Make it happen
International Trade Training
Fundamentals of International Trade
How do we ensure When does the risk
payment? transfers to buyer?
(Incoterms)
(Modes of payment)
Letter of Credits /
Which bank to submit
Elcees / LCs (UCP
our documents for
600)
negotiation
International Trade - Conflicting Interests
Seller (Exporter / Buyer (Importer / Drawee
Drawer / Beneficiary) / Applicant)
Payment as soon as Pay after Receipt of goods
Shipment takes place Assurance that Seller will
Assurance that buyer will ship goods in right
pay as per Contract quality/quantity
Receive Payment in his/her Receive Shipment at the
own Country right time (not to lose
Information about Buyer’s market)
Credit Worthiness, Country’s Information about Seller’s
Currency conditions, ability to fulfill the
Assistance in Win – Win obligations, Import
Documentation, the Legal Licenses, the Legal System
System and Regulations in and Regulations in the
the Buyer’s Country Seller’s Country
Financing Financing
Risk Matrix: Seller’s Viewpoint
Slow payment/default
Credit risk
Bankruptcy
Commercial risk
Contract repudiation
Contract risk
Contract dispute
Foreign exchange control legislation
Discharge of debt legislation
Government repudiation of debt
Payment moratorium
Political risk
Insurrection/overthrow/domestic turmoil Country risk
Non-payment due to war
Non-payment due to natural disasters
‘End of civilisation’
Currency inconvertibility Transfer/economic risk
Currency fluctuation/devaluation FX risk
Methods of Payment/Settlement
Cash in Advance
Open Account
Documentary Collection
Letters of Credit (LCs)
Risks (Micro) - Methods of Payment
High
Risk Cash in Advance
Method Seller's View Buyer's View
Confirmed Letter of Credit
Open Must Trust
Buyer
Account Buyer Totally Secure Letter of Credit
Doc. Collection
Constructive
Documentary Control Gets to see
Collections over Goods the Documents Open Account
Low Risk Seller High Risk
Payment Payment only if
Documentary Undertaking Documents are
Credits by the Bank Compliant
Advance Totally Secure Must Trust
Payments Seller
Cash In Advance
Cash in advance is an arrangement between the Seller and
the Buyer whereby :
Buyer pays cash in advance to the Seller
Seller ships the goods to the Buyer
Seller sends the shipping documents to the Buyer
Buyer Seller
Risks Involved - Require early funding of purchases None
- Seller may delay / refuse to ship goods
Advantages None - Ships goods when convenient
- Immediate use of buyer’s funds
Open Account
Open Account is an arrangement between the Seller and the Buyer whereby :
Seller ships the goods to the Buyer
Seller sends the shipping documents to the Buyer
Buyer agrees to pay in accordance to the Seller’s instruction stated in the
invoice
Buyer Seller
Risks Involved
• None No control over the goods or payment
Buyer may refuse to pay
Advantages Control over the goods None
Pays when convenient
Obtain Supplier’s credit
Documentary Collections
An arrangement between the Seller and Buyer:
Seller ships the goods to the Buyer
Seller presents documents through banks
Buyer agrees to take action as follows:
Sight Bill: To pay upon advice of the arrival of documents
Usance / tenor/ term bill: To accept a Bill of Exchange and thereafter to pay on due date
Banks will customarily send documents subject to URC 522
Buyer Seller
Risks Involved Payment made / Commitment to pay Buyer may refuse to take up documents
undertaken before sight of goods presented
Goods may not match description Buyer may refuse to pay on due date
stated in the documents presented after taking up goods
Advantages May refuse to take up the documents if Title to goods are controlled through
market price has fallen banking channel
May delay payment till arrival of the Availability of Financing
vessel or after disposal of the goods
Using Documentary Collections
As a Seller, ask
What is the value of the goods?
Can you trust the buyer?
Is the buyer credit worthy?
Is the political situation in the buyer’s country stable?
Does the buyer’s country have a well defined judicial
system?
Are the goods perishable?
Are the goods custom made?
Can you resell the goods to another buyer in the buyer’s
country?
What is the cost of getting the goods back?
As a Buyer, ask
Can you trust the seller?
Documents against Payment (D/P)
1. Contract
Seller/ Buyer/
Drawer 8. Takes delivery
2. Shipment Drawee
Goods
5. Ask buyer to pay
10. Credit funds
3. Documents
7. Documents
6. Pay
9. Remits funds
Remitting 4. Docs Collecting/
Bank Presenting
Bank
Documents against Acceptance (D/A)
1. Contract
Seller/ Buyer/
Drawer 2. Shipment 8. Takes delivery Drawee
Goods
5. Ask buyer to accept bill
10. Advise acceptance
13. Credits funds
6. Accepted B/E
7. Documents
3. Documents
and due date
11. Pay
of exchange
12. Remits funds
9. Advise acceptance and due date
Remitting 4. Docs Collecting/
Bank Presenting
Bank
Letters of Credit (LC)
An arrangement involving - Buyer/Applicant, Issuing Bank, Advising/Negotiating Bank &
Seller/Beneficiary
Payment terms - At sight or Usance / tenor
Payment will be effected provided the stipulated documents are presented & terms and
conditions of the LC are complied with.
