The Importance
In international trade today,
the competition is no longer
confined to price, quality or
delivery schedule but extends
to terms of payment
The terms of payment often
decide obtaining of the order
2
The Risks
Risks involved may be more serious than
those in domestic trade
Complete elimination of the risks
associated with international trade is
difficult
Consider your preferred option with
care
Hedge the risks along with appropriate
credit checks on your customers.
3
Determination of Method of
Payment
Host of factors determine the payment terms,
such as
export control regulations,
trade practices,
buyers credibility,
economic and political stability of the
buyers country
competition faced by the seller bargaining strength
size and type of sale, etc.
4
(contd)
Methods of Payments
Cash in advance
Letter of credit
Bill of exchange
Open account
Cash in Advance
Typically used where transactions
are small or you have a unique
product
Advantage to exporter:
No risk
Immediate use of funds
Letters of Credit
Most commonly used mechanism in
international trade.
Affords greatest degree of protection to
the seller after advance payment. Acts
like an insurance contract for
buyer/seller, eliminating credit risk
Issued by importers bank in favour of
the exporter giving him authority to
draw bills up to a particular amount
covering a specified shipments of goods
(contd.)
10
11
The Process
The importer (opener) asks his bank to open a LC in
favour of the exporter
The LC is opened by the opening bank
The advising bank (an intermediary bank in exporters
country) receives credit from the opening bank. If all
okay, it is forwarded to beneficiary (exporter)
Exporter satisfies itself about the provisions in the LC
as in conformity with the contract and seeks any
amendment, if needed
The shipment is effected by the exporter. He prepares
the documents and draws his bill under the LC and
sends these to advising/negotiating bank
contd
12
The Process
(contd)
Sight LC
Usance/Deferred payment
LC
Revocable & Irrevocable LC
Confirmed LC
With recourse & without recourse LC
Transferable LC contd.
14
contd.
Divisible
Back to back LC
Red Clause and Green Clause LC
Revolving LC
Restricted & unrestricted LC
Standby LCBoth ISP98 (International
Standby Practices) & UCP 600 apply
15
UCP 600
The stated aim of the new revision is:
To address developments in the banking,
transport and insurance industries.
To improve the drafting of the UCP in order
to facilitate consistent application and
interpretation of the Rules.
In practice there are many changes, the
overall effect is one of clarification and
consolidation not radical rethought.
16
23
24
26
Open Account
Least secure for exporter, most
attractive to buyer. Goods are shipped
and documents are sent for payment
at the appropriate time as may be
agreed.
Exporter has little or no control over
the process
28
Collection
Commercial L/C
Recommended
Required
Risk to Seller
Relies on Issuing/Confirming
Banks financial strength and
legal obligation
Documentation
Role of Banks
Receipt of
Merchandise
Cost
Least
Secure
Importer:
Most
Secure
Open
Account
Less
Secure
More
Secure
Most
Secure
More
Secure
Less
Secure
Least
Secure
Bills for
Collection
Documentary
Credits
Advance
Payment
30
Thank
You
31