Export Transaction Procedures

Steps to Export Transactions

Once a prospective customer has indicated an intention to place an order, it is important for management to determine their legitimacy and financial soundness. Some companies will undertake this analysis early in the sales cycle, particularly if the sales process is extensive. The financial condition of the buyer should also figure heavily when determining the appropriate payment terms.

There are also several commercial services for qualifying potential customers, such as Dun & Bradstreet's Business Identification Service and Graydon reports. U.S. banks and their correspondent banks or branches overseas, and foreign banks located in the United States can provide specific financial information.

Analyzing the Potential Customer

Depending upon the nature of the customer and the size of the transaction, there are a number of resources which management may wish to consult to learn more about the firm's ownership, financial condition, and operations.
These include:

Credit Reporting Firms:

Firms like Graydon America and Dun & Bradstreet offer timely credit reports on overseas companies. These reports are based on interviews with the management of the subject company as well as searches of public records for liens and other legal actions. They can also contain information on how promptly the subject company repays their current customers. The fee for these reports typically varies according to the region of the world and the promised delivery time for the report. I-TRADE users can order credit reports directly from Graydon America. Dun & Bradstreet also maintains a Web site where users can order Business Background Reports on-line (using a secure browser) and access further guidance on how to assess business credit risks.

Other Sources of Information on Overseas Companies:

  • Company Directories — these typically do not include much financial information except perhaps annual revenues. Most directory resources provide contact information and some data concerning the firm's business activities (e.g. SIC code).
  • International Banks — Most banks active in financing trade have extensive networks of correspondent banks overseas, which can be helpful in gathering information on a particular country. This is a fee-based service at many banks.

For detailed information on US and foreign firms which are listed on US stock exchanges, the regulatory filings for many of these companies are available on-line through the SEC EDGAR Database.

Determining the Appropriate Methods of Payment

There are several methods of payment in common use by firms engaged in international trade. The selection of a method of payment involves a trade-off between credit risk exposure for the seller versus issues of cost and convenience for the buyer. The five principal methods include:

  • Cash in Advance — which imposes the greatest burden on the buyer but poses the least risk to the exporter.
  • Letter of Credit — where the buyer has to shoulder the expense of opening a letter of credit, however the exporter is assured of payment upon accurate presentation of the requisite documents to the guarantor bank.
  • Documentary Collection or Draft — where the buyer provides a cash payment or a written promise to pay at a specified future date when the requisite documents are presented. The risk to the exporter is increased, however the buyer does not have to incur the expenses associated with a letter of credit.
  • Open Account — which poses the greatest risk to the exporter and therefore should be offered only to regular customers who have demonstrated a good payment record, unless credit insurance or factoring is utilized.
  • Alternative Payment Mechanisms — including countertrade and consignment sales.

Documentation, Shipping, and Logistics

Shipping product overseas involves a number of different parties (e.g. freight forwarders, shipping companies, customs, etc.) as well as specific requirements for packing, labeling, documentation, and licensing. Many companies outsource the responsibility to freight forwarders and other trade service providers for coordinating the shipments and meeting these various requirements. However, it is still important to fully understand the various considerations (including costs and risks) in order to avoid unnecessary delays and ensure that the associated expenses are incorporated into the invoice price of the products shipped.

Transportation Options:

When determining the mode to be used in international shipping, the importer/exporter should consider the total logistics cost, not simply the least costly transportation option. Included in the decision should be consideration of pipeline inventory costs, damage risks, perishability of the product, value of the shipment, customer delivery requirements, and accessibility of the destination for the transportation mode being considered.

Although air carriers are more expensive from a narrow transportation cost measurement, their cost may be offset by lower domestic shipping expenses or reduced inventory carrying costs.

Ocean transport is cheaper but slower, and requires further transportation arrangements should the goods be bound for an inland destination.

Before shipment, the exporter should confirm the destination of the goods with the foreign buyer. Buyers often wish the goods to be shipped to a free-trade zone or a free port, where goods are exempt from import duties.

