CUSTOM AND FREIGHT
Term of Payment FOWARDING
MANAGEMENT
BSM32024
International
Payment
Presentation Outline
• Cash Advance
• Letters of Credit (L/C)
• Documentary Collections
• Open Account
According to U.S. Department of Commerce
(October, 1999), U.S. exports to Taiwan amounted
to U.S.$ 10.466 billion from January to July of this
year, while during the same period only U.S.$
7.466 billion worth of American products were
sold to mainland China.
Trade
Statistics
The United States exported 1.4 times more goods
to Taiwan than to the mainland. Mainland China
is, however, 265 times the geographical size of
Taiwan with a population 58 times larger.
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
Draft:
• A bill of exchange-- an unconditional promise drawn by party
(exporter), instructing the importer (buyer) to pay the face amount
of the draft upon presentation
Letters of Credit
• What is L/C?
• A document issued by a
bank stating its
commitment to pay
someone (seller or
exporter) 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
Documentary Credit Procedure
Buyer (1) Contract of Sale Seller
(Importer) (Exporter)
(5) Delivery of Goods
(2) (8) (6) (4)
Request Documents Documents Letter of
to Provide & Claim for Presented Credit
Credit Payment Delivered
(7) Documents Presented to
issuing Bank
Importer’s Bank Correspondent
(9) Payment
(Issuing Bank) Bank
(3) Credit Sent to Correspondent
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 due
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; costs
go to buyer
Time draft M/H Lowers customer resistance Same as sight dragt, plus goods
by allowing extanded payment delivered before payment is due
after receipt of goods or received
Consignment sales M/H Facilitates delevery; lowers Capital tied up until sales; must
customer resistance establish distributor's creditworthiness
need 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
Methods of Payment
Risk Protection
Buyer Max
Min
Con-
firmed
Uncon-
firmed
Sight
Draft
Time
Draft
Max Min
Seller
Cash in Letter of Documentary Open
Advance Credit Collection Account
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 buyer’s bank (issuing bank) prepares a
L/C
• The buyer’s bank then sends the L/C to its
corresponding bank (buyer’s bank), which
is called the advising bank
• The advising bank forwards the L/C to the
buyer for approval-- terms can be amended
• After final terms (agreed), goods shipped
• L/C (continued)
• Shipping documents
• Bill of Lading:
• title document-
• contract between carrier and
shipper
• shipper’s receipt of the goods
• document assigns control of
goods
• Commerce Invoice:
• description of the product, price
and others
• Packing list:
• outlines things to be filled
• Certificate of Insurance
• Certificate of Origin
Irrevocable
Documentary (Commercial)
Letter of Credit (L/C)
Advised or Confirmed
Conditional, legal
obligation of bank beneficiary
to pay
Document Bank places its credit rating
ary Letter internationally
accepted
before
customer’s
of Credit
Eliminates commercial risk
Applicant (importer/buyer/account party)
Principal Beneficiary (exporter/seller)
Parties to
Letter of
Credit Issuing Bank (guarantor)
Correspondent Bank
Credit standing of buyers is uncertain
Use a Your ability to absorb risk is low
Letter of
Credit to Merchandise is custom-made or high value
Seller
when: Economic, political conditions unstable
Use does not harm you competitive stand
Issuing bank eliminates
commercial risk of buyer
To the
seller,
having a Confirmation eliminates
economic, political, foreign bank
Letter of risk
Credit
means:
Streamlines pre-export financing
Payment made upon full
compliance of L/C term
To the
buyer,
having a Possible
import/export (bankers’
Letter of
acceptance)
financing
Credit
means:
Buyer must tie up (potential
credit availability loan)
The life of a Typical Banker’s Acceptance
Mr. Jones 1. Purchase Order Mr. Susuki
(Importer) (Exporter)
6. Shipping Documents & Time Draft
9. Payment-Discounted Value of B/A
5. Shipment of Cars
9. Payment - Face Value of B/A
10. Signed Promissory Note for
4. L/C Notification
2. L/C Application
6. Shipping Documents
Prior to B/A Creation
Face Value of B/A
At and just after B/A Creation
At maturity date of B/A
3. L/C
7. Shipping documents & Time Draft
American Bank Draft Accepted (B/A Created) Japan Bank
8. Payment - Discounted Value of B/A
15. B/A Presented at Maturity
16. Payment - Face Value of B/A
Money Marker
13. Payment-Discounted Value of B/A
Investor
12. B/A
L/C expired
Late shipment
Where We Documents discrepancy
Go Wrong:
• Amount differs with invoice
• Amount in excess of L/C
• Signatures missing
• Drawn on wrong party
Good description differs from L/C
Where We Extension of cost wrong
Go Wrong
Commercia
l Invoices Partial shipment not authorized
Term of shipment missing
Required risks not covered
Where We Amount of coverage not enough
Go Wrong
Insurance
Certificates Currency not consistent with L/C
Effective date later than bills of lading
Can you meet
Can you meet
documentary
Exporter
shipping/expire/dates?
requirements
Trouble
Shooting Is description of goods Are names and
accurate? addresses correct?
Is credit Is credit Is credit amount
Exporter irrevocable? confirmed? correct?
Trouble-
Shooting
Is credit tenor Is L/C
correct? negotiable?
A Letter of Credit
Does Not:
• Replace a contract
• Substitute for buyer’s confidence
in seller and vice versa
• Constitute a guarantee of
performance
• Assure payment if an condition
not meet
Flexible document
Advantage
Governed by internationally
s to both accepted set of rules
parties:
The Uniform Customs and
Practice for Documentary
Credits (The UCP)
Shipping schedule is not met
stipulations concerning freight cost are unacceptable
price is insufficient due to FX rate changes
Problems
of L/C unexpected quantity of product
description of product insufficient or too detailed
documents are impossible to obtain specified in L/C
Three Types of DC
Document Documents against Payment (D/P)
ary
Collections
(DC) Documents against Acceptance (D/A)
Collection with Acceptance (Acceptance
D/P)
• 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
promising to pay at a later date.
• Acceptance Documents against Payment
(Acceptance D/P)
• the buyer signs a time draft for payment at a later date. Goods remain in
escrow until payment is made
Easier to use and lower bank fee
collection procedure entails risk
Why DC? Conditions to use DC
• No doubt on buyer’s integrity
• buyer’s country is stable and safe
• No foreign exchange control
• goods are marketable (exporter resell
goods)
Exporter ships the goods
DC exporter forwards the documents to
seller bank (remitting bank),which in
Procedure turns gives the document to the
buyer’s bank (collecting bank)
Collecting bank informs the importer
the conditions of the document or
contract
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
Export • offers programs like guarantees, bank insurance and
export credit insurance
Incentive
Foreign Export Credit Insurance
Programs • provide insurance to exporters (nonpayment and
preshippment risk
Small Business Administration (SBA)
• provide business loans and financing for small
companies
• Financial and financing documents
• The financial documents, bills of
exchange and promissory notes are
listed below. A short description then
follows:
• a) Bill of exchange drawn in foreign
currency and payable at sight
b) Bill of exchange drawn in sterling and
payable at sight
c) Bill of exchange accepted payable at
30 days' sight
d) Promissory note
e) Inspection and sampling order
f) Delivery order
g) Warehouse receipt
h) Trust receipt.
