Buyer Risk Seller Risk •Open Account HighLow •Documentary Collection •Letter of Credit Low •Cash in AdvanceHigh
• Meaning:- An amount paid before it is earned or incurred, for example, a prepayment by an importer to an exporter before goods are shipped, or a cash advance for travel expenses.• Desirable for the Exporter.• In India advance payment is allowed only ina) import of booksb) life saving payment apparatusc) capital goodsd) machinery and a few other items.e) Advance payment of USD 2500/- or equal to this amount can be made for commercial purposes.• In the case of export of vegetables and fruits, it is customary to demand 100% advance payment.
• Time of Payment Before Shipment• Goods Available to Buyer After Payment• Risks to Seller None• When Appropriate Seller has negotiating strength to demand cash in advance
A transaction where the payment is due 30 to 90 days after theshipment has been done.• Time of Payment • After the shipment• Goods Available to Buyer • Before Payment• Risks to Seller • Buyer defaults on payment obligation • Delays in availability of foreign exchange and transferring of funds from buyer’s country• When Appropriate • Seller has absolute trust that buyer will accept shipment and pay at agreed time • Seller is confident that importing country will not impose regulations deferring or blocking transfer of payment
Collection by a bank of funds due from a buyer against thedelivery of documents. The bank acts as an agent for theseller.• The bank presents documents to the buyer (the importer)through that partys bank. In exchange, the sellersbank receives payment of the amount owed, or a promise topay at a particular date.•Allows exporters to retain ownership of the goods until theyreceive payment or are reasonably certain they will receive it•Bank assumes no risk but must act in good faith and exercisereasonable care
Seller Buyer $ Documents Documents $ Documents $Seller’s Bank Buyer’s Bank
• Sight Draft• When the Exporter wants the Bank to hand over the export documents to the Importer only against payment immediately, the Bill of Exchange is called a Sight Draft.• Time Draft• Bill of exchange payable at a fixed future date or a determinable future time such as 30 days after presentation (after sight). The purpose of a time draft is to allow the buyer some time to pay for goods bought.
When a drawee (buyer) acknowledges in writing on the face ofthe draft that the buyer will pay the draft at maturity• Time of Payment • At maturity of accepted draft• Goods Available to Buyer • Before payment• Risks to Seller • Buyer’s default on payment obligation • Delays in availability of foreign exchange and transferring of funds from buyer’s country • Payment blocked due to political events in buyer’s country• When Appropriate • Seller has confidence that buyer will accept shipment and pay on agreed date • Seller is confident that importing country will not impose regulations deferring or blocking the transfer of payment
• Time of Payment • On presentation of sight draft by a bank to buyer• Goods Available to Buyer • After payment• Risks to Seller • Buyer’s nonacceptance of shipment • Payment delays due to unavailability of foreign exchange in buyer’s country • Payment blocked due to political actions in buyer’s country• When Appropriate • Seller is confident that buyer will accept shipment • Seller is confident that importing country will not impose regulations deferring or blocking transfer of payment
• Unscrupulous buyer• Insolvent buyer• Buyer changes mind• Buyer’s country is in turmoil• Foreign exchange may not be available• Seller may have to pay return freight• Buyer may not honor promise to pay
• Letters of Credit (L/Cs) are legal instruments issued by banks (on behalf of their customers) with the conditional obligation to make payment to the beneficiary of the L/C • Documentary (Trade) Letters of Credit are used to facilitate payments in import and export transactions • Standby Letters of Credit are “Standing By” for an event of default or non-performance before they can be drawn on
• Applicant • Advising Bank • Buyer/Importer • authenticates LC• Beneficiary • Confirming Bank • Seller/Exporter • guarantees payment if Issuing Bank defaults• Issuing Bank • Guarantees payment • Negotiating Bank • checks for compliance with the terms of the LC
• General provisions and definitions.• Form and notification of credits.• Liabilities and responsibilities of parties.• Documents of commerce.• Miscellaneous provisions.• Transferability of letters of credit.
• Commercial Invoice• Transport Document • Ocean Bill of Lading • Air Waybill• Packing Lists/Weight Lists• Insurance Policy or Certificate• Draft or Bill of Exchange• Other Documents • Inspection Certificate • Special Customs Invoices • Certificate of Origin
Letter of Credit Issuance Contract Exporter Step 1 ImporterStep 4 L/C Forwarded Application Made Step 2 to Beneficiary with for Letter of Credit or without confirmation Letter of Credit Advising Bank Forwarded by the Issuing Issuing Bank in in Importer’s City Exporter’s City Bank Step 3
Letter of Credit Payment Step 3 Issuing / Documents Advising/Step 4 Opening Confirming Step 2 Bank Money Bank Documents Money Money Documents Buyer Importer Seller/ ExporterStep 5 Step 1 Account Party Beneficiary Surrenders Receives Receives Surrenders Bill of Goods Bill of Lading Lading Goods Carrier
Time of Payment • When LC calls for a sight draft - at time documents are presented to negotiating bank • When LC calls for a time (usance) draft - at maturity of accepted time draftGoods Available to Buyer • When LC calls for a sight draft - after payment • When LC calls for a time draft - after draft has been accepted by bank
Risks to Seller • Discrepancies in the documents • Buyer’s Bank (opening bank) defaults on its payment obligation • Payment blocked due to political events in buyer’s country When Appropriate • Seller is unsure of creditworthiness of buyer
• Revocable• Irrevocable• Back to Back• Transferable• Revolving• Red Clause• Installment credit
Question Letter of Credit Collection Open AccountWhat is customer relationship New Established Parent/SubImpact of total loss ($) Substantial Normal SmallNature of order Custom Normal Excess Inventory ProductionPolitical situation – buyer’s Unstable Stable StrongcountryEconomic situation – buyer’s Unstable Stable StrongcountryCompetition to sell goods No Some HeavyChanging price environment Yes No NoExperience in preparing Extensive Some NonedocumentsCompany policy for protection Strong Medium Unwritten
• Countertrade • i.e. barter, counterpurchase, compensation• Factoring • Outright sale of short term receivables• Forfaiting • Outright sale of medium term (large) obligation