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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)