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7/31/2019 In t Payment

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International Payment

Presentation Outline

Cash Advance

Letters of Credit (L/C)

Documentary Collections Open Account


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Cash in Advance

Buyer pays before shipment

Used in new relationship

Transactions are small and buyer has no

choice

Maximum security to sellers

No guarantee that goods are shipped


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Draft:

A bill of exchange-- an unconditionalpromise drawn by party (exporter),

instructing the importer (buyer) to pay the

face amount of the draft upon presentation


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Letters of Credit

What is L/C?

A document issued by a bank stating its

commitment to pay someone (seller orexporter) a stated amount provided the seller or

exporter meets specific terms and conditions

also called the documentary letters of credit Most common payment method in

international trade


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International Methods of Payment: Advantages and Disadvantages

Method Risk Chief Advantage Chief Disadvantage

cash in advance L No credit extension required Can limit sales potential, disturb

some potential customers.Sight draft M/L Retains control and title; If customer does not or cannot

ensures payment before accept goods, goods remain

goods are delivered at port of entry and no payment is du

Letters of credit Banks accept responsibility If revocable, terms can change

Irrevocable M pay; payment upon during contract work.

Revocable M/H presentation of paper; costsgo to buyer

Time draft M/H Lowers customer resistance Same as sight dragt, plus goods

by allowing extanded paymen delivered before payment is due

after receipt of goods or received

Consignment sale M/H Facilitates delevery; lowers Capital tied up until sales; must

customer resistance establish distributor's creditworthinessneed political rish insurance in some

countries; increased risk from

currency controls

Open account H Simplified procefure; no High risk; seller must finance

customer resistance production; increased risk from

currency controls


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Methods of PaymentRisk Protection

Buyer Max

Min

Min

Max

Con-

firmed

Uncon-

firmed

Sight

Draft Time

Draft

Cash in

Advance

Letter of

Credit

Documentary

Collection

Open

Account

Seller


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Steps in Obtaining L/C

Buyer and seller agree on the terms of a sale,seller requests buyer to arrange for his bank to

open a L/C

The buyers bank (issuing bank) prepares a L/C

The buyers bank then sends the L/C to its

corresponding bank (buyers bank), which is

called the advising bank

The advising bank forwards the L/C to the buyerfor approval-- terms can be amended

After final terms (agreed), goods shipped


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L/C (continued)

Shipping documents Bill of Lading:

title document-

contract between carrier and shipper shippers receipt of the goods

document assigns control of goods

Commerce Invoice:description of the product, price and others


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Packing list:

outlines things to be filled Certificate of Insurance

Certificate of Origin


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Documentary Credit Procedure

Buyer

(Importer)

Seller

(Exporter)

Importers Bank

(Issuing Bank)

Correspondent

Bank

(1) Contract of Sale

(5) Delivery of Goods

(7) Documents Presented toissuing Bank

(3) Credit Sent to Correspondent

(6)

Documents

Presented

(4)

Letter of

Credit

Delivered

(8)

Documents

& Claim for

Payment

(2)

Request

to Provide

Credit

(9) Payment


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Irrevocable

Documentary (Commercial)Letter of Credit (L/C)

Advised or Confirmed


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Documentary Letter of Credit

Conditional, legal obligation of bank to pay

beneficiary

Bank places its internationally accepted

credit rating before customers

Eliminates commercial risk


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Principal Parties to Letter of

Credit Applicant

(importer/buyer/account party)

Beneficiary

(exporter/seller)

Issuing Bank(guarantor)

Correspondent Bank


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Use a Letter of Credit to Seller

when: Credit standing of buyers is uncertain

Your ability to absorb risk is low

Merchandise is custom-made or high value

Economic, political conditions unstable

Use does not harm you competitive stand


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To the seller,

having a Letter of Credit means:

Issuing bank eliminates commercial risk of

buyer Confirmation eliminates economic,

political, foreign bank risk

Streamlines pre-export financing


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To the buyer,

having a Letter of Credit means:

