2. payment methods in international trade

7/24/2019 2. Payment Methods in International Trade

1/31

Payment Methods inInternational trade


2/31

International Payment Methods1Clean Payment

a)Advance

b)Open Account

2Bills for collection Collections

3!ocumentaryCredit


3/31

"is# vs Method of Payment

Low

High

High

Low

Buyer Risk Seller Risk

Open Account

DocumentaryCollection

Letter of Credit

Cash in Advance


4/31


5/31

Open Account%%%% clean Collection $ime of Payment

As a'reed, ie 3- days

(oods Available to Buyer Before Payment

"is#s to &eller Buyer defaults on payment obli'ation !elays in availability of forei'n e.chan'e and transferrin' of

funds from buyer/s country


6/31

Open Account

+hen Appropriate &eller has absolute trust that buyer0ill accept shipment and pay at

a'reed time &eller is condent that importin'country 0ill not impose re'ulationsdeferrin' or bloc#in' transfer of

payment &eller has sucient liuidity oraccess to outside nancin' to

e.tend deferred payment terms


7/31

!ocumentary CollectionCharacteristics

Allo0s e.porters to retain o0nership of the 'oods until theyreceive payment or are reasonably certain they 0ill receive it

Ban# acts as a'ent for e.porter by holdin' the title documents

Ban# assumes no ris# but must act in 'ood faith and e.ercisereasonable care

$he terms are called !4P $5"M&


8/31

!ocumentary Collection % !4P

$ime of Payment On presentation of si'ht draft by a ban# to buyer

(oods Available to Buyer After payment

"is#s to &eller Buyer/s nonacceptance of shipment Payment delays due to unavailability of forei'n

e.chan'e in buyer/s country Payment bloc#ed due to political actions in buyer/s

country


9/31

!ocumentary Collection % !4P

+hen Appropriate&eller is condent that buyer 0illaccept shipment

&eller is condent that importin'country 0ill not imposere'ulations deferrin' or bloc#in'

transfer of payment


10/31

!ocumentary Collections % !4A

$ime of Payment

At maturity of accepted draft%Bill of5.chan'e

(oods Available to Buyer

Before payment"is#s to &eller

Buyer/s default on payment obli'ation

!elays in availability of forei'ne.chan'e and transferrin' of funds frombuyer/s country

Payment bloc#ed due to political events

in buyer/s country


11/31

!ocumentary Collections % !4A

+hen Appropriate&eller has condence that buyer0ill accept shipment and pay ona'reed date

&eller is condent that importin'

country 0ill not imposere'ulations deferrin' or bloc#in'the transfer of payment


12/31

6etter of Credit Letters of Credit764Cs) are le'al instrumentsissued by

ban#s 7on behalf of their customers) 0ith the conditionalobli'ation to ma#e payment to the beneciary of the 64C

Documentary7$rade) 6etters of Credit are used to facilitatepayments in import and e.port transactions

Standby6etters of Credit are 8&tandin' By9 for an event ofdefault or non%performance before they can be dra0n on


13/31

6etter of Credit : ;eyParties Applicant

Buyer4Importer

Beneciary &eller45.porter

Issuin' Ban# (uarantees

payment

Advisin' Ban#

authenticates 6C Conrmin' Ban#

'uarantees

payment if Issuin'Ban# defaults


14/31

64C $erminolo'y

Irrevocable

ICC ?

Incoterms

$enor &i'ht


15/31

Uniform Customs and Practices

for Documentary Credits $he


16/31

1=


17/31

The UCP 600 Revision

Some Highlights:

e0er articles articles $he

A replacement of the term Greasonable timeG 0ithdenite number of days 7E) for e.aminin' and

determinin' compliance of documents,

A ne0 provision concernin' addresses of thebeneciary and the applicant,

An e.panded discussion of Gori'inal documentsG, and

"e%drafted transport articles aimed at resolvin'confusion over the identication of carriers anda'ent


18/31

The UCP 600 Revision

Some Highlights (continued):

