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JPMORGAN CHASE GLOBAL TRADE SERVICES
WORLD TRADE DAY
Trade Payment Terms: Pitfalls to Avoid, Protections to
Employ
April 25, 2014
This presentation is for discussion purposes only and is incomplete without reference to, and should be
viewed solely in conjunction with, the oral briefing provided by J.P. Morgan. Neither this
presentation nor any of its contents may be used for any other purpose without the prior written
consent of J.P. Morgan. J.P. Morgan makes no representations as to the legal, regulatory, tax or
accounting implications of the matters referred to in this presentation.
Notwithstanding anything in this presentation to the contrary, the statements in this presentation are
not intended to be legally binding. Any products, services, terms or other matters described in this
presentation (other than in respect of confidentiality) are subject to the terms of separate legally
binding documentation and/or are subject to change without notice.
Neither J.P. Morgan nor any of its directors, officers, employees or agents shall incur any responsibility
or liability whatsoever to the Company or any other party in respect of the contents of this
presentation or any matters referred to in, or discussed as a result of, this document.
J.P. Morgan is a marketing name for the treasury services businesses of JPMorgan Chase Bank, N.A. and
its subsidiaries worldwide.
J.P. Morgan is licensed under U.S. Pat Nos. 5,910,988 and 6,032,137.
© April 25, 2014 JPMorgan Chase & Co. All rights reserved
Risks & Terms & Opportunities
 Political—unexpected/unpredictable changes (country or regional).
 Economic—economic change in specific countries, regions.
 Commercial
 Buyer financial strength and stability
 Financial Information difficult to obtain
 Different financial standards/Difficult to Analyze
 Cultural/Business Standard Differences
 Foreign Exchange – currency rate fluctuation
 Money Transfer Risk – Availability of USD / Currency Restriction, License
 Mutually Agreeable / Competitive Terms
 Within Standards of the Industry/Goods
 Workable for both parties
 Afford Financing when needed
 Assure a successful transaction – expansion of business
International Payment Methods
Most Commonly Used Methods
Most Protection
CASH IN ADVANCE
LETTER OF CREDIT
DOCUMENTRY COLLECTION
OPEN ACCOUNT
Least Protection
CASH IN ADVANCE
CHARACTERISTICS:
BUYER orders and pays for goods before shipment is made.
SELLER begins to manufacture or ship upon receipt of funds.
SELLER has a unique – must have product or service, or
 SELLER has unquestioned brand and reputation and/or
shipment and the cost of goods is small.
 BUYER is not protected and may not be willing to pay up front.
 Least secure method for the BUYER, but most secure method
for the SELLER.
 Often an uncompetitive payment term.
Letters of Credit
Advice Letter
Letter of Credit
BUYER’s
Bank
Advising/Confirming
Bank
Letter of Credit
Application
Documents
BUYER
Goods
SELLER
 A Letter of Credit replaces risk of BUYER with risk of Issuing Bank
(Risk Transfer)
 It assures that the SELLER will be paid provided that documents
presented strictly comply with its terms and conditions
 A Confirmed Letter of Credit is the undertaking of two Banks; the
Issuing Bank and the Confirming Bank. Both are equally liable to
pay the beneficiary
LETTER OF CREDIT (LC)
CHARACTERISTICS
 Offers the most protection to the SELLER, other than Cash in Advance
 Three independent “agreements” underlie letters of credit
 between BUYER and SELLER (their contract)
 between Applicant and Issuing Bank (application and reimbursement
agreement)
 between Issuing Bank and Beneficiary (the LC)
 LC is an independent undertaking from the contract
 Banks deal in documents only. BUYER’s recourse for problems with
goods is to the contract with the SELLER
 LCs do not protect against fraud (presumed good faith on both sides)
 Documents presented under an LC must comply [strictly] with its
terms and conditions, otherwise there is no obligation to honor.
 Banks cannot provide copies of the documents to the BUYER prior to
payment/acceptance.
 Commercial LCs most often are issued and governed under UCP [600]
Roles of the Advising and Confirming Bank
Advising Bank :
 Authenticate Letter of Credit
 Review for Workability against UCP & Compliance
 Examine Presented Documents
 Convey Docs to Issuing Bank w/Demand for Payment
Confirming Bank:
 Assumes same payment obligation of issuing bank
 Examine and Negotiate Presented Documents
 Convey Docs to Issuing Bank w/Demand for Payment
 Pay beneficiary if issuing bank defaults on compliant presentation
 Beneficiary usually pays the cost of confirmation
The Letter of Credit
TYPES OF LETTERS OF CREDIT
 Commercial [Documentary] Irrevocable Letter of Credit (CILC)
 Expected to be drawn upon to pay for goods shipped
 Import, Export, Domestic, Services
 Issued under UCP [600]

Standby Letter of Credit (SBLC) – [Primary Obligation of Issuer]
 Not expected to be drawn upon, but tend to be drawn upon
in case of default in performance of applicant
 Financial/Performance, Payment Guarantee
 Issued under ISP 98 or UCP 600
 Bank Guarantee (BG) – [Secondary Obligation of Issuer]
 Generally unable to issue Bank Guarantees from U.S.
