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On Your Mark….Every morning in Africa, a gazelle wakes up.It knows it must run faster than the lion or it will be killed.Every morning a lion wakes up.It knows it must outrun the gazelle or starve.It doesn’t matter if you’re a gazelle or lion.When the sun comes up, you better start running!
Building a Global Reach to Run a Global Race
The Intermodal Global Supply Chain
1970 – 1 million containers2000 – 20 million containers2020 – 50 million containers2050 – 100 million containers
The Pace QuickensChanging U.S. Economy1970…International trade is 7%2000…International trade is 27%
2050…International trade up to 50%
Changing U.S. Life StylesLocal Economy of 19th Century—93% of Work Force
Employed in AgricultureGlobal Economy of 21st Century—3% of Work Force
Employed in Agriculture
The Global Marketplace of the 21st Century – Looking Ahead
(% of World GDP)
EU 34%
Japan 12%
China 4%
India 2%
US 28%
Other 20%
EU 15%
Japan 4%
China 28%
India 17%
US 26%
Other 10%
2004 2050
Countries Ranked by Population: 2000Country Population• 1 China 1,262,474,301• 2 India 1,002,708,291• 3 United States 282,338,631 • 4 Indonesia 224,138,438 • 5 Brazil 175,552,771• 6 Russia 146,001,176• 7 Pakistan 141,553,775• 8 Bangladesh 130,406,594 • 9 Japan 126,699,784• 10 Nigeria 123,749,589
Types of Exporters
• Direct
• Indirect
• Trading Company
• Export Management company
Sheep/Goats
If you can’t do it here- you can’t do it there.
What is your export credit policy?
What Incoterm do you quote?
Who is your freight forwarder?
Letter of Credit?
• Do you have a passport?
• Business Plan?
• Pricing
• Banker
• What country?
• What is your HS number?
• Credit Insurance
DOMESTIC RISK
• BANKRUPT
• DOES NOT WANT TO PAY
• CAN NOT PAY
• PRODUCT DISPUTE
• WENT OUT OF BUSINESS
International Trade
ExporterExporter(Seller)(Seller)
ImporterImporter(Buyer)(Buyer)
I want to sell.
I want to buy.
Country Border
International TradeSome Things are Different
• Language
• Currency
• Banking
• Credit Terms & Risk
• Transportation / Packaging
• Insurance - Shipping - War
• Government Requirements - Each Country
International TradeSome Things are Different
• Language
• Currency
• Banking
• Credit Terms & Risk
• Transportation / Packaging
• Insurance - Shipping - War
• Government Requirements - Each Country
FOREIGN RISK
• THE MONEY IS NO GOOD
• THERE WAS A COUP
• A BRIBE IS NEEDED FOR CUSTOMS
• DOCUMENTS ARE NOT CLEAN
• FOREIGN BANK HOLDS MONEY
COUNTRY RISK
• The first consideration will ALWAYSALWAYS be country risk.
COUNTRY RISK
• If the deal is in a country that is too risky, the customer can never be good.
Political Risk
• Transfer risk- shortage of foreign exchange
• Political risk- events that prevent payment– moratorium on external debt– legal discharge of debt– war– cancellation of import license
Customer Risk
• Is the customer about to go bust?
• Can the customer pay on our credit terms?
• Is our goods “special”?
• Is this the first sale?
• Is the order more that the last order?
• Do we have a credit application?
CONTROLS
• BANK
• CREDIT REPORTING AGENCIES
• INSURANCE
• RESEARCH
• LETTER OF CREDIT
CONTROLS
• CASH IN ADVANCE
• FREIGHT FORWARDER
• GOOD BUSINESS CONTROLS
What is the HS number?
• It’s like a Social Security Number, uniquely explains your product. Helps others who are not familiar with your product.
• HS is a Product Classification.
• A Harmonized System is used because Customs officials worldwide don’t speak the same language.
• With everyone using the same “songbook,” we can watch the flow of goods in and out of countries.
