FIN 3163 Unit 1 Slides

1
Negotiations and Planning for Successful International

Transactions
Explains the need for effective planning of foreign trade ventures to ensure costs are controlled and the
risks of doing business on the international market are managed
2
Payment Risk Assessment
Describes the types of payment risks that are encountered by exporters and the financial tools that are
available to help the exporter address those risks
3 Using Export Credit Agency Services for Financing and Mitigating

Commercial Risks
Explains the nature and the role of various export credit agencies (ECAs) while exploring the services ECAs
offer that help alleviate cash flow burden and provide working capital support
Continued…
© 2017, 2020, 2021 FITT All Rights Reserved

4
Cash Flow Management
Explores the necessity of cash flow planning when doing business on the international market, along with
the steps to improving a company’s overall cash flow position
5
Disputes in International Trade
Details the types of disputes – along with the key reasons for dispute – between counterparties; and this
unit demonstrates dispute resolution mechanisms including Alternative Dispute Resolution (ADR) methods

Course Learning Outcomes
Upon successful completion of this course, the individual will be able to:
Describe types of commercial, currency and other risks involved in international trade
1 transactions and describe methods available to minimize them
Assess the competitiveness and profitability of potential import ventures through
consideration of applicable components such as market interest, landed costs,
2 packaging and other related expenses in order to optimize potential risk and
negotiate trade terms
Assess the competitiveness and profitability of potential export ventures through
3 consideration of all associated costs and possible risks of both environmental and
market factors in order to negotiate trade terms and establish final pricing
Negotiate payment method as part of the terms and conditions of a contract for an
4 international venture, considering payment options, benefits and relative risk for
buyer and seller
Describe several ways in which importers and exporters can mitigate potential risks
5 related to currency exchange rate fluctuations.
Continued…

Describe how banks and international financial institutions support international trade
6 finance
Explain the range of products and services provided by various models of export
7 credit agencies and how they can support organizations in their international trade
transactions
8 Make use of cash flow projections, income forecasts and develop a cash flow plan as
part of an annual budget and the development of financing packages
9 Employ the most prudent course of collection procedures for non-payment by an

international importer
Continued…

Explain the two key types of disputes in international transactions with examples of
10 situations where disputes may arise, and why the inclusion of an arbitration
agreement or mediation clauses in contracts is valuable
Resolve any international business disputes through alternative dispute resolution

11 techniques where possible before considering litigation

Background – International Trade Finance
Expanding from domestic trade to international trade requires additional factors and
alternative strategies
KSFs (KEY SUCCESS FACTORS) for a successful international trade, whether importing
or exporting, include:
• Understanding the mechanisms associated with the cross-border flow of goods

and services
• Understanding cross-border payment mechanisms • Access to risk mitigation
tools for contract performance and payments • Understanding trade finance
options that are applicable for international trade
• Access to timely information related to cash flow
Continued…

Background – International Trade Finance
At the core of international trade transactions are expectations
of importers and exporters:
Exporters – Prompt and Secure payment for goods or services

delivered
Importers – Authorize payment only when satisfied that
products or services have been delivered as per terms of
agreements

Objective of this course:
• Negotiating payment options is a critical component of the contract negotiation process and helps mitigate
risk for each party involved in the transaction. In addition, exporters can use trade finance instruments, such
as credit insurance to help mitigate transaction payment risk, while importers may use bonds and guarantees
(e.g. bid, performance, warranty) to protect from project incompletion or transaction performance risk.
• Banks act as intermediaries between importers and exporters, offering specific products and services with
features designed to facilitate the objectives of the importer and exporter. Beyond the pure payment aspect,
trade finance also provides importers and exporters with tools to finance production prior to export, or to
permit the importer to sell the goods purchased, generate the intended profit and then pay for the cost of
acquiring the goods.
• Trade finance also involves a specialized type of financing designed specifically to address the needs and
expectations of importers and exporters. Like any other component of international business and trade,
financing business across borders presents greater challenges than operating domestically.
• The course International Trade Finance, therefore, centres on the strategies and knowledge required for
successful international trade transactions. The success and timeliness of these transactions impact an
organization’s bottom line and are more likely when the organization has knowledge of payment options, risk
mitigation strategies, contracts and effective cash flow management, as well as techniques and plans to
manage disputes should they arise.
• Video:
https://ecampusontario.pressbooks.pub/globalvaluechain/chapter/international-trade-process-and-stakehol
ders/
Reflect on Your Experience
Reflect on your past experience and answer the following questions to the best of your ability.
1 What are trade finance instruments?
2 How can trade finance instruments help mitigate risk of non-payment?
Have you ever negotiated a contract on behalf of your company? What key elements
3 do you have to keep in mind when negotiating a contract on the international
market?
4 How do export credit agencies (ECAs) help foster international trade transactions?
5 What products and services do ECAs offer?
Continued…