Intermodal transportation is a term for the movement of goods in a unit load device that is handled across multiple modes of transportation. Intermodal allows for door-to-door transportation without breaking down or reloading a shipment, thus providing more efficient and safer movement and processing of cargo. The intermodal industry is characterized by cooperative agreements across multiple transport modes, such as ocean-rail-truck and air-truck.

International Support Services:

Due to the variety of considerations involved in the physical import/export process, most importers and exporters, new and experienced, rely on a variety of support services in conducting international transportation and distribution activities.

The international freight forwarder acts as an agent for the importer or exporter in moving cargo to the overseas destination. These agents are familiar with the import rules and regulations of foreign countries, methods of shipping, U.S. government export regulations, and the documents connected with foreign trade.

Another facilitating party in international business transactions is the customshouse broker. A customshouse broker is licensed by the local customs service and represents clients in conducting import entry transactions, including preparation of paperwork, advice on relevant duties and taxes, and arrangement for shipment release and customs payments.

The central examination station, or CES, is a site that is contracted by US Customs and provides for intensive customs examinations of imported cargo.

The container freight station, or CFS, is a bonded facility that allows for the processing of imported airline and ocean containers for customs clearance.

A Non-Vessel Operating Common Carrier or NVOCC, is a firm that does not own or lease ocean vessels, but is licensed to consolidate shipments into containers. An NVOCC sets their own rates and issues their own bills of lading.

Trade Documentation:

Documentation is an important element of the import/export process and is primarily driven by the requirements of exporter's and importer's governments. However, trade documentation is also needed to support financial aspects of the transaction, such as the insurance of the shipment and collection of payment from the importer or his bank. The following documents are commonly used in exporting, although which are actually used in each case depends on the requirements of both the governments involved.

  • Commercial Invoice — As in a domestic transaction, the commercial invoice is a bill for the goods from the seller to the buyer. A commercial invoice should include basic information about the transaction, including a description of the goods, the address of the shipper and seller and the delivery and payment terms. The buyer requires the invoice to prove ownership and to arrange payment. Some governments use the commercial invoice to assess customs duties.
  • Bill of Lading — Bills of lading are contracts between the owner of the goods and the transportation provider.
  • Certificate of Origin — Certain nations require a signed statement as to the origin of the export item.
  • Inspection Certification — Some purchasers and countries may require a certificate of inspection attesting to the specifications of the goods shipped, usually performed by a third party.
  • Dock Receipt and Warehouse Receipt — These receipts are used to transfer accountability when the export item is moved by the domestic carrier to the port of embarkation and left with the international carrier for export.
  • Insurance Certificate — If the seller provides insurance, the insurance certificate states the type and amount of coverage.
  • Shipper's Export Declaration — The Shipper's Export Declaration is used to control exports and compile trade statistics.
  • Export License — U.S. export shipments are required by the U.S. government to have an export license, either a general license or an individual validated license (IVL).
  • Export Packing List — Considerably more detailed and informative than a standard domestic packing list, an export packing list itemizes the material in each individual package and indicates the type of package, and is used by customs and transportation companies.

Documentation must be precise. Slight discrepancies or omissions may prevent merchandise from being exported, cause delays in payment or even result in the seizure of the shipment by the customs authorities. Much of the documentation is routine for freight forwarders or customs brokers acting on the firm's behalf, but the exporter is ultimately responsible for the accuracy of the documentation.

Financing Export Transactions

Numerous financing instruments and techniques have been developed over the years to support the evolving needs of companies trading abroad. In addition, government trade development agencies have developed a range of finance, guarantee and risk management programs in an effort to promote increased export activity.

Trade Finance Products Fall Into Three Major Categories:

  • Pre-Shipment Finance — to fund the inventory and production costs associated with manufacturing goods for export. This is particularly important to smaller businesses, as the international sales cycle is typically longer than for domestic sales.
  • Short-Term Post-Shipment Finance — to cover the overseas accounts receivables, which tend to involve longer payment terms, frequently up to 180 days.
  • Structured Finance (medium and long term) — to address the needs of capital goods buyers, particularly for construction projects where the ultimate repayment of the loan comes from the revenues generated from the completed investment project (e.g. a factory). Frequently, the attractiveness of the financing package arranged by the exporter and its financial institution is a critical factor in the purchase decision.