 Structure can involve unclear amounts and expiry date
 Often issued under local law (prefer URDG 758)
 Issuance generally requires a two bank process and fees
DOCUMENTARY COLLECTION: Document & Goods Flow
4
BUYER’s
Bank
BUYER
2
3
Documents
SELLER’s
Bank
Documents
SELLER
Documents
5
Port
Goods
1
 SELLER makes shipment (1) and sends shipping documents to
its Bank (2), which sends them on to BUYER’s Bank (3)
 BUYER’s Bank advises BUYER that documents have arrived
(4) and will be released against whatever payment terms are
in the Collection Letter (Sight or Time/Acceptance) (5)
DOCUMENTARY COLLECTION: Docs. Against Payment/Acceptance
Documents
BUYER’s
Bank
BUYER
Documents
Goods
Port
SELLER
 BUYER makes payment (Sight) or accepts (Time) draft and
BUYER’s Bank releases the documents to BUYER
 BUYER takes documents to port/airport and picks up goods
 BUYER’s Bank pays SELLER’s Bank or advises of acceptance.
SELLER’s Bank pays SELLER or advises of acceptance
SELLER’s
Bank
DOCUMENTARY COLLECTION
CHARACTERISTICS:
 Collections are a method that may allow a SELLER to ensure
that shipping documents are exchanged for payment or
acceptance.
 Sight or Usance (Time) terms may be used in Collections
 Sight Terms may or may not involve a Draft. Time Terms often
require BUYER to sign and Accept a Draft (Debt Instrument)
 The full amount of a collection must be paid, unless the
Collecting (BUYER’s) Bank receives authority from the
Remitting (SELLER’s) Bank to accept partial payment
 Collections are subject to the International Chamber of
Commerce Rules for Documentary Collections (currently
Publication No. 522)
 Exporter/Seller takes direct importer/buyer risk
DOCUMENTARY COLLECTION
PROCESS:
 The SELLER’s Bank (Remitting Bank) will collect proceeds from the
Collecting Bank (BUYER’s Bank) according to the instructions of
the SELLER (Instruction Letter).
 The BUYER’s Bank (Collecting Bank) is responsible for carrying out the
instructions described in the collection instruction letter sent from
the Remitting Bank, in order to collect the proceeds from the BUYER
 Banks act as agents only and are not responsible for the payment/non-
payment of the collection, at sight or at maturity of an accepted draft
 The BUYER’S Bank (Collecting Bank) cannot provide copies of the
documents to the BUYER in advance of the payment or acceptance.
 Documents Against Payment (D/P) vs. Acceptance (D/A)
 Non-Payment redress is to Collection Agency, Legal/Arbitration/Courts
per the Contract (Protest Accepted Draft), or Credit Insurance claim
OPEN ACCOUNT
CHARACTERISTICS:
SELLER ships and sends documents (Invoice & B/L) to BUYER
No debt instrument signed or exchanged
BUYER pays for goods upon receipt or agreed deferred date per
the invoice.
 SELLER knows BUYER well and has little concern about
BUYER’s ability to pay
 Typically, these are periodic shipments often the same goods
and the same/similar quantity
 Least secure method for the SELLER, but most secure method
for the BUYER.
 Non-Payment redress is to Collection Agency, Legal,
Arbitration, or courts (no draft/debt instrument), or Credit
Insurance claim.
Credit Insurance
Provides Account Receivable (A/R) Non-Payment Protection
Against Policy Defined Commercial and Political Risks/Perils
 COMMERCIAL RISKS:
 Protracted Default
 Insolvency/Bankruptcy
 POLITICAL RISKS:
 War, Insurrection, Civil Commotion
 Confiscation, Expropriation, Boycotts/Sanctions
 Cancellation of Export or Import License
 Currency Inconvertibility
Credit Insurance
Two Principle Markets
 GOVERNMENT
 Export-Import Bank of the United States (‘Eximbank’)
 Foreign Government Export Credit Agencies (‘ECAs’)
- Export Development Corp. (EDC), Canada
- Hermes, Germany
- Coface, France
- etc….UK, Italy, China, Japan, Israel….