Reflect on Your Experience
Reflect on your past experience and answer the following questions to the best of your ability.
A Senior Manager at Exports Inc. has sought your advice on building a payment
structure that helps mitigate the risk of non-delivery and risk of not receiving the
6 ordered goods. What structure do you propose? How can ECAs complement your
proposed approach?
What sources of financing does an organization have available to finance shortfall in

7 cash?
What happens when the exporter delivers the products but the importer does not
8 want to accept them? How do you think this type of dispute can be resolved?
Commercial disputes are significantly more complicated than personal disputes. As

9 such, companies draft contracts that aim to include all possible clauses to avoid
future disputes. What types of conditions should all parties stipulate in a contract?

International Trade Finance
UNIT 1
Negotiations and Planning for
Successful International
Transactions
◎ Successful Planning
◎ Identifying Cost and Price Elements
◎ Identifying Risk
◎ Negotiating International Contracts
◎ Method of Payment and Payment Terms
◎ Pricing Strategies

Why Is This Important?

Successful Planning
For Exports & Imports: Is the product or service financially
viable or profitable?
o Can the goods and services be provided at a price and quality that is competitive?
o Is the cost of entering the market too high?
o Is the competition grueling?
Determining all elements that factor into successful international

trading is time consuming and complicated, involving numerous
variables: o Packaging, insurance
o Travel
o Professional service fees
o Communication
o Market research

Identifying Cost and Pricing Elements
Trading on international markets requires a Pricing a product for

export is one of the most
good understanding of: important steps in
o Environmental factors evaluating the viability
o Foreign exchange rates

The cost of the sale will
o Varying inflation rates set the lower limit at
which the export price will
o Applicable laws and regulations (at home and abroad) be set, which is the basis
for the negotiation
o Market factors, e.g. competition, market share, between exporter and
purchasing power importer

Identifying Cost and Pricing Elements, Continued
Approaches to Determining Product Cost

o Calculation of the Cost of Goods Sold (COGS)
o Calculation of Selling, General and Administrative (SG&A) expenses
o Cost-plus pricing
o Market-driven pricing, EXW (Ex Works) pricing
o Marginal-cost (or variable-cost) export pricing
See Figure 1.1 – Product Cost Pricing Approaches

Product Cost Pricing Approaches
Domestic International
Sales Sales
EXW Pricing* Cost-Plus Approach
Profit Profit
Marginal Cost
Approach (No SG&A)
SG&A SG&A Incremental Margin
(whatever can be added)
COGS COGS COGS
EXW > Ex Works Pricing means the Price being quoted is for the Goods to be readily available for pick up at the
Exporter’s location for the Importer! It doesn’t include transportation and other costs. FIGURE 1.1

Trade terms establish the:
o Responsibilities of the exporter and the importer for shipping the goods
o Responsibility for insurance in transit
o Title to goods in the transport process* (When does the Title transfer?)
o Payment of the loss if the goods cannot be delivered
Unique Costs
o International travel o Hiring of foreign agents
o Long distance communications o Translation
o Participation in trade fairs and missions abroad

Delivery
Factors for
Exporters
FIGURE 1.2

Freight Forwarders
o Provide advisory, administrative and physical services
o Arrange transportation and delivery of goods and commodities
o Provide or arrange for packaging, storage, handling, export credits, insurance and
trade documentation
o Provide or arrange shipment handling, crating, marking, inspection, storage
o Prepare shipping and customs documents
o Translate, certify or transmit documents
o Obtain permits, licences and certificates
o Provide financial assistance through letters of credit or collections

Non-Vessel Operating Common Carriers (NVOCC)
Trading Houses - Mostly food industry
Risk Elements and
Cargo Insurance – Ocean Marine Policy Related Costs
Requirements for Insurance – Insurable Interest o Dispute resolution costs
o Demurrage charges
Third-Party Logistics Providers o Delays in transit
o Inbound freight o Documentation errors or
o Customs and freight consolidation omissions
o Legal fees
o Warehousing
o Delays in funds transfer
o Order fulfillment o Unanticipated costs
o Distribution
o Management of freight to customers See Table 1.1

Incremental Costs of Doing Business Abroad
TABLE 1.1
Continued…
Continued… TABLE 1.1

