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Trade and Project Financing

How Do I Get Paid (Methods of Payment)

The Korean financial system is frequently hard-pressed to meet the demand for financing and capital for international commercial transactions. This is mainly attributed to banks holding BIS (Bank for International Settlement Reserves) capital adequacy ratios above the 10 percent required, and by being stricter on loan requirements for SMEs and small businesses, given significant personal household debt. Foreign companies in start-up operations with a Korean partner often need to invest financial resources for the joint venture, while their Korean partner makes in-kind investments, i.e., land or facilities, for their share of equity. Joint-venture companies and foreign firms often work with branches of foreign banks for local-currency financing, although the branches of foreign banks control a small portion of available Korean Won.

Sources of Korean Won financing have included domestic commercial banks, regional banks, and specialized banks, including the Korea Development Bank, the National Agricultural Cooperative Federation, the Industrial Bank of Korea (IBK), and the Korea Housing Bank.

Korea’s major international banks offer services for all types of international trade payment methods. When you engaged in business activities with a customer overseas, knowing how to collect payment on an overseas sales transaction is the single most critical factor for SME business owners who aspire to expand their international business operations.

There are basically three ways to get paid overseas:

  • Sight and deferred payment Letters of Credit (L/C),
  • Documents against Acceptance (D/A) and Documents against Payment (D/P), and
  • Open Account Transactions.

D/A and L/Cs are forms of extended credit in which the importer makes no payment for the goods until the date called for in the L/C.

D/P is similar to D/A except that the importer cannot clear the goods from customs prior to making payment. In some cases an importer can clear goods prior to payment under a sight L/C. L/C transactions generally follow standard international Uniform Customs and Practice (UCP) codes.

CS Korea recommends that U.S. companies consider dealing on a confirmed L/C credit basis with new and even familiar customers. A confirmed L/C through a U.S. bank is recommended because it prevents unwanted changes to the original L/C, and it places responsibility for collection on the banks rather than on the seller. Once a business relationship has strengthened over time, use of payment mechanisms other than L/Cs can be employed.

To reduce risk of nonpayment, U.S. companies may also contact credit rating agencies, which can provide fee-based corporate information to evaluate the financial credibility of Korean companies. Dun & Bradstreet Korea (https://www.dnb.com/english/contactus/index.htm), the Korea Investors Service (http://www.kisrating.com/eng/), and the Korean Information Service are known to provide fee-based credit rating services in Korea.

CS Korea can provide valuable information, including a company’s credit standing, through our fee-based International Company Profile Service http://export.gov/southkorea/servicesforuscompanies/icp/index.asp. The Korean Commercial Arbitration Board http://www.kcab.or.kr/servlet/kcab_adm/memberauth/5000, and private collection agencies can provide arbitration and collection services. The KCAB is staffed with counselors who advise U.S. companies on contract guidelines.

Whatever payment terms are agreed upon, make sure they are understood by all parties and that your client, representative or contact signs a mutually agreed document. Payment terms must be agreed to in advance. It is rarely wise to sell on open account to a brand new customer.

How Does the Banking System Operate

Korea’s financial system consists of banking and non-bank financial institutions. The Financial Supervisory Commission (FSC: http://www.fsc.go.kr/eng/) and the Financial Supervisory Service (FSS: http://english.fss.or.kr/fss/en/main.jsp), its regulatory arm, are responsible for supervising and examining all banks, including specialized and government-owned banks, as well as securities and insurance companies. The FSC has played a key role in financial restructuring and has strengthened the regulatory and supervisory framework governing the entire financial sector. Oversight standards are improving, but they will need more time to meet international standards.

Korea’s 18 largest banks (the four largest hold approximately 70% of market share) in 2011 (4Q) reported a BIS average capital adequacy ratio of 13.94% and a Tier I capital ratio of 11.06%. These ratios are higher than required under Basel II (Basel II is the international agreement requiring banks to maintain adequate capital ratios in anticipation of global slowdown or financial crises). This Basel II ratio is in accord with the Government of Korea’s efforts to strengthen the quality and quantity of bank capital, while being more conservative given the country’s reliance on trade, any future global economic downturn, and other ongoing economic concerns in the Euro Zone.

Financial Services and KORUS FTA

With the passage (Fall 2011) and the March 15, 2012 implementation of the KORUS FTA, the U.S. financial service industry can expect new and unprecedented access to the Korean market. Financial service commitments outlined in the KORUS FTA are some of the most progressive commitments made with any U.S. trade partner to date. The Agreement locks in standards, regulations, and commitments that increase the transparency, predictability, and cost-efficiency for operating in the Korean financial services market.

Some of the financial service commitments inherent in this Agreement include:

  • Language allowing for cross-border data flow and giving U.S.-based “back-office” support to U.S. firms with operations in Korea. This commitment has a two-year phase-in period, designed to identify, review, and modify data transfer practices to ensure protections in Korea that are no less stringent than those in the U.S.
  • Permitting U.S. financial institutions the ability to establish or acquire financial institutions in Korea and choose the corporate form that best meets their business needs
  • Encouraging Korea to implement several reforms that would contribute to the transparency of rules and procedures, including regional integration of data processing.