Each type of financing is discussed in further detail below.

Pre-Shipment Finance:

Some enterprises can generate this working capital from internal resources or maintain a bank overdraft facility for this purpose. For firms that require further external resources, several financing mechanisms have been developed. Usually backed by various forms of collateral or guarantees, they include but are not limited to the following:

Loans secured by a letter of credit (L/C) from the buyer and a pledge of the exporter's assets. This can be very expensive for smaller firms, for frequently the assets that must be pledged will greatly exceed the loan amount, even with the L/C as additional collateral. Many countries operate programs to provide pre-export finance guarantees to facilitate borrowing by providing a collateral substitute. In the US both the Small Business Administration and Ex-Im Bank offer working capital guarantee facilities. Some countries have established specific programs to provide hard currency funds required to purchase foreign-sourced production inputs. Facilities developed in countries such as Mexico, Costa Rica, and Zimbabwe offer short-term pre-shipment finance in hard currency.

There are a number of specialized finance houses and trading companies that offer pre-shipment finance but actually take a lien on (or title to) the production inputs purchased, in lieu of other collateral. Where title is taken, the exporter in effect acts as an agent for the financier until the goods are shipped. Frequently a separate post-shipment financing mechanism is then utilized and the financier is repaid for the inputs plus a mark-up. This technique is used in many countries for products ranging from agricultural commodities to personal computers.

In many countries indirect exporters play a major role in the export economy. These enterprises can include component producers for firms that export an assembled final product or manufacturers of finished goods that are later exported by trading companies. As many of these firms are small businesses, they frequently require preshipment financing but may not have access to the facilities described previously. Several countries, such as Mexico and Malaysia, have therefore developed domestic letter of credit systems that facilitate the use of a technique known as backtoback letters of credit. Under this mechanism, a direct exporter issues domestic or import (for foreign-sourced inputs) L/C's to its suppliers, backed by a confirmed L/C from the ultimate buyer. The domestic indirect exporter can then obtain a preshipment loan backed by the domestic L/C.

Short-Term Post-Shipment Finance:

This generally involves transactions with payment terms of 180 days or less although certain financine techniques can be applied to trade on more extended terms. The major financing methods include the following:

Acceptance financing or bill discounting - which is one of the most frequently utilized types of trade finance. This technique involves the creation of a banker's acceptance, which is a term bill of exchange (or usance bill) drawn by the importer on a bank (frequently under a L/C), which has been accepted as the bank's commitment to pay the exporter a stated sum at a specified future date. The exporter can then discount the acceptance with his bank to obtain funds. Most commercial banks offer some form of acceptance financing or bill discounting facility to their clients.

Factoring and Invoice Discounting - which has emerged as an effective method of financing and credit risk intermediation for exporters around the world. Modern factoring first developed in the United States as a means of financing domestic trade, particularly in the textile and garment industries. Since the 1960s the factoring industry has expanded internationally, with a fourfold growth in factoring volume in the decade from 1982 to 1992. Today there are over 750 factors in more than 40 countries, accounting for a total factoring volume of over $260 billion, of which about 6 per cent represents crossborder transactions. The term factoring actually encompasses a package of services that can be accessed individually or in combination. These typically include:

  • Evaluation of buyer creditworthiness;
  • Credit intermediation, with up to 100 per cent of the risks assumed by the factor;
  • Collection services, including follow-up on past-due receivables;
  • Accounts receivable ledger administration;
  • Financing through cash advances against accounts receivable.

The latter service, when utilized alone, is often referred to as invoice discounting or confidential receivables finance. Banks will also provide invoice discounting services, particularly when the overseas credit risk is mitigated through an export credit insurance policy. A major advantage of factoring is that it allows the exporter to quote open account payment terms for buyers which have been approved by the factoring house. In most industrialized countries trade is normally conducted under open account terms, therefore in order to compete effectively, a firm exporting to these countries must either assume the credit risk itself or lay off the risk through a credit insurer or factoring house.

