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Short Description: Tips for Competitive Payment Terms in Global Markets: The U.S. Small Business Administration Has Help for Small Exporters by Inga Fisher Williams ...

Content Inside: http://blogs.officialexportguide.com/special/?p=11

April 2008

Tips for Competitive Payment Terms in Global Markets: The U.S. Small Business Administration Has Help for Small Exporters
by Inga Fisher Williams

When the Monte dei Paschi Bank of Sienna, the fourth largest bank in Italy today, issued the first Letter of Credit in 1646, it could not have anticipated the role that this financial instrument would come to play in global trade. According to the World Trade Organization (WTO), the dollar volume of trade has doubled in the last decade and quadrupled over the past 20 years. The volume of international payment advisories routed through banks is now around one and a half billion a year and growing.Letters of Credit (LC) have evolved and adapted over hundreds of years; they are a recognized and well-known tool in processing international payments. Their importance is undisputed, although today they are no longer the only method for settling international accounts and often may not even be the one best-suited. As technology and competitive factors erode the volume of their use, letters of credit are nevertheless known even to the most unseasoned small exporter. Small exporters' contribution to U.S. trade is around 30 percent of total U.S. exports, which reached $1.6 trillion in 2007. With around $500 billion worth of annual exports, small U.S. businesses are players in the global market. They may not have at their command all the details of the UCP 600 (revised rules for letters of credit that became effective January 2006). Nor may they be knowledgeable in how to structure an LC properly so that risk is truly mitigated. But after open account terms, the LC is their favorite means of getting paid for export sales. Lacking information about alternatives, how can small firms adapt their practices to the modern market? To be fair, the knowledge related to established practices and terminology of export financing is not integrated in the United States in nearly the same degree and at all levels of business as it is in European countries, where exporting has been practiced for profit -- and as a survival technique -- for decades. Globalization, however, has thrown small businesses into this arena for good. It's sink or swim, and, thanks to the Small Business Administration (SBA) export finance staff distributed across the country in regional U.S. Export Assistance Centers1), there is a life preserver. Small exporters can get help from SBA in learning about key ingredients2) for success in international trade and what is important in the practice of using a 350-year old convention for settling international accounts. How To Get Paid It is not uncommon for small businesses to begin exporting in response to an unsolicited inquiry, not by any design or plan. How to get paid is one of the central, immediate questions for start-up exporters. Because they are inexperienced in export practices and risk-averse, they frequently opt for getting paid in advance. But there are other options. Trade transactions are usually divided into traditional (LC, documentary collections, etc.) and open account terms. The LC, formally a "documentary Letter of Credit," is estimated to be used today in 10-12% of international settlements arranged through banks. When an LC is used, the buyer's bank steps into the place of the payment risk of the importer and promises payment, if the exporter abides by the terms and conditions of the Letter of Credit. Since it is essentially a bank-to-bank transaction, the LC language is designed and formed by bankers. Knowing how to "read" an LC and how to advise the buyer on the preferred structure and language is a technical skill that used to be provided by the international trade services division of major banks.However, amid the consolidation of the banking industry, pressures for market share and profitability, and the centralization of services, the formerly customary "call-your-local-banker" method for finding this information is likely to fail. Small businesses' access to LC guidance from the international divisions of trade banks has largely disappeared. But SBA's export finance staff in the Export Assistance Centers are able to fill this advice gap. Aside from the technical aspects of using an LC, SBA staff can also help an export business focus its use of LCs on suitable customers and current country risk. As a traditional risk mitigation tool, LCs are a payment method well-suited to first-time customers, sizeable transactions, and markets with a lessdeveloped platform for credit checks or payment infrastructure.


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