A ne0 section of GdenitionsG containin' terms suchas GhonorG and Gne'otiation8

*onor means i) to pay at si'ht if the credit is available by si'ht

payment ii) to incur a deferred payment underta#in' and payat maturity if the credit is available by deferred payment 7iii)to accept a bill of e.chan'e 78draft9) dra0n by the beneciary

and pay atmaturity if the credit is availableby acceptance

e'otiation means the purchase by the nominated ban# ofdrafts 7dra0n on a ban# other than the nominated ban#)and4or documents under a complyin' presentation byadvancin' or a'reein' to advance funds to the beneciary onor before the ban#in' day on 0hich reimbursement is due to

the nominated ban#


19/31

&ummary of Chan'es$he phrase Greasonable timeG for acceptance

or refusal of documents has been replaced by

a rm period of ve ban#in' days$he number of articles reduced to 3>

e0 provisions allo0 for the discountin' of

deferred payment credits Ban#s can no0 accept an insurance

document that contains reference to anye.clusion clause

e0 sections on GdenitionsG andGinterpretationsG have been added to clarifythe meanin' of ambi'uous terms

Credit must state if reimbursement is subHect


20/31

Commonly


21/31

!raft or Bill of 5.chan'e

O 7CI$J) 7!A$5)A$ &I(*$ O $*I& BI66 O 5KC*A(5

PAJ $O $*5 O"!5" O 7AMO


22/31

22

ART 4: TRIANGULAR CONTRACTUAL

ARRANGEMENT

5KPO"$5"

&A65

CO$"AC$!5II($5"M&

IMPO"$5"

I&&


23/31

Letter of Credit Issuance

mporter

Advising Bank

in

!"porter#s City

ssuing Bank

in mporter#s City

Step 1

Step 2Step 4

Step 3

L/C Forwarded

to Beneficiary with

or without

confirmation

Application Made

for Letter of Credit

Letter of Credit

Forwarded

by the Issuing

Bank

Contract

5.porter


24/31

Letter of Credit Pa!ent

Issuing /Opening

Bank

Adising/Confirming

Bank

!eller/ "#porterBeneficiary

Buyer Importer

Account $arty

Carrier

Step 3

Step 2

Step 1Step 5

Step 4%ocuments

Money

%ocuments Money Money %ocuments

!urrenders

Bill of

Lading

&eceies

'oods!urrenders

'oods

&eceies

Bill of Lading


25/31

6etter of Credit

$ime of Payment +hen 6C calls for a si'ht draft % at time

documents are presented to ne'otiatin'ban#

+hen 6C calls for a time 7usance) draft % atmaturity of accepted time draft

(oods Available to Buyer

+hen 6C calls for a si'ht draft % afterpayment

+hen 6C calls for a time draft % after drafthas been accepted by ban#


26/31

6etter of Credit

"is#s to &eller !iscrepancies in the documents Buyer/s Ban# 7openin' ban#) defaults on its

payment obli'ation Payment bloc#ed due to political events in buyer/s

country

+hen Appropriate &eller is unsure of credit0orthiness of buyer


27/31

&tandby 6etter of Credit

Commercial documents 'enerally No0outside the letter of credit 7bet0eenbuyer and seller)

unds 'enerally No0 outside of a letterof credit 7bet0een buyer and seller)

$hese credits are 8&tandin' By9 for anevent of default or non%performancebefore they can be dra0n on


28/31

&tandby 6etter of Credit

inancial

Assures account party/s performanceof a nancial obli'ation ie to pay aninvoice by a certain date

Performance

Assures account party/s performanceof a non%nancial contract obli'ationie to deliver products under acontract


29/31

Inter Ban#Communication &+I$&ociety for 0orld0ide interban# inancial

$elecommunication A member o0ned co%operative throu'h 0hich the nancial

0orld conducts its business operations 0ith speedcertainty and condence

$here are >--- ban#in' or'anisations in more than 2==countries e.chan'e standardised nancial messa'es

&+I$ enables its customers to automate and standardisenancial transactions at the reduced cost and operationalris#


30/31

&+I$ has its *O at Bal'ium and oces at maHor centers+orld0ide

It is only messa'e carrier and does not hold funds ormana'es accounts on behalf of customer

It carries propriety data 0ith condentiality and maintainin'inte'rity

&+I$ messa'es are preset and referred to by cate'orynumbers called M$ numbers

5'%M$ ?--%for :$C

M$ 3-- deals 0ith orei'n currency 5.chan'e

M$E-- has ?> dierent messa'es codes


31/31

$*A; JO

2. payment methods in international trade

Documents