Buyer Seller
Risks Involved Payment will be effected against Payment guaranteed only if compliant
compliant documents, regardless of the documents are presented per terms and
quality of the goods conditions of the LC
Banks deal only in documents, not with Assumes bank and country risks (if LC is
the goods not confirmed)
Advantages Shipping documents, terms and Payment guaranteed if compliant
conditions are dictated by buyer documents are presented
Documents are checked by bank before Financing opportunities, e.g. LC
payment discounting
Better price or longer credit term
Financing opportunities, e.g. TR
Using Letters of Credit
As n Seller, ask
Do the L/C terms conform to the contract?
Is the L/C workable?
Can I trust the issuing bank?
Are my risks adequately covered?
As a Buyer, ask
Does the L/C application conform to the contract?
Have I asked for adequate and appropriate documentation?
Using Letters of Credit
An L/C can be available for settlement with:
The Issuing Bank
The Nominated Bank
The Confirming Bank
The Issuing Bank and Confirming Bank are obligated to ‘Honour’, there is no
obligation for the Nominated Bank to honour.
“A credit must state the bank with which it is available or whether it is available
with any bank. A credit available with a nominated bank is also available with the
issuing bank.”
“Unless a nominated bank is the confirming bank, an authorization to honour or
negotiate does not impose any obligation on that nominated bank to honour or
negotiate, except when expressly agreed to by that nominated bank and so
communicated to the beneficiary.” UCP600 Article 12 (a)
Nominated Bank
A nominated bank is authorised to:
Receive presentation
Examine the documents for compliance
Forward documents to the issuing bank/ confirming bank (if any)
Honour/ Negotiate documents
Pre-pay against credits available by deferred payment, acceptance and
negotiation
A nominated bank is not obliged to perform any of the above activities. It is a prudent
practice for the nominated bank to inform the beneficiary of its intentions including the terms
and conditions under which it undertakes any of these activities.
Advantages for the beneficiary
Present documents and obtain settlement at a bank in their country
Can avoid risk of delays/ lost in transit of documents on submission to the
issuing bank
Letters of Credit (Sight)
1. Contract
Seller/ Buyer/
Beneficiary 5. Shipment 12. Takes delivery Applicant
Goods
2. Applies for LC
4. Advise LC
9. Credits funds
6. Docs
10. Pay
11. Docs
8. Remit funds
Advising / 7. Docs Issuing
Negotiatin Bank
3. Issue LC
g Bank
Letters of Credit (Usance)
1. Contract
Seller/ Buyer/
Beneficiary 5. Shipment 12. Takes delivery Applicant
Goods
15. Credits funds on due date
acceptance
9. Advise
2. Applies for LC
13. Pay on due date
4. Advise LC
10. Accept B/E
6. Docs
11. Docs
14. Remit funds on due date
8. Acceptance
Advising 7. Docs Issuing
/Negotiating Bank
3. Issue LC
Bank
Payment methods - comparative chart
DIFFERENCES OPEN ACCOUNT CASH IN ADVANCE COLLECTION COMMERCIAL L/C
Bank Line of NA NA Not Needed Required
Credit
Obligation to Buyer Only Buyer Only Buyer Only Issuing/Confirming Bank
Pay
Risk to Seller Non payment/ Delayed / no Relies on Buyer’s financial Relies on Issuing / Confirming Bank’s
delayed payment shipment strength and willingness to pay financial strength and legal obligation
Documentation Minimum & simple Minimum & simple Simple. Not checked by the bank, Complex. Compared to letter of credit
only counted. Buyer must review requirements provided by the Buyer and
himself or herself international guidelines
Role of Banks Funds transferring Funds transferring Acts as collecting agent only Bank substitutes its credit for that of buyer.
bank in case of TT bank in case of TT Pays against conforming
documents regardless of whether Buyer can
pay
Receipt of Before payment After payment After time draft is accepted or after After time draft is accepted or after
shipment payment of sight draft by the Buyer payment of sight draft by the Bank
Risk of non High None Medium Low
payment
Where used - Within high trust - For new - For ongoing business - When ability of Buyer to pay is uncertain.
relationships. relationships. relationships. - In countries where there is a regulatory
- With inter- - For smaller - For transactions not requiring the requirement.
company Transactions where protection and expense of L/C's. - When a seller needs an L/C to obtain bank
transactions. buyer is unable to financing.
obtain an L/C.
Cost Cost of TT Cost of TT Less expensive. Charges typically More Expensive. Buyer’s charges usually
include Buyer’s Bank collection include Issuing Bank’s underwriting,
fee, courier, cable charges, and wire reparation,
transfer fees document examination, courier, and cable
charges