Classifying your Product
Classify your good on WHAT IT IS, not on its end use, nor its destination (like Mexico or Malaysia.)•Example: A bolt by itself may be a part of a machine, but it is first and foremost a bolt, and it should be classified as such.•Example: Grass seed and fertilizer mix. Classify the mixture as being primarily grass seed, if it is.
HHarmonized SystemSystem• The World HS number is 6 digits longThe World HS number is 6 digits long
• US schedule B number is 10 digits longUS schedule B number is 10 digits long
• The whole world only recognizes the The whole world only recognizes the first 6 digits (everybody has the same first 6 digits (everybody has the same songbook) songbook)
THE MORE NUMBERS,THE MORE NUMBERS,
THE MORE DESCRIPTIVETHE MORE DESCRIPTIVE
Where to find the HS code:Where to find the HS code:The Harmonized Tariff Schedule of the US is online, but can be
purchased at the government bookstore
The U.S. Department of Commerce Schedule B Classification of Exports
U.S. Census Bureau:
• Durable Goods (Chapters 1-71): (301) 763-3259
• Non-Durable Goods (Chapters 72-97): (301) 763-3484
• Don't know: (301) 763-3047
Census On-line: www.census.gov/foreign-trade
- choose Schedule B Search Engine from tool bar
- or select Search and type in a key word(s) in capital letters
Remember: the US-specific number Schedule B is 10 digits long; the first 6 digits is a world recognized HS number
Containers and Cases General Rules of Interpretation
• If a container is suitable for repetitive use, it must be classified on its own.
• Example: If you are exporting propane in a tank to Canada, you actually have to classify the propane in its own classification and the tank in its classification, because the tank itself is reusable in Canada.
Containers and CasesGeneral Rules of Interpretation
• Full cartons of eggs are classified under eggs, 040700. Without the eggs, the carton is made of paperboard, 482370.
• A can of Coke falls under beverage, 220210.
• A violin case without the violin is HS 4202xx, but if shipped with the violin inside, it is HS 920210, a stringed musical instrument.
The Role of the Ocean Transportation Intermediary (OTI)
The freight forwarder
The Ocean Transportation Intermediary coordinates the various
parties involved in the cargo movement and the services provided
are based on the needs of the individual shipper.
OTI
• OTI’s combine the former operations of International Freight Forwarders (IFF) and Non Vessel Operating Common Carriers (NVOCC)
• They are regulated by the Federal Maritime Commission (FMC)
OTI’s Involvement
I. Provide Information
II. Prepare Documentation
III. Move the Shipment
Provide Information
• Available Steamship Service
• Port Capabilities
• Packing Requirements
• Containerization Options
• Freight Charges:– Handling Fees– Port Fees, etc.
Prepare Documentation
• Export Clearance
• Carriage
• Insurance
• Destination Clearance
• Banking
Move the Shipment
• Secure (book) space on the carrier
• Arrange for container to be placed for loading
• Arrange for any required inspections, fumigations, etc.
• Secure the on-board carrier bill of lading
OTI’s Receive Compensation From…
• Shipper– Documentation and Forwarding Fees
• Ocean Carrier– Brokerage (commission)
• Inland Carrier– Property Brokerage
• Insurance Provider– Markup of premium
Freight Insurance Why insure ?
• Carrier’s limit of liability (COGSA & Warsaw Convention)
• Filing Claims is problematic and complicated– Insurance pays the claim and then files with the Carrier
– You may have to file suit against the Carrier to get his attention
– Carrier will try to keep you talking until claim is “Time Barred”.
– Irritation
• Use “declared value” to increase carrier liability ? Expensive & Insurance is cheaper and easier to use…..
• Usually required with Letters of Credit
• Cost is usually less than 2% of value of shipment……..(1.25% is average)
CARGO INSURANCEInternational transportation is risky! $30 - $50 billion in worldwide lossesOcean carriers only cover up to $500 per
package, Airlines $20/kilo.General average can put a lien on
your cargo!
Buying insurance is a simple, straight-forward process, about $0.40/$100 of value.
