Payment modes
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  • Normally all letters of credit are irrevocable unless the seller has not complied with the obligation so in that case the seller has to fulfill the contract without a payment in the next 90 days.

Transcript

  • 1. PAYMENT METHODS International Business II
  • 2. INTERNATIONAL TRADE PAYMENT METHODS • Advance payment (most secure for seller) – Where the buyer parts with money first and waits for the seller to forward the goods • Documentary Credit (more secure for seller as well as buyer) – Letter of Credit • Revocable • Irrevocable
  • 3. INTERNATIONAL TRADE PAYMENT METHODS • Documentary collection (more secure for buyer and to a certain extent to seller) – Also called "Cash Against Documents • Direct payment (most secure for buyer) – Where the supplier ships the goods and waits for the buyer to remit the bill proceeds, on open account terms.
  • 4. CURRENCY OF NEGOCIATION • In Colombia all international business transactions are expressed in USD – However in the practice, business can be made in €, £, ¥ too • The currency exchange risk is up to the seller when the transaction is made in the buyer’s currency of choice. – It goes to the buyer when the currency used is from the seller’s country.
  • 5. PAYMENT FORM • It is determined by the exporter according to: – Company’s policies – Corporate objectives (long, medium, short term) – Market conditions – Government regulations
  • 6. DOCUMENTARY CREDIT • The importer’s word is not a warrant. • The buyer has to ask his bank the opening of a documentary credit. • A documentary credit is the written promise from a bank on behalf of a customer authorizing a third party to claim some money. – Reasons: • To assure the seller the seriousness of the business. • Because of the changing currency exchange rates. • To involve a serious firm in the negotiation.
  • 7. LETTER OF CREDIT • It is not the same as the DC; the letter establishes the conditions of use of the credit; it is a kind of a voucher issued by the bank to the seller, stating the instructions to make the DC effective. • Importer  Applicant • M Bank  Remitter • X Bank  Collector • Exporter  Payee
  • 8. APPLICANT – ACCOUNT PARTY • Obligations: – Receive the merchandise – Pay the price – Comply with all the requirements established by the bank
  • 9. REMITTER • Obligations: – Inform the payee of the transaction. • Using SWIFT (Society for Worldwide Interbank Financial Communication) • Fax, e-mail (secured connection) – Consider the request by the applicant. – Pay
  • 10. COLLECTOR • Obligations: – Verify the nature of the transaction. – Confirm the credit by Remitter’s request (the bank has the right no to do so) • If confirmed, the collector is directly involved in the transaction.
  • 11. PAYEE • Obligations: – Present all the required documents. – Present them in the established deadline. – Comply with all the general conditions of the contract. – The seller doesn’t have to accept the Letter of Credit, the notice is not an offer.
  • 12. LETTER OF CREDIT - PROCESS A Applicant (Buyer) Payee (Seller) B C Remitter (Applicant’s Bank) Collector (Payee’s Bank) D Contract Letter of Credit Notice
  • 13. LETTER OF CREDIT - USAGE A Applicant (Buyer) Payee (Seller) B C Remitter (Applicant’s Bank) Collector (Payee’s Bank) D Documents for the nationalization Shipment Export Documents process Export Documents
  • 14. OPENING REQUEST PROCESS • The buyer must provide: – Full name and address of the payee. – The amount of the credit. – Merchandise description. – Docs required by the importer. – Sight payment or acceptance. – Incoterm – Confirmed or not confirmed / transferrable or not. – Deadlines for: shipment, docs and payment. – Transport modes and partial shipment. (if required and allowed) – Mailing details about shipment docs. – Any other required info.
  • 15. DEADLINE FOR THE LETTER OF CREDIT • Docs must be delivered in the 21st days after the shipment was made. – Stale • Payment: Usually 90 days after the notice.
  • 16. INTERNATIONAL PAYMENT METHODS • The decision of which method of payment must be used depends on: • The risk assumed by the parties. • The cost of the transaction.
  • 17. MOST USED METHODS • Open account • Direct transfer • Cheque • Bank instruments • (subject to documents) • Letter of credit • Collection • Bill of exchange
  • 18. CONDITIONS OF THE LETTER OF CREDIT • Confirmed • Notified • Pay the bearer at sight
  • 19. SECURITY 0 25 50 75 100 125 LETTER OF CREDIT COLLECTION BILL OF EXCHANGE PAYMENT ENGAGEMENT CHEQUE TRANSFER Security of payment Risk of unpayment