Structured Finance:

Trade financiers have adapted many of the securitization and financial engineering techniques first pioneered in the corporate finance industry for use in structuring trade transactions. These are frequently used to finance trade involving developing countries or economies in transition, particularly for highvalue exports and construction projects where longer repayment terms are desired. A significant amount of medium- and long-term finance is also facilitated through guarantees provided by export credit agencies in the seller's country. In addition, age-old trading techniques, such as barter and countertrade, have been updated through the use of modern risk management instruments.

This discussion will focus on forfaiting, countertrade, and leasing, which are mechanisms commonly used today, particularly for capital goods exports. There are a variety of other techniques available but many of them are more appropriate for situations requiring long-term project finance.

Forfaiting - which was extensively used in financing East-West trade during the Cold War era but is widely used today to finance exports, particularly capital equipment, to and among developing countries and economies in transition. A typical transaction involves the delivery of goods by the exporter in return for bills of exchange or promissory notes from the importer. Usually these are drawn in a series with semi-annual maturities, the total number of bills/notes being dependent on the amount borrowed and the credit period. Maturities can range from 3 months to 5 years. These bills/notes are frequently guaranteed by the importer's bank or another third party, either through a "Per Aval" endorsement or a separate letter of guarantee. The exporter then discounts these bills/notes (without recourse) with the forfaitor, who will either hold them to maturity or sell them in the informal secondary market that exists for this type of security. Institutions that make a market in forfaited notes are generally located in Europe and include international banks and specialized investors. Advantages of forfaiting include reasonable interest rates (usually a spread above interbank rates appropriate to the maturity structure of the transaction) and the ability to lay off political, transfer, credit, and documentary risks.

Barter and Countertrade - which are estimated to comprise over 10 per cent of world trade today, and are particularly common in transactions involving developing countries and economies in transition. Countertrade differs from barter in that part of the transaction involves a cash payment. These transactions are usually much more complex today due to the use of various techniques to minimize the risks to one or both of the counterparties or the countertrade intermediary, if one is involved. The risks relate to the timely delivery of goods promised, quality of goods delivered, and pricing. Some of the techniques developed to facilitate barter and countertrade include:

  • External performance guarantees on one or both counterparties, which can be issued by a bank or take the form of an insurance policy. For example, some syndicates in Lloyd's of London underwrite policies covering non-delivery risks. Also, inspection agencies are frequently used to ensure that the quantity and quality of goods are consistent with the contractual agreement.
  • Barter by L/C involves the exchange of L/Cs between the counterparties, with the release of funds from the sale of the bartered goods being contingent upon shipment of the primary goods.
  • Escrow accounts are used to hold funds arising from the sale of bartered goods until payments are due to the primary goods exporter. The account is usually managed by a bank which acts strictly in accordance with the terms of the countertrade agreement. This mechanism is particularly useful as it can be used repeatedly over time and can be accessed by several exporters dealing with one counterparty.

Countertrade brokers play a very important role in finding buyers for the goods offered in the exchange and in arranging the risk management mechanisms. They are usually compensated on a commission basis. New techniques to facilitate countertrade are being refined in the transitional economies of Eastern Europe and the former Soviet Union. These include:

  • Buy-back transactions, in which one company exports equipment and technical assistance to another, taking products produced by the equipment as payment and selling them at a mark-up.
  • Internal switch trade, where a local hard currency exporter finances cash purchases on behalf of another company, which pays the exporter with its own goods.

Crossborder Leasing - which is a form of financing that is increasingly utilized for equipment exports between developed countries. Although the more visible examples of crossborder leasing in developing countries or economies in transition involve high value items such as aircraft, leasing of smaller equipment is becoming more common. The use of leasing can enhance an exporter's competitiveness in several ways:

  • Leases provide a means of offering extended credit terms, thus helping the buyer to conserve working capital. The nature of the credit risk assumed differs from a direct sale in that the exporter or financial intermediary writing the lease retains title to the assets.
  • Operating leases can be booked in most countries as offbalance sheet liabilities, which may be useful if the importer has exhausted its borrowing capacity.
  • The exporter or financial intermediary may be able to take advantage of tax incentives and accelerated depreciation provisions to increase their margins or offer a lower rental rate to the importer. This can be particularly significant if the exporter is in a higher tax regime.
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