I don’t need no stinking marine insurance
Basic collection terms or Accounts Receivable methods
Cash in AdvanceOpen AccountDocumentary CollectionLetter of Credit
AT _SIGHT_____________
ABC CO.
XYZ CO.ABC CO.
AMOUNT
APRIL 24, 1996(Seller)(Seller)
ImporterImporter(Buyer)(Buyer)
Agreement (1)Agreement (1)
B/L (3)B/L (3)
MerchandiseMerchandise
(2)(2)(5)(5)
(6)(6)
Documents (4)Documents (4)
Open Account
MerchandiseMerchandise
Cash Against DocumentsAdvantages to Exporter
Low cost ($ 75.00)
Banks acting as collection agents
Relatively quick payment
Exporter controls goods
Credit insurance available
Disadvantages to Exporter Importer can refuse
documents/payment
No title document on air shipments
No guarantee of payment unless insured
AT _SIGHT_____________
ABC CO.
XYZ CO.ABC CO.
AMOUNT
APRIL 24, 1996
Documentary Collection Export
Foreign Collecting BankForeign Collecting BankU.S. Bank (Centura)U.S. Bank (Centura)
ImporterImporter(Buyer)(Buyer)(Seller)(Seller)
B/L (3)B/L (3)
Merchandise (2)Merchandise (2)
(8)(8)
(6)(6)
(7)(7)
(5)(5)
Commercial Letter of Credit
THE PURPOSE OF A LETTER OF CREDIT IS TO ALLOW STRANGERS TO DO
BUSINESS.
AT _SIGHT_____________
ABC CO.
XYZ CO.ABC CO.
AMOUNT
APRIL 24, 1996
Letter of Credit Exporter
ImporterImporter(Buyer)(Buyer)(Seller)(Seller)
Agreement Agreement (1)(1)
B/L B/L (6)(6)MerchandiseMerchandise
Merchandise Merchandise (5)(5)(13)(13)
(10)(10)
(2)(2)
(9)(9)
Foreign Issuing BankForeign Issuing Bank
(12)(12)
(4)(4)
Docs/Draft Docs/Draft (8)(8)
(3) Letter of Credit(3) Letter of Credit
(11)(11)
Apply Apply for LCfor LC(7)(7)
LC/ LC/ Docs Docs DraftDraft
LC LC AdvisedAdvised
U.S. Bank U.S. Bank
Does a Letter of Credit Guarantee Payment to the Exporter?
• L/C’s are CONDITIONAL • Almost 80% of L/C’s have discrepancies
• ONE discrepancy can void the L/C
• Exporters lack control
• Protect banks, not exporters
INCO Terms 2000
International Commercial Terms
http://www.iccwbo.org/index_incoterms.asp
www.iccbooks.com
Incoterms
Incoterms are used worldwide between a buyer and seller making all parties in the
transaction aware of each persons responsibility
EXWORKS
COST INSURANCE AND FREIGHT
FOB – Free On Board
• Exporter pays crating, containerization, transportation, loading, and port charges. Goods cleared for export by seller.
Freight does not need liberating!
• There are more terms than
FREE ON BOARD
EXW …Ex Works
• Seller prepares goods and places them on the loading dock.
DAF – Delivered At Frontier
Seller delivers freight, cleared for export to named port of import. (DAF Buffalo, NY)
Export Credit Insurancefor
Managing risk, Improving Financing, and
Enabling Trade
Insurance
• Risk protection: Exporter can offer Open Account terms with a payment guarantee against non-payment due to commercial and political risks
• Marketing Tool: Offer competitive credit terms directly to foreign buyers to meet/beat the competition and increase sales!
• Financing Aid: Assign policy proceeds (claim payments) to a lender as additional collateral
Export Credit Insurancefor
Managing risk, Improve Financing, and Enabling Trade
Kathy EdwardsGlobal Business Solutions Corp.
What is Credit Insurance?• Risk mitigation insures accounts receivable
against non-payment
• Simplified source of payment
• Collateral
• Sleep Insurance
What it is Not• A means to make a bad credit good
• Primary source of repayment
• Factoring
Types of Coverage• Commercial Risks
– Insolvency of debtor
– Death
– Default of payment
• Political Risk Transfer risk– Government Moratorium preventing release of funds – war/revolution– currency inconvertibility– loss of import/export license (Contract Frustration)
What is NOT covered??
