The global business market is in constant motion. Keeping up requires akeen eye on emerging trends and technological advances and continually workingto be more attractive to international tradingpartners.
Whether your business is importing orexporting, you’ll want to know about all available banking and financing alternatives,including letters of credit, foreign exchangeand trade financing options.
“If your business is importing and/orexporting, there are several banking andfinance options available to you,” says Elias J.Nunez, vice president and international banking adviser with Capital One Bank. “If youunderstand them, your business will havemore leverage in the global economy andyou’ll be able to sell and do more.”
Smart Business spoke with Nunez abouthow businesses can be better importers andexporters.
What are letters of credit?
Letters of credit (L/Cs) facilitate tradearound the globe by protecting companiesagainst the risks of nonpayment or performance. They are contractual agreements inwhich the bank issuing the L/C substitutes itscreditworthiness for that of the applicant.Payment is made against documents presented by the beneficiary and in compliancewith the agreed-upon terms and conditionsstated in the L/C.
There are two basic types of L/Cs: commercial and standby:
Commercial: As an importer, you might beasked by your foreign supplier to provide anL/C. As an exporter, the bank can also serveyou as an advising and/or confirming bank.As an advising bank, the bank will authenticate L/Cs issued by foreign banks andprocess documents required for you toreceive payment in accordance with an L/C’sterms. As a confirming bank, the bank willsubstitute its creditworthiness for that of theissuing bank by committing to pay you inaccordance with the L/C upon presentationof the documents.
Standby: Unlike a commercial letter ofcredit, which is basically an internationalpayment mechanism used by exporters andimporters, a standby letter of credit is a formof a bank guarantee intended to be paid onlyin the event of our clients’ nonpayment ornoncompliance with contract terms. Standbys are issued for many purposes, such as:
- Insurance premiums for workers’ compensation
- Security deposits for utility bills, rents, leases
- Bid and performance bonds
What is involved with foreign exchange trading?
Foreign exchange trading is for companiesthat have payables and/or receivables in foreign currencies. Two basic options:
Spot contract: A foreign exchange contract that allows you to convert foreign currency at the current market spot foreignexchange rate. In most cases, final settlementoccurs two business days later. Spot contracts are used to make a payment in a foreign currency or when you wish to convertforeign currency into U.S. dollars.
Forward contract: Forward foreignexchange contracts protect your profit margin when receiving or making a foreign currency payment at some point in the future. Aforward contract locks in the foreign exchange rate for a future date and eliminates the effect that a change in the foreignexchange rate would have on your profits.
What types of trade financing are available?
Banks can analyze your transactionrequirements and help you find the ideal payment and financing techniques to close eachdeal and improve your cash flow. Tradefinance options:
- Insured accounts receivable (A/R) financing. Insuring your export-related A/R permits their inclusion in your borrowing base, thus increasing your cash flow and working capital. You offer qualified buyers competitive credit terms while protecting you against nonpayment due to commercial or political default.
- Export working capital guarantee (EWCP). As holder of delegated lending authority on behalf of Ex-Im Bank, banks have the discretionary authority to expedite loans under the guidelines. Banks can offer loans with a 90 percent guarantee thus providing you the liquidity to accept new business and increase sales.
- Medium-term insurance. Ex-Im Bank’s medium-term insurance program allows banks to finance foreign buyers of U.S. capital goods over longer time periods, generally up to five years. Exporters receive 15 percent upfront and 85 percent after shipment.
What consequences can a company face if itdoesn’t properly monitor its importing andexporting?
There are several different risks. Companies are concerned with different paymentoptions; country risks based on political andcommercial concerns; currency exchangerisks such as transaction, translation, forecast and economic exposures; and legal andregulatory risk requirements such as the U.S.Patriot Act, OFAC and Foreign CorruptPractices Act. Your bank is one of the bestsources to assist in minimizing internationalbusiness risks while helping you leverage themost appropriate financial option to generatemore sales and manage imports needs.
ELIAS J. NUNEZ is a vice president and international banking adviser with Capital One Bank. Reach him at email@example.com (713) 435-5448, or reach Jorge Calderon, commercial relationship manager, at firstname.lastname@example.org or (972) 855-3936.