As businesses grow and expand, many enter foreign markets either by sourcing products and services from overseas or through exporting their own products and services to meet global market demand and preferences. As they do so, they must manage risks that are different than those that are associated with a typical transaction within the U.S. Commercial banks not only support domestic transactions but also provide a broad array of international services to assist in mitigating risk, facilitating global payments and providing financing.
In international sales, businesses must determine the best basic contract terms for their situation, with each of those terms entailing certain risks. Payment options may include cash in advance, open account, letters of credit or documentary collections, with the associated risk taken on by the buyer, the seller or a combination of both.
The primary function for which businesses and individuals look to a bank in international transactions is the transfer of funds between countries. These transactions are made through the Federal Reserve System, clearing houses, SWIFT relationships and correspondent accounts. Zions Bank is able to facilitate the payment and receipt of funds throughout the world using its network of payment options quickly and proficiently.
Making Transactions Possible
Commercial letters of credit and documentary collections are alternatives to prepayments and open accounts. With these types of transactions, the bank is an intermediary for payments on behalf of the exporter and the importer as it facilitates the exchange of documents that determine the title, price and shipping terms. Zions’ international division maintains an experienced staff to issue letters of credit and documentary collections. The bank advises the export letter of credit, which it receives from its extensive correspondent network, examines the merchandise documents, and intermediates to process the payment. Despite the increasing use of open terms and prepayments in contracts, the commercial letter of credit continues to be one of the most important instruments in international trade and in managing the associated risks.
Because letters of credit are obligations for banks, there are risks associated with foreign bank defaults and political risks in which a bank is prevented from making a payment due to government restrictions. A significant advantage for our business clients is that they can request that Zions confirm or assume those risks. Often, companies are faced with the need to extend deferred payment terms under a letter of credit or they could lose business to a competitor who will do so. Mechanisms exist in which the deferred payment, or Banker’s Acceptance, is used to extend the terms. Under certain conditions, Zions will discount the transaction and advance the payment before the maturity date for the exporter and assume the risk associated with the foreign bank, which enables the client to remain competitive and mitigate risk at the same time. It will work within its correspondent bank network when an in-country issuance or when foreign services are required.
Dealing with Currency Risks
Another necessary business decision involves determining the unit of exchange or the currency in which the sale or purchase is made. A U.S. buyer or seller assumes the currency risk when the transaction is denominated in foreign currency. Alternatively a foreign counterpart might assume that risk by allowing the transaction to be denominated in USD. Zions has an active trading desk that buys and sells foreign currencies and is able to assist a company in hedging any FX transaction for a future date. Depending on the geographic market, the type of currency may increase business competitiveness. The ability to assist a company in FX transactions is a key component of our international services. Increasingly it is also a contract decision that growing companies face.
In addition to transactional services, the financing of a sale of export products or the purchase of goods and services is a valuable asset Zions can provide for businesses. A company’s working capital needs may require it to purchase goods with the assistance of a bank. Foreign sales may require financing with post-export or pre-export funds. Zions has various mechanisms to assist its clients in obtaining this funding and thus supporting the sale. It works closely with the EXIM Bank, and Zions is a Delegated Lender for both pre- and post-export financing, under the guarantee program. In addition, Zions is a Preferred Lender engaged in various Small Business Administration export guarantee programs. These programs have helped many companies expand access to working capital that in turn leads to increased sales and profit opportunities.
By providing such a broad array of services in international transactions, Zions helps its clients grow and expand their businesses in global markets. Its expertise and skill in handling these types of complex transactions makes it an ideal partner for any business hoping to increase its reach around the world.