• NOT COVERED
– Product disputes
– Sales to buyers not approved
$27,000$29,400$30,000$33,000Estimated Premium on sales of $6 Mil
.45%.49%.50%.55%Premium Rate
$100,000$0$150,000$20,000Discretionary Credit Limit -DCL
$40,000$0$50,000$0Annual Deductible
95%90%90%90%Indemnity
$1.5 mil$3 mil$2 mil$1 milPolicy Limit
Quotes from Insurers
Underwriting Philosophies• Underwriting the Insured
– Length of time in business
– Financial information
– Credit approval experience
– Losses
• Underwriting Buyers– Trade References– Credit reports– Financial information
Underwriting the Insured
• Policyholder’s ability to assess and control risk
• Analysis of debtor risk and complete credit
files
• Discretionary credit limits
• Deductibles
Underwriting Buyers
• Financial stability of debtor
• Analysis on book of receivables (Spread of
Risk)
• Low levels of discretion for policyholder
• Insurer’s expertise in the global
marketplace
Advantages of Credit Insurance• Protection Against Bad Debt Loss
• Increased Sales
• Better Borrowing Position with Insured
Receivables
• Credit Information Resource
• Collection Services
Credit Insurance as a Sales Aid
• Open account sales
• Better credit terms
• Develop new markets
• Less “Creative” sales terms from sales staff
Increased Sales Volume - existing customer
Without credit insurance:With credit insurance:
• Credit limit: $ 50,000 $100,000
• 6 turns per year $300,000 $600,000
• Margin on sale 10% 10%
• Risk potential $ 50,000 $10,000
• Insurance Cost $0 $3,000 (0.5% of sales)
• Gross Income $30,000 $60,000
• Net “income” $57,000
• Differential income $27,000
Increased Sales Volume - new customer
• Coverage: $50,000
• Terms: 60 days open account
• Annual sales: $300,000
• Margins: 10% ($30,000)
• Insurance cost: $1,500 (0.5% of sales)
• Risk sharing (Deductible): $5,000
• Minimum Differential Income $23,500
Policy Assignment• Benefits of policy can be assigned to a
bank or lending institution
• Immediate availability of funds
• Pass cost of funds to importer
• Claims will be paid directly to the lender
Replace Letters of Credit• Letters of Credit
– L/C’s do NOT guarantee payment– L/C’s require expertise– L/C may cost the sale if a competitor offers open account terms– L/C’s tie up buyers’ funds or credit facilities– Insurance eliminates high local interest costs– Insurance eliminate bank fees, amendment fees, and discrepancy fees– Insurance builds customer loyalty
• Documentary Collections– Cover risk with credit insurance
Public Underwriters• Export-Import Bank of the United States
– Defined programs and costs
– Subject to US government policies
– Small business policies
– Short term, medium term, long term
– Single buyer or multi-buyer
– Pay as you go to improve cash flow
Types of Credit Insurance
• Government Insured– Backed by the full faith and credit of the U.S.
Government
– If the importer defaults, it is the U.S. Government who collects, not the exporter
– Underwriters approve your buyers in advance so your buyers and their credit limits are set
– Very attractive for bank lending
– Pay for insurance as you use it – not in advance
– Terms available up to 360 days
Private Insurers
• Insure domestic as well as foreign receivables• No U.S. content requirement • No requirement for exporter to provide credit
reports or trade references• Can insure shipments dispatched from other
countries• Premiums are paid upfront with minimum
premium of $ 5000
Private Insurance Market Export & Domestic Coverage
• AIG
• Coface (f/k/a CNA)
• Euler Hermes ACI (f/k/a Euler ACI)
• Altradius Trade Credit Insurance (f/k/a Gerling NCM Credit Insurance)
• FCIA
Kathy EdwardsGlobal Business Solutions
800-499-6065
