COMMON PAYMENT TERMS• Cash in Advance• Documents against Payment/DA• Open Account• Letter of Credit
CASH IN ADVANCE• Receive cash from the buyer before shipping – Telegraphic Transfer – Demand Draft• In case of HUGE payments (importer may demand a bank guarantee)• Followed if exporter is in a strong trading position & particular product is not available
DOCUMENTS AGAINST PAYMENT• When the importer’s bank sends a collection notice to the importer, the importer pays thus taking the possession of documents
DOCUMENTS AGAINST ACCEPTANCE• When the importer’s bank sends a collection notice to the importer, the importer gives the ‘acceptance’ to pay at a later date I/O making payment upon receiving the collection notice
OPEN ACCOUNT Ship the goodsforward the shipping docs directly to buyer await payments ……
A LETTER OF CREDITA L/C is A formal document of payment Opened by a party wishing to import Communicated through banking channels Paid by the opening bank within a specified timeframe upon presentation of docs
Parties to a letter of credit – Applicant/Importer – Exporter – Issuing Bank – Intermediary Bank/Confirming Bank
Documentary Credit Cycle (1) Contract EXPORTER- SELLER IMPORTER - BUYER (BENEFICIARY) (5) Shipment (APPLICANT)(4) Advising (6) Documents (2) Application for negotiation (8) Retirement (9) Remit the payment EXPORTER’S BANK (NEGOTIATING/ IMPORTER’S BANK (3) L/C CONFIRMING BANK) (L/C ISSUING BANK) (7) Dispatch of Documents - Claim Reimbursement
Comparison of Various Methods of Payment Goods Usual Time Risk to Risk to Method Available of Payment Exporter Importer to BuyerCash In After Before Very Low Maximum-ReliesAdvance Payment Shipment on exporter to ship goods as orderedLetter of After When Very Low Assured ofCredit Payment documents quantity and alsoConfirmed are available quality at at shipment shipment ifUnconfirmed inspection report(Advised) is requiredDocumentary After On If draft unpaid, Assured ofCollection Payment presentation goods must quantity, alsoSight Draft of draft to be returned or quality, if goodsDocuments importer disposed of, are inspectedagainst usually at loss before shipmentPayment
Comparison of Various Methods of Payment Goods Usual Time Risk To Risk To Method Available To Of Payment Exporter Importer BuyerDocumentary Before payment On maturity of Relies on importer Minimal—Can checkCollection Time Draft draft to pay draft shipment forDocuments against quantity and qualityAcceptance before paymentConsignment Before payment, After use; Substantial risk Very Low exporter retains inventory and unless through title until goods warehousing cost foreign branch or are sold or used to exporter subsidiaryOpen Account Before payment As agreed Relies on importer Very Low to pay as agreed - complete risk
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