TABLE 1.1

Identifying Risk
What is risk?
Higher Risk = Lower Competition = Higher Returns || Barrier to Entry • Frequency of coups and labour unrest
• Possibility of a war or civil disruption
Mitigating Risk, Residual Risk • Movements towards expropriation
and protectionism
Balancing Risk & Return • Social and ethnic conflicts
• Role of military
Commercial Risk – Non Payment (for Exporter); Non Performance (for Importer) • Role of political opposition
• Country’s inflation and unemployment
Currency Risk – 2 or 3 different currencies rates
• Growth rate of GDP
See Table 1.2 – Impact of Currency Fluctuations • Fiscal deficits
• International reserve position
Other Risks to Consider • Stoppage of foreign payments
o Country Risk
o Bank Risk

Impact of Currency Fluctuations
TABLE 1.2

Impact of Currency Fluctuations, Continued
TABLE 1.2

Currency Mitigation Tools
Currency hedging:
• Forward Contracts
• Futures and Options
TABLE 1.2

Negotiating International Contracts
The importance of getting a contract right cannot be overemphasized.

The terms of the contract will determine the allocation of the financial
risk, which in turn determines the trade finance products used to
mitigate it. A solid contract can therefore help avoid disputes and
possible litigation, both of which are especially risky and costly when
selling internationally. When negotiating international contracts,
organizations must be sure to:

Identify parties to the o If affiliated companies, agents or representatives are
contract involved, the contract should include them as well
o To reduce the likelihood of a dispute, the contract
Specify the law that
governs the contract should specify which country’s laws will govern the
agreement.
Draft comprehensive
o It must include all the essential terms that the parties
contract have agreed on, since leaving one out may lead to
disputes.
o clearly written and readily understood by all parties.
Draft all parts of the
contract Ambiguous language in a contract invites
disagreements and litigation.

Incoterms® Rules
They have very precise meanings, which can help avoid ambiguous language in sales
agreements, and can reduce the risk of disagreement about who does what. They also deal
with specific questions related to responsibilities in international trade transactions that apply
primarily to the following aspects of the delivery of goods:
o Obligations – responsibilities of seller and buyer e.g on carriage, insurance, shipping
documents, export/import licences
o Costs - Who is responsible for the expenses associated with a shipment at a specific point
in the shipment’s journey, such as export packing costs, the main transport costs and
custom duties?
o Risks - Who bears the risk of loss or damage to the shipment, i.e. who is responsible for
the goods during transit?

Because of the wide scope for misunderstanding, the terms and
conditions of international trade contracts should be as unambiguous
as possible. A poorly drafted contract increases the risk of disputes,
which may lead to the customer’s refusal to pay or other difficulties.
Verbal Agreements - Given the complexity of international

contracts, the importance of a written contract cannot be overstated.
Although verbal commitments or undertakings can be regarded as
legally valid contracts, there can be ambiguities inherent in such
arrangements. Unless the verbal agreement is between parties that
know each other very well, it is always best to get everything in
writing, or to follow up in writing to recap the agreement.

Due Diligence - Basic due diligence includes checking into a
company’s creditworthiness, its financial situation, the quality of its
management, its business history and its reputation in the local and
international marketplace. Legal, consulting and credit reporting firms
can help do this, but in many foreign markets it can be difficult to
uncover all pertinent information. Commercial offices at the exporter’s
embassy in the target market may be able to help since its trade team
will be familiar with local business conditions.
Basic Contract Clauses and Terms

See Table 1.3 – Elements to Address in an International Contract

Elements to Address in an International Contract

It is easy for a company new to international trade to overlook the
sheer scale of the task involved in transporting goods overseas. If
insufficient attention is paid to the logistics of the transaction—
especially as expressed in the fine details of contractual obligations—
the contract can become expensive for both parties
Because of the wide scope for misunderstanding, the terms and

conditions of international trade contracts should be as unambiguous
as possible. A poorly drafted contract increases the risk of disputes,
which may lead to the customer’s refusal to pay or other difficulties.

Method of Payment and Payment Terms
o During contract negotiation, the payment method and payment terms must be
specified and agreed upon
o Mutual assessment of the risks involved in the transaction will influence the
method of payment and payment terms.
o The purchasing company will normally want to defer payment and secure the
longest possible time between the date when products are received and the date
funds are transferred. During this time, the importer can verify the quality of the
shipment, evaluate product performance and minimize the risk of fraud. The
importer might even wish to save on financing costs by selling the goods before
paying for them.
o On the other hand, the exporter will want to be paid as quickly as possible, even
to the extent of receiving payment before shipping the ordered goods. As the
payment objectives of the importer and exporter pull in opposite directions, the
payment terms agreed upon in a contract often reflect the relative strengths of
the two parties.

