, please see Appendix V.
For more information, SBA has offices located throughout the U.S. and its territories. For the one nearest you, please see Appendix VI or look under "U.S. Government" in your telephone directory. You may also call the Small Business Answer Desk at (800) 8-ASK-SBA. To fax, dial (202) 205-7064. For the hearing impaired, the TDD number is (202) 205-7533. To access SBA OnLine (electronic bulletin board) dial (800) 697-4636 (limited access) or (900) 463-4636 (full access); Home Page: http://www.sbaonline.sba.gov; SBA's gopher: gopher://www.sbaonline.sba.gov; File transfer protocol: ftp://www.sbaonline.sba.gov; Telnet: telnet sbaonline.sba.gov.
In addition, there are 56 Small Business Development Centers (SBDCs) in 900 service locations and over 400 Service Corps of Retired Executives (SCORE) offices to help you start and/or strengthen your own business.
U.S. Trade and Development Agency (TDA)
The U.S. Trade and Development Agency (TDA), an independent federal agency, provides funding for feasibility studies for public and private sector projects in developing and middle-income nations which lead to the export of U.S. products and services. Helping U.S. businesses win contracts to implement major overseas infrastructure projects is one of TDA's main objectives. TDA funds studies on a variety of projects including large-scale energy generation and conservation, infrastructure, mineral development, agribusiness, and basic industrial facilities; all of which could make use of U.S. products. For additional information on country eligibility, developmental priorities, and U.S. goods procurement requirements, contact the U.S. Trade and Development Agency, 1621 North Kent Street, Suite 200, Arlington, VA 22209, Tel. (703) 875-4357, Fax (703) 875-4009, http://www.tda.gov
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