video case analysis

A. FORMS OF BANK FINANCING

Two primary categories

1. Secured Financing:

a. Defined as: Financing secured by collateral

b. Types of collateral include:

i. Advanced funds

ii. Shipment documents

iii. Banker’s acceptance (BA) time draft where bank guarantees payment at a future date. BA’s are negotiable, tradable instruments

2. Unsecured financing

a. Uncollaterized financing available to customers with excellent, established relationships with the bank.

OMIT “FACTORS” p. 98

B. SOURCES OF FINANCING

1. Private Export Funding Corp (PEFCO)

a. Founded 1970

b. Operates in conjunction with EXIM Bank, OPIC, SBA

c. Loans guaranteed by EXIM and SBA

d. Typical loan minimum of $1m

2. Overseas Private Investment Corp (OPIC)

a. U.S. government’s development finance institution

b. Works with private sector (via private capital) to promote economic growth

c. Programs include

i. Financing (e.g. to SMEs)

ii. Political risk insurance

iii. Investment Funds

3. Small Business Administration – loans and support services to small businesses

4. Export Import Bank (EXIM Bank)

a. US Government agency

b. Has funds to provide credit (loans, guarantees, etc) to support US exports.

CONTINUED

B. SOURCS OF FINANCING (continued)

5. Agency for International Development (USAID)

a. An agency of US State Dept

b. Provides economic and humanitarian assistance (e.g. grants and loans) to lesser developed countries

OMIT “INTERNATIONAL DEVELOPMENT COOPERATION AGENCY” p. 101

C. RISKS IN IMPORT/EXPORT INDUSTRY

Types of risk include

1. Commercial Risk

a. Defined as: Risk resulting from miscommunication, fraud, etc between seller and buyer

b. Major concern(s):

i. Seller – not getting paid

ii. Buyer – goods not received on time (or at all) incorrect goods received

c. How to avoid:

i. Written sales contract

ii. Check buyer’s credit

iii. Check reputation of all parties

NOTE: Payment methods covered later in chapter

2. Shipping Risk

a. Defined as: Risk of loss or damage during transportation

b. Major concern(s):

i. Limited liability of carriers

· ocean limited to $500 per package (or freight unit)

· regulated by U.S. Carriage of Goods by Sea (COGSA) 1936

· Air limited to US$9.07 per lb (gross weight) or US$20/kg

· regulated by the Warsaw Convention

c. How to avoid:

i. Obtain cargo/marine insurance

· covers warehouse-to-warehouse (e.g. inland marine insurance – land based; ocean marine insurance – ocean)

· rates based on product, destination, loss history, shipping method

3. Political risk

a. Defined as: the likelihood that a company’s investment will be constrained by the actions of a foreign government

b. Major concern(s):

i. Wars

ii. Expropriation

iii. Expulsion

iv. FX controls

v. Export/import license revocation

c. How to avoid:

i. Obtain credit/loan guarantees via EXIM bank, OPIC

ii. EXIM Bank has specific program for political risk

4. Foreign Exchange Risk

a. Defined as: Risk of loss of investment due to fluctuations in FX

b. Major concern(s):

i. Loss of value of transaction due to unstable currencies

c. How to avoid:

i. Denominate transaction using hard currencies

ii. Use forward rate

D. GETTING PAID

1. Methods of payment

In order of riskiness to seller (most – least)

a. Open Account

i. Goods ship with no guarantee of payment

ii. Riskiest for seller

iii. Use only when close relationships

b. Consignment

i. Buyer (importer) keeps goods in warehouse or retail location until sold

ii. Seller (exporter) maintains ownership of goods

iii. Seller gets paid when goods sold

CONTINUED

D. GETTING PAID (Continued)

1. Methods of payment (continued)

c. Drafts (a/k/a Bills of Exchange)

Include:

i. Bank draft – a “check” payable at “sight” or “tenor” (tenor = a release period; including at “sight”)

ii. Time draft

· payable a number of days after “sight”.

