Export Finance: The Tools and Techniques

for Financing Your Foreign Sales Silicon Valley Bank

November 9, 2011

Speakers

• Carla Winfield, CGBP, Sr. Global Trade Finance Advisor,

Silicon Valley Bank

• Matt Wysong, CICP, Global Trade Finance Advisor,

Silicon Valley Bank

Overview

• International Credit Products and Services

• Method of Payment: Risk Assessment

• Alternative Financing Solutions

• International Trade Documentation

• Summary

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Method of Payment: Risk Assessment

Relies completely

on buyer to pay as

previously agreed.

No Risk.

Open

Account

Relies on buyer to pay

draft on presentation

or upon maturity.

Relies on exporter

to ship goods as

described in documents.

Documentary

Collections

Risk of his own non-

performance in

adhering to all the

requirements in the LC.

Relies on seller to ship

goods as described

in the documents.

Letter of Credit

No risk. Relies completely

on exporter to ship

goods as ordered.

Cash in

Advance

High Risk

Low Risk High Risk

Low Risk

Seller

Exporter

Buyer

Importer

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Alternative Financing Solutions

What is L/C Discounting?

• Bank purchases the draft under an L/C from the client at discount of the

face value on a non-recourse basis, then SVB collects the proceeds of the

L/C at maturity.

• Utilize commercial letters of credit to obtain extended payment terms from

suppliers

• Reduce country and commercial risk

• Discounting allows access to cash tied up in letters of credit that have yet to

pay.

• Source of cash beyond traditional lines of credit or equity

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Draft Finance — Example

Exporter

Exporter Bank

(SVB)

Importer

Importer Bank

Step 1:

Exporter sends documents

to Exporter Bank

Step 1:

Exporter ships goods to

Importer

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Draft Finance — Example

Exporter

Exporter Bank

(SVB)

Importer

Importer Bank

Step 2:

Exporter Bank sends

documents to Importer Bank

Step 3:

Importer Bank accepts documents and

notifies Exporter Bank

8

Draft Finance — Example

Exporter

Exporter Bank

(SVB)

Importer

Importer Bank

Step 4:

Exporter Bank credits Exporter invoice

amount less fees and interest

9 9

Letters of Credit Discounting - Calculation

Discounting of $10,000,000 L/C for 180 days

Formula: Amount of L/C X Discount Rate X No. of Days / 360

$10,000,000 X 4.11% (0.61% [6Mo Libor] + 3.5%) X 180 / 360 =

$205,500.00

Net proceeds = $9,794,500

Pricing Considerations::

• Credit worthiness of issuing bank of the L/C

• Country risk

• Tenor of draft

• Party responsible for discount fee

Alternative Financing Solutions

What is Forfaiting?

• It’s an international trade finance practice, where SVB

purchases, at a discount, larger dollar amount, longer-

term receivables from exporters. It could be a one-off

deal or a series of on-going transactions.

• Forfaiting is a non-recourse transaction

• Ideally, amount is $500,000 or more and the term is 6

months or longer, up to 5-8 years.

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Credit Insurance

• Export credit insurance (ECI) protects an exporter of products

and/or services against the risk of non-payment by a foreign

buyer.

• The policy generally covers commercial risks—insolvency of

the buyer, bankruptcy or protracted defaults (slow payment),

and certain political risks—war, terrorism, riots, and revolution,

as well as currency inconvertibility, expropriation, and changes

in import or export regulations.

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Exporter

Exporter Bank

(SVB)

Importer

Importer Bank

Exporter Exporter

Importer Bank

Exporter

Exporter Bank

(SVB)

Importer

Importer Bank

International Credit Products and Services Description

U.S. Export-Import Bank Programs • Working Capital Guarantee (―WCG‖)

− Short-term (less than 360 days) foreign accounts receivable and inventory

financing

− Advance rates of up to 90% (AR) and 75% (Inventory) respectively on product

sales with minimum 51% US content

− Billed from the U.S.

− LCs issued under the Ex-Im loan only require 25% collateral coverage

• Use of Disbursements

– To purchase finished products for export

– To pay for raw materials, labor, and overhead

– To cover the costs of producing goods and/or providing services for export

– To cover standby letters of credit serving as bid bonds, performance bonds, or

payment guarantees

– To finance foreign receivables

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Exporter

Exporter Bank

(SVB)

Importer

Importer Bank

Exporter Exporter

Importer Bank

Exporter

Exporter Bank

(SVB)

Importer

Importer Bank

Working Capital Impact of Guarantee

Your Working Capital Facility

without Ex-Im Bank

Your Working Capital Facility

with Ex-Im Bank

Collateral

(Inventory) Amount Advance Rate Borrowing Base Advance Rate Borrowing Base

Export Inventory

Raw Materials $200,000 20% $40,000 75% $150,000

WIP $200,000 0% $0 75% $150,000

Finished Goods $600,000 50% $300,000 75% $450,000

Export/Foreign Accounts Receivable

Open Account $400,000 0% $0 90% $360,000

L/C Backed A/R $600,000 70% $420,000 90% $540,000

Total Borrowing Base $760,000 $1,650,000

International Trade Documentation

Essential Export Documents

Document: Issued by:

Commercial invoice

Packing list

Shipper’s export declaration

All generally issued by seller

and accompany shipment

Bill of Lading or Air Waybill Freight company

Certificate of Origin Seller but not always required

Insurance certificate Various parties

Draft Seller but not always required

Miscellaneous Export Documents:

U.S. export licenses Seller but not always required

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Commercial Invoice

• Listing, describing:

– Merchandise shipped

– Price

– Terms of shipment

• Issued by seller

• Main Document for entry/exit (duties)

Transport Document

• Can be:

− Marine, rail, or truck bill of lading

− Air waybill

− Combined transport document

• Provides evidence that merchandise was placed on board a carrier

or vessel

• Can serve as title to merchandise

• Usually signed by transport company

No. 12345 November 30, 2011

At 60 Days from Sight OF THIS SOLE BILL OF EXCHANGE PAY TO THE

ORDER OF XYZ COMPANY

THE SUM OF $100,000.00 ------------------- U.S. DOLLARS

One Hundred Thousand and 00/100 United States Dollars

TO: BANK OF CHINA XYZ COMPANY

BEIJING, CHINA

Drawn under LC # 34698 issued by Bank of China AUTHORIZED SIGNATURE

The Draft

•Also know as ―Bill of Exchange‖

• A draft is a demand for payment

• The drawer (seller) makes a written demand for payment on the drawee,

instructing the drawee to pay a specified amount of money to the payee

(the seller)

•Most Letters of Credit require a draft to be presented in order for payment

to be made.

Acceptance and Deferred Payment

• Acceptance:

– A time draft, or a bill of exchange, on which the drawee has written the

word "Accepted" and affixed a signature. It is an unconditional obligation of

the drawee to pay it at maturity.

• Banker's Acceptance: A draft drawn on and accepted by a bank (drawee)

• Trade Acceptance: A draft drawn on and accepted by a buyer (drawee)

• Deferred Payment:

− Paid at some future date without requirement of bill of exchange or draft

(stamp duty in certain countries)

No. 12345 November 30, 2012

At 60 Days after Sight OF THIS SOLE BILL OF EXCHANGE PAY TO THE

ORDER OF XYZ COMPANY

THE SUM OF $100,000.00 ------------------- U.S. DOLLARS

One Hundred Thousand and 00/100 United States Dollars

TO: ABC Company XYZ COMPANY

BEIJING, CHINA

AUTHORIZED SIGNATURE

Trade Acceptance

• A draft drawn on and accepted by a buyer (drawee)

•Type of draft presented under Documentary Collections

• Time Draft may require an enhancement to be discounted

•Forms of enhancement:

–Aval: is the preferred form of security of payment of a bill or note. For an aval to be

acceptable, the avalizing bank must be internationally recognized and credit worthy.

The aval may be placed on the face of the note.

–Letter of Guarantee or Standby Letter of Credit: are issued instead of an aval,

particularly in some countries that may not recognize the aval as legally binding.

..

Benefits of International Trade Documentation

• Letter of Credit

• The Bill of Exchange/Draft is a built in financing tool that is drawn on

the issuing bank.

• Forfaiting Agreement

• The Bills of Exchange/Draft are issued for each installment of the

supplier’s credit to document the existence of a legal claim of the

exporter on the importer.

The Bill of Exchange/Draft are unconditional and irrevocable once

accepted. The documents are financeable. It separates the

performance risk from the underlying trade transaction.

Summary

Summary

• Don’t say no to an order just because the buyer is asking for

extended terms or is in an emerging market

• Understand the risk factors when entering into a new market and the

tools to mitigate risk to increase your competitive edge, to optimize

the profitability of your international transactions to better manage

your cash flows

• Do consult with your Product Advisor early in the process to

structure a financeable transaction

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Summary

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International Sale + Risk Mitigation =

Financeable Transaction and Increase Sales

Questions?

Biographies

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Carla Winfield

Carla Winfield is the senior international trade advisor for Silicon

Valley Bank in its Eastern Region. She is responsible for helping

clients mitigate their risk as they expand their business globally.

Winfield has over 20 years experience in international banking

including trade services, trade finance, export compliance and

global cash management. She was awarded the Certified Global

Business Professional (CGBP) designation by NASBITE

International during its inaugural session in 2006 and has taught

trade finance at the Massachusetts Export Center for the NASBITE

International CGBP Certificate Preparation Course. A recognized

expert in trade, she has made presentations to The Massachusetts

Treasury Management Association, Massachusetts Export Center,

national associations of exporters and importers and many bank

presentations on the subject of trade finance, export compliance

and global cash management. Winfield has also been published in

The Journal of New England Technology.

Her board experience, practical knowledge and technical expertise

allow her to develop innovative solutions for companies involved in

international trade banking.

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Senior Global Trade Finance Advisor

Silicon Valley Bank

cwinfield@svb.com

617.630.4154

Matt Wysong

Matt Wysong is a Global Trade and Foreign Exchange Advisor for

Silicon Valley Bank. He is responsible for advising clients on

international expansion, foreign accounts receivable financing,

foreign exchange hedging and international risk mitigation.

Prior to joining Silicon Valley Bank in 2008, Mr. Wysong was a

Relationship Manger for Wells Fargo focusing on analyzing,

negotiating and managing complex credit transactions for

commercial clients in the Rocky Mountain Region. He started his

career 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 of

Colorado at Boulder, possesses a Series 6 license from FINRA, is a

Certified International Credit Professional from the FCIB, and has

completed the Export-Import Bank Delegated Authority Underwriting

Program.

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Global Trade Finance Advisor

Silicon Valley Bank

mwysong@svb.com

303.410.3431

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Disclosures

This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decision. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.