Consult: http://www.uskoreafta.org/sites/default/files/Financial-Services-KORUS.pdf.

Foreign-Exchange Controls

Korea has liberalized foreign exchange controls in line with OECD benchmarks. A foreign firm that invests under the terms of the Foreign Capital Promotion Act (FCPA: http://untreaty.un.org/cod/avl/pdf/ls/Shin_RelDocs.pdf) is permitted to remit a substantial portion of its profits, providing it submits an audited financial statement to its foreign exchange bank.

To withdraw capital, a stock valuation report issued by a recognized securities company or the Korean Appraisal Board must be presented. Foreign companies not investing under the FCPA must repatriate funds through authorized foreign exchange banks after obtaining government approval. Although Korea does not routinely limit the repatriation of funds, it reserves the right to do so in exceptional circumstances, such as in situations which may harm its international balance of payments, cause excessive fluctuations in interest or exchange rates, or threaten the stability of its domestic financial markets. To date, the Korean government has had no instance of limiting repatriation for these reasons, even during and after the 1997-98 financial crisis.

The Bank of Korea has detailed information about foreign-exchange control policies in Korea. Consult: http://eng.bok.or.kr/.

U.S. Banks and Local Correspondent Banks

For a list of major U.S. and Korean banks in Korea, consult: http://export.gov/southkorea/usefullinks/majoruskoreanbanks/index.aspgov/korea/en/bankcontacts.html.

Project Financing

Project financing (PF) is designed to facilitate funding of large-scale projects. The concept was first introduced in Korea to finance a highway construction project between Seoul and the Incheon International Airport. The government's decision to introduce this financing technique was prompted by the need to boost domestic demand by stimulating investments in large-scale projects, including housing construction and social infrastructure facilities.

Most of Korea’s social overhead capital (SOC) projects are funded through PF. PF is also used for the financing of private sector projects, to include real estate development and buy-outs of financially troubled companies. Several Korean and foreign banks provide PF and offer venture capital investment programs for social infrastructure projects, private projects and SMEs in Korea. These banks are committed to support the financial strength of companies through direct equity investments although domestic companies generally have access to local funding as well as informal and secondary financial markets charging higher interest rates. Debentures are also used as a financing alternate, although slightly more expensive than bank financing. Finally, long-term debt is available from the Korea Development Bank (KDB), but generally for high priority industries.

In February 2013, the state-run Export-Import Bank of Korea announced that it will provide a total of KRW 74 trillion (USD 66 billion) in loans (KRW 50 trillion) and loan guarantees (KRW 24 trillion) to finance industrial activities and international development projects involving Korean companies amid a prolonged global downturn and the appreciation of the KRW. It will first finance large projects overseas related to engineering, procurement and construction (EPC), general construction, shipbuilding, and trade finance. This is a slight increase from the USD 62 billion executed in the previous year. It also set aside 45 percent of its total loan amount, or KRW 22.5 trillion (USD 20 billion), for SMEs to promote shared growth between large and small enterprises.

Web Resources

Bank of Korea: http://eng.bok.or.kr/

Commercial Service International Company Profile (ICP) www.export.gov/southkora/ICP

Country Limitation Schedule: http://www.exim.gov/tools/country/country_limits.html

Dun and Bradstreet: https://www.dnb.com/english/contactus/index.htm

Export-Import Bank of Korea: http://www.koreaexim.go.kr/en2/index.jsp

Financial Supervisory Commission: http://www.fsc.go.kr/eng/

Financial Supervisory Service: http://english.fss.or.kr/fss/en/main.jsp

Korea Investors Service: www.kisrating.com/eng/

Korean Appraisal Board: http://www.kab.co.kr/kab/home/eng/index.jsp

Korean Commercial Arbitration Board: www.kcab.or.kr/jsp/kcab_eng/index.jsp

KORUS FTA – Financial Services: http://www.uskoreafta.org/sites/default/files/Financial-Services-KORUS.pdf

National Agricultural Cooperative Federation: http://www.fsc.go.kr/eng/rl/list.jsp?menu=01&bbsid=BBS0060 and http://www.nonghyup.com/eng/main/main.html

OPIC: http://www.opic.gov

Overseas Private Investment Corporation

Small Business Administration’s (SBA) Office of International Trade: http://www.sba.gov/oit/

Trade and Development Agency: http://www.tda.gov/

U.S. Agency for International Development: http://www.usaid.gov

USDA Commodity Credit Corporation: http://www.fsa.usda.gov/ccc/default.htm

Export-Import Bank of the United States: http://www.exim.gov

Country Limitation Schedule: http://www.exim.gov/tools/country/country_limits.html