Neal Weisenburger, a Chicago-based vice president of international trade services with Wells Fargo Bank, said U.S. recyclers need to be more focused on export markets as 95 percent of the world’s population residing outside of the United States and 80 percent of the world’s purchasing power lying outside of the domestic market.
Weisenburger addressed attendees of the 2014 Paper & Plastics Recycling Conference, which is taking place in Chicago Oct. 8-10 at the Marriott Downtown Chicago Magnificent Mile. During the session “Financing for Export,” he outlined various financing options available for export shipments, saying they offered recyclers an opportunity to mitigate nonpayment risk and improve liquidity management.
Not only do U.S. sellers face financial risks when selling material overseas in the form of slow payment or buyer bankruptcy, they also face contract risks in the form of disputes, political risks such as changes in export or import restrictions, economic risks such as inability to obtain hard currency and lack of consistent or transparent regulations, Weisenburger said. Other factors that can affect export transactions are commodity price fluctuations, cultural differences, fraud and shipping hazards, he added.
When shipping overseas, Weisenburger suggested a number of best practices, including knowing the associated risks and options for mitigating them; knowing the risks to the buyer; using accurate and clear purchase orders, invoices and shipping documents; matching incoterms with payment terms; and understanding the options for minimizing risk while considering opportunity costs of being too strict.
Payment methods range from cash in advance, which lessens the risk for the seller but increases the risk to the buyer, to and open account, which represents more risk for the seller than for the buyer, he said. This spectrum also includes documentary collection and a letter of credit (LC) .
When documentary collection is used as a method of payment, Weisenburger said, “a bank exchanges documents for a buyer’s payment or acceptance.”
This method is characterized by the use of a draft and documents that the buyer must pay or accept prior to obtaining the title to the goods. Banks do not examine documents or assume any credit risk under this method, Weisenburger said, instead following the instructions regarding the release of the documents; however, it offers a lower processing cost than a LCwould.
LCs, on the other hand, “replace the risk of the importer with the risk of the issuing bank,” Weisenburger said. Using this method “your customer’s bank must pay a sum upon presentation of complying documents,” he added.
The seller’s bank can either act as a advisor on an LC, authenticating the LC and delivering it to the seller, or it can confirm the LC, assuring payment if the terms and conditions are met and substituting for the issuing bank.
Weisenburger suggested requesting confirmation when the seller is uncomfortable with the bank issuing the LC, the amount of the transaction or with the country the material is being shipped to. The cost of confirming a LC varies based on the strength of the issuing bank, the country of issuance, the amount of the LC and the validity period, he noted.
Nearly 70 percent of documents can be discrepant with LCs, Weisenburger noted, adding that there are very few times on a percentage basis when the foreign bank find a discrepancy that the U.S. bank missed.
If the banks involved fined discrepant documents, he said, the documents are returned to the beneficiary, the issuing bank is contacted to waive the discrepancy or the documents are sent on a collection basis for review and acceptance by the buyer and issuing bank, he said.
Common discrepancies include incomplete or incorrect drafts, irregular invoices, insurance shortcomings, bill of lading/airway bill problems, late shipments/late presentation and inconsistency among documents.
“Letters of credit are separate from any underlying sales contract,” Weisenburger said, adding that they are also only as good as the bank that issues them.
“Confirmed letters of credit replace the country and commercial credit risk of the issuing bank with that of the confirming bank,” he noted.
In terms of LCs, the bank is an active party, whereas the bank is solely a processor when it comes to documentary collection, Weisenburger reminded attendees. The seller’s risk remains with the buyer in documentary collection, while with a LC it is with the bank, he added.
Weisenburger advised using documentary collection when the dollar amounts are smaller, the buyer and seller have an established relationship and for transactions that represent lower risk for the seller. He advised using LCs for larger transactions that represent high risks and newer relationships.
The 2014 Paper & Plastics Recycling Conference continues Thursday, Oct. 9, with the following sessions:
- "Mill Buyers Panel;”
- “Keeping a Lid on Transportation Costs;”
- “Re-Defining the PSI Definition and Specification for OCC;” and
- “The Outlook for Plastics.”