Payment made upon full compliance of L/C

term Possible import/export financing

(bankers acceptance)

Buyer must tie up credit availability(potential loan)


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The life of a Typical Bankers Acceptance

Mr. Jones

(Importer)

Mr. Susuki

(Exporter)

Japan Bank

1. Purchase Order

5. Shipment of Cars

3. L/C7. Shipping documents & Time Draft

American Bank Draft Accepted (B/A Created)

8. Payment - Discounted Value of B/A

Money Marker

Investor

15. B/A Presented at Maturity

16. Payment - Face Value of B/A

13. Payment-Discounted Value of B/A

12. B/A

9.

Payment-DiscountedValueofB/A

9.

Payment-FaceValueofB/A

Prior to B/A Creation

At and just after B/A Creation

At maturity date of B/A


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Where We Go Wrong:

L/C expired

Late shipment

Documents discrepancy

Amount differs with invoice

Amount in excess of L/C

Signatures missing

Drawn on wrong party


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Where We Go Wrong Commercial

Invoices Good description differs from L/C

Extension of cost wrong

Partial shipment not authorized

Term of shipment missing


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Where We Go Wrong Insurance

Certificates

Required risks not covered

Amount of coverage not enough Currency not consistent with L/C

Effective date later than bills of lading


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Exporter Trouble Shooting

Can you meet documentary requirements

Can you meet shipping/expire/dates?

Is description of goods accurate?

Are names and addresses correct?


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Exporter Trouble-Shooting

Is credit irrevocable?

Is credit confirmed?

Is credit amount correct?

Is credit tenor correct?

Is L/C negotiable?


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A Letter of Credit Does Not:

Replace a contract

Substitute for buyers confidence in sellerand vice versa

Constitute a guarantee of performance

Assure payment if an condition not meet


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Advantages to both parties:

Flexible document

Governed by internationally accepted set of

rules

The Uniform Customs and Practice for

Documentary Credits (The UCP)


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Problems of L/C

Shipping schedule is not met

stipulations concerning freight cost are

unacceptable

price is insufficient due to FX rate changes

unexpected quantity of product

description of product insufficient or too detailed

documents are impossible to obtain specified inL/C


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Documentary Collections (DC)

Three Types of DC

Documents against Payment (D/P)

Documents against Acceptance (D/A)

Collection with Acceptance (Acceptance

D/P)


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Documents against Payment (D/P)

Buyer may only receives the title and other

documents after paying for the goods

Documents against Acceptance (D/A)

the buyer may receive the title and other

documents after signing a time draft promisingto pay at a later date.

Acceptance Documents against Payment

(Acceptance D/P)the buyer signs a time draft for payment at alater date. Goods remain in escrow until

payment is made


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Why DC?

Easier to use and lower bank fee

collection procedure entails risk

Conditions to use DC

No doubt on buyers integrity

buyers country is stable and safe

No foreign exchange control

goods are marketable (exporter resell goods)


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DC Procedure

Exporter ships the goods

exporter forwards the documents to seller

bank (remitting bank),which in turns givesthe document to the buyers bank

(collecting bank)

Collecting bank informs the importer theconditions of the document or contract


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Export Incentive Programs

Export-Import Bank of the U.S. (Exim-Bank) set up in 1934

to facilitate finance and export of American goods and

services and maintain American companies in oversea market

offers programs like guarantees, bank insurance and export

credit insurance

Foreign Export Credit Insurance

provide insurance to exporters (nonpayment and preshippmentrisk

Small Business Administration (SBA)

provide business loans and financing for small companies


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Export Incentive Programs

Commodity Credit Corporation (CCC)

provide assistance in production/marketing of US agricultural

products overseas

Overseas Private Investment Corporation(OPIC)

formed in 1971 insuring direct US investments in foreign countries

provide medium and long-term financing

Private Export Funding Corporation (PEFCO)

consortium of commercial banks and industrial companies

provides medium to long-term financing to foreign buyers

United States Export Assistance Center (USEAC)

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