· Must be accompanied by supporting documents (bill of lading, commercial invoice, etc)

iii. Sight draft – similar to time draft, except payment due upon sight.

d. Authority to purchase – omit

e. Letters of Credit (L/C)

i. Importer’s bank guarantees that exporter will be paid if all conditions of L/C (documents, delivery, etc.) are met.

ii. Governed by the Uniform Customs and Practice for Documentary Credits (UCP) (established by ICC)

iii. Parties to L/C

· Applicant – the buyer (importer)

· Beneficiary – seller (exporter)

· Issuing bank – buyer’s bank (issues the L/C) (may also be an Opening bank

· Advising bank – notifies seller that LC has been issued

· Confirming bank - often the seller’s bank which adds its commitment to the LC

iv. Types of L/Cs

· Two main categories

· Revocable – can be amended or cancelled at any time by the applicant without consent or notification of the beneficiary

· Irrevocable – all parties must agree to amendments or cancellations

· Common types of L/Cs

· Stand-by – L/C not executed unless payment not received in xx days

· Transferable – see below

· Common types of L/Cs (continued)

· Transferable L/C

· buyer opens L/C naming middleman (e.g. supplier or subcontractor) as beneficiary middleman transfers L/C to seller

· Assignment of proceeds (similar to Transferable L/C)

· Back-to-back – seller asks his/her bank to issue credit in favor of a supplier using seller’s L/C as security

· Red Clause L/C – allows partial payments as a project

f. Cash in Advance

i. Least risky to seller

ii. Requires buyers to tie up capital

OMIT “AGENCY/DISTRIBUTOR AGREEMENTS” p. 119-120

E. PHYSICAL DISTRIBUTION and SHIPPING

1. Logistics a/k/a Physical Distribution

a. Defined as: the means by which goods are moved from the manufacturer to the end customer

2. Shipping

a. Types of shipping methods (modes)

i. Water Transportation

Types of ocean lines:

· Ocean conference lines – association of ocean lines formed to offer common rates

· Independent lines – accept any booking, based on availability of space

· Tramp vessels – bulk carriers operating on charter-basis.

ii. Air Transportation

iii. Land Transportation (road and rail)

b. Shipping terms

i. Intermodalism – transportation using multiple methods per trip

ii. Load centers – omit

iii. Bridges – omit

b. Shipping terms (continued)

iv. LCL/FCL – Less than container load/Full container load (containers typically 20’, 40’ or 45’

v. Consignor – seller/exporter/shipper

vi. Consignee – buyer/importer

OMIT “PACKING AND MARKING FOR OVERSEAS SHIPMENT” p. 124 to top of p. 126

F. DOCUMENTATION

Classification of documents:

1. Shipping documents:

a. Defined as: documents allowing cargo to clear customs, get loaded aboard a vessel, and shipped to destination

b. Types include:

i. Export license – discussed further in Ch. 7

ii. Packing list – describe contents in shipment/cargo

iii. Bill of lading –

· Contract between seller and carrier

· Types include

· Ocean bill of lading

· Air waybill

· Surface waybill (trucking/rail)

· Straight bill of lading – non-negotiable. Goods delivered to anyone listed as “consignee”

· Order bill of lading – negotiable. Represents ownership/title of goods

· Clean on Board – cargo accepted/loaded without “exception” (e.g. without damage)

· Foul bill of lading – an exception was noted (i.e. some type of damage)

iv. Export Electronic Information (formerly Shipper’s Export Declaration)

· Prepared by exporter or freight forwarder

· Required by US government for shipments $2,500 and over

· Used to measure volume of exports from U.S.

2. Collection Documents

a. Defined as: documents needed for submission to receive payment

b. Include:

i. Commercial Invoice – details all aspects of the final agreement between seller and buyer

2. Collection Documents (continued)

ii. Consular invoice – required by some countries for entry of goods.

iii. Certificate of Origin – certifies that goods are made in a particular country.

iv. Inspection Certificate – may be required by importer to verify condition of goods prior to shipment. Often done by independent firm.