 PRIVATE MARKET
 Atradius
 Chartis
 Coface
 Euler Hermes
 Foreign Credit Insurance Association
 QBE
Credit Insurance
Benefits:
 Insure key asset class (A/R) on balance sheet
 Mitigate commercial, political, concentration risks
 Payment assurance support on Documentary Collection and
Open Account (O/A) Terms
 Monetize A/R Portfolio, esp. Foreign A/R
 Enhances internal credit control and risk management
 Umbrella against Unpredictabilty
Credit Insurance: Claims
 Credit Insurance Policy in Good Standing (???)
 File Claims Form proving insurable loss / peril (for evaluation)
 Demonstrate normal and continuous collection effort
 Submit transaction documents and subrogate transaction rights and
ownership to credit insurer
 Claims ‘Waiting Period’ – if any
 Claims Payment, generally at less than 100% (usually 90% indemnity or
less) and net of policy deductible – if any (Shared Fate Factor)
VS.
 Claims under a Letter of Credit
- Submit compliant documents to Confirming or Issuing LC Bank
- Documents submitted within called for Validity Date of the LC
- Banks deal only in documents
- Compliant presentations are paid by the issuing or confirming bank
- Process governed under UCP [600] / Substantial Case Law
Export Financing Tools
POST SHIPMENT FINANCING:
Deferred Term Letter of Credit:
 Documents accepted by issuing or confirming bank
 Discount deferred terms up to 180 days, exceptionally up to 360 days
 Discount fee paid by beneficiary (SELLER), but can be structured to
be paid by applicant (BUYER)
Deferred Term Trade Acceptances or Open Account:
 Deferred term trade acceptances under Documentary Collection
 Deferred payment invoices under Open Account
 Either supported by Credit Insurance assigned to financing bank
 Include insured foreign A/R in borrowing base or discount trade
acceptance draft
Capital Equipment: Deferred Term Promissary Note:
 2-7 years term, semi-annual installments, support by Eximbank Gtee.
 Use for capital equipment exports and underlying financing.
Pre-Export Financing
EXIMBANK EXPORT WORKING CAPITAL GUARANTEE PROGRAM
 Obtain more working capital from your balance sheet
 Greater value from asset classes: Foreign A/R, Export related
WIP and Inventory
 90% Guarantee to Lending Bank to support Export WC Facility
 Asset Based Lending Program
 Higher Advance Rates: Up to 90% on Foreign A/R; 75% on
Export related WIP and Inventory
 Funds used by borrow to finance cost to manufacture,
producing or purchasing eligible items for export, and/or…
 Support issuance of Bid, Advance Payment or Performance
Standby LCs against 25% or less collateral base to preserve
working capital
Pre-Export Financing: EXPANSION OF BORROWING BASE
Asset Based Facility
Collateral
Amount
WCGP
Advance
Collateral
Advance
Collateral
$ 40,000
75%
$
150,000
$
0.00
75%
$
150,000
$300,000
75%
$
450,000
$
750,000
Exportable Inventory
Raw Materials
$ 200,000
20%
WIP
$ 200,000
0%
Finished Goods
$ 600,000
50%
Subtotal
$1,000,000
$340,000
Foreign Accounts Receivable
(A/R)
Open Account
$ 400,000
0%
L/C Backed A/R
$ 600,000
75%
Subtotal
$1,000,000
Total Borrowing Base
$
0.00
90%
$
360,000
$450,000
90%
$
540,000
$450,000
$
900,000
$790,000
$1,650,000
Best Practices
Summary Thoughts:
 Understand the full menu of payment terms, risk mitigation tools,
financing alternatives
 Assure your bank credit agreement allows LC issuance in major currencies
other than USD
 Obtain banking fees/costs early – before setting final sale price
 Take early control of payment terms, structure, process and fees. Use LC
drafts or templates containing your required or preferred conditions
 Keep LC structure clear and simple. Avoid non-documentary conditions
or requirements
 Avoid and eliminate applicant controlled conditions, requirements,
documents. Assure your full control of compliance with LC requirements.
 Under LC be sure Incoterms sync up with document requirements
 Uncertain about Confirmation, have LC call for ‘May Add’
 Have Questions, Need Help, ask your Trade Banker
Contact Information
Tom Gaglione
Vice President, Global Trade
J. P. Morgan Chase Bank, N.A.
Office: 414-977-6733
Mobile: 414-339-2788
Email: [email protected]