Method of Payment and Payment Terms
Factors that influence methods of payment and terms:

o Location of the importer
o The supplier
o Previous business relationships
Different methods of arranging payment available to an

exporter:
o Cash in advance or pre-payment
o Documentary letter of credit
o Documentary collection
o Open account

Method of Payment and Payment Terms, Continued
SCHEDULE OF PAYMENTS
• When negotiating a contract that is spread over a period of time, parties tend to
outline a schedule of payments that defines the dates at which payments are made.
When contract duration is long (e.g. 12 months or more), a schedule of payment is
based on various milestones that will be reached during the contract.
• Milestone-based contracts are much easier to control and payments are based on
achieved results. The success of such contracts lies in the wisdom of defining the
milestones, which should be justified to both parties. In this way, the percentage of the
contract that has been completed can be evaluated and the payment that is due can
be assessed.
• Scheduled payments can either be parameterised or customized.

Parameterised Schedule – based on a set of rules and market

conventions defining parameters which include:
o Payment frequency – Annually, quarterly, monthly etc
o Payment day – The day of the month payment is made
o Date rolling – how date is adjusted if schedule date is not a business day
o Start date – first payment date
o End date - last payment date aka the maturity date

Customized Schedule
o Series of dates that define exactly when payments will be made, tailored to expected
progress of the contract over its duration
See Figure 1.4 – Sample Schedule of Payments

Schedule of Payments
2017
2017
2017
Continued…
FIGURE 1.4

Schedule of Payments, Continued
FIGURE 1.4

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1

Negotiations and Planning for Successful International

3 Using Export Credit Agency Services for Financing and Mitigating

© 2017, 2020, 2021 FITT All Rights Reserved

© 2017, 2020, 2021 FITT All Rights Reserved

© 2017, 2020, 2021 FITT All Rights Reserved

9 Employ the most prudent course of collection procedures for non-payment by an

© 2017, 2020, 2021 FITT All Rights Reserved

Resolve any international business disputes through alternative dispute resolution

© 2017, 2020, 2021 FITT All Rights Reserved

• Understanding the mechanisms associated with the cross-border flow of goods

© 2017, 2020, 2021 FITT All Rights Reserved

Exporters – Prompt and Secure payment for goods or services

© 2017, 2020, 2021 FITT All Rights Reserved

1 What are trade finance instruments?

2 How can trade finance instruments help mitigate risk of non-payment?

5 What products and services do ECAs offer?

© 2017, 2020, 2021 FITT All Rights Reserved

What sources of financing does an organization have available to finance shortfall in

Commercial disputes are significantly more complicated than personal disputes. As

© 2017, 2020, 2021 FITT All Rights Reserved

© 2017, 2020, 2021 FITT All Rights Reserved

© 2017, 2020, 2021 FITT All Rights Reserved

Determining all elements that factor into successful international

© 2017, 2020, 2021 FITT All Rights Reserved

Trading on international markets requires a Pricing a product for

o Foreign exchange rates

© 2017, 2020, 2021 FITT All Rights Reserved

Approaches to Determining Product Cost

o Calculation of Selling, General and Administrative (SG&A) expenses

o Market-driven pricing, EXW (Ex Works) pricing

o Marginal-cost (or variable-cost) export pricing

See Figure 1.1 – Product Cost Pricing Approaches

© 2017, 2020, 2021 FITT All Rights Reserved

EXW Pricing* Cost-Plus Approach

COGS COGS COGS

© 2017, 2020, 2021 FITT All Rights Reserved

© 2017, 2020, 2021 FITT All Rights Reserved

© 2017, 2020, 2021 FITT All Rights Reserved

© 2017, 2020, 2021 FITT All Rights Reserved

© 2017, 2020, 2021 FITT All Rights Reserved

© 2017, 2020, 2021 FITT All Rights Reserved

© 2017, 2020, 2021 FITT All Rights Reserved

© 2017, 2020, 2021 FITT All Rights Reserved

© 2017, 2020, 2021 FITT All Rights Reserved

© 2017, 2020, 2021 FITT All Rights Reserved

© 2017, 2020, 2021 FITT All Rights Reserved

The importance of getting a contract right cannot be overemphasized.

© 2017, 2020, 2021 FITT All Rights Reserved

© 2017, 2020, 2021 FITT All Rights Reserved

© 2017, 2020, 2021 FITT All Rights Reserved

Verbal Agreements - Given the complexity of international

© 2017, 2020, 2021 FITT All Rights Reserved

Basic Contract Clauses and Terms

© 2017, 2020, 2021 FITT All Rights Reserved

Continued… TABLE 1.3

© 2017, 2020, 2021 FITT All Rights Reserved

Because of the wide scope for misunderstanding, the terms and

© 2017, 2020, 2021 FITT All Rights Reserved

© 2017, 2020, 2021 FITT All Rights Reserved

Factors that influence methods of payment and terms:

Different methods of arranging payment available to an

© 2017, 2020, 2021 FITT All Rights Reserved