EXPORT PAYMENT TERMS AND CREDIT RISK ANALYSIS
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The document discusses various payment terms that can be offered by exporters to foreign buyers, including cash in advance, letters of credit, documentary drafts, and open account. It provides details on each payment term, including their applications, advantages, and disadvantages. Letters of credit are further broken down into types like irrevocable, revolving, and standby letters of credit. The document also compares the different payment terms in terms of timing of goods availability and payment. It concludes with a discussion on types of credit risks in international trade and ways to manage those risks.
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EXPORT PAYMENT TERMS AND CREDIT RISK ANALYSIS
- 1. EXPORT PROCEDURE AND DOCUMENTATION - PAYMENT TERMS
- 2. PAYMENT TERMS Types of Payment Terms offered by exporters to foreign buyers: • Cash In Advance • Letter of Credits • Documentary Drafts • Open Account
- 3. PAYMENT TERMS Cash In Advance Term offered where exporter ships the goods after receipt of payment Applications – • Importer is unknown, One-time sale • Customized goods, Small shipments • High risk country Advantages – • No risk to exporters, Low Cost Disadvantages – • High risk for importers, Some countries prohibit advance payments • Uncompetitive, may preclude repeat business
- 4. PAYMENT TERMS Letter of Credits (LCs) Instrument offered by importer’s bank in favor of exporter, payable against presentation of specified complaint documents Different types of LCs– • Irrevocable / Revocable • Confirmed / Unconfirmed • Revolving LC • Standby LC
- 5. PAYMENT TERMS Irrevocable Letter of Credit This LC cannot be cancelled or modified without consent of the beneficiary (Seller). This LC reflects absolute liability of the Bank (issuer) to the other party Applications – • Importer’s credit rating may be excellent, good or unknown, First-time sale • Customized goods, Large scale shipments, High risk country Advantages – • Exporter’s credit risk is the confirming bank • LC can be amended (only upon concurrence of all parties) Disadvantages – • Cost of LC and confirmation • Requires experienced stuff who possess certain amount of trade finance knowledge
- 6. PAYMENT TERMS Revolving Letter of Credit Instrument used for orders with large value and longer validity. Instead of arranging new LC for each shipment, a single LC is used covering multiple shipments over long period. Applications – • Importer is known • Importer’s credit rating may be excellent, good or unknown, First-time sale • Customized goods, Large scale shipments, Low risk country Advantages – • Quick Payments possible. Credit restores against each payment Disadvantages – • Cost of LC and Country Risk
- 7. PAYMENT TERMS Standby Letter of Credit (SLOC) A guarantee of payment issued by a bank on behalf of a client that is used as "payment of last resort" if the client fail to fulfil a contractual commitment Requirements – • Agreed payment schedule (CAD/DP, DA at usance etc.) • Agreed quality of supplies (Commodity type, tolerance limit) • Agreed supply period (one year, half year etc.) Applications – • Low Risk country, Old buyers, large orders Advantages – • Less cost, Unknown risk (buyer) converts to known risk (our bank) Disadvantages – • Bank does not negotiate without recourse
- 8. PAYMENT TERMS Documentary Draft A payment term where exporter’s bank collects the money on their behalf. An instruction document is forwarded by seller’s bank to buyer’s bank for release against, • Payment (Documents against Payment) / (Cash Against Documents) • Acceptance – of a Bill of Exchange (Documents against Acceptance) It is not as time consuming or costly as a letter of credit and doesn’t take up any credit facilities. This can be a good way of “meeting in the middle” with buyer, wherein the risk is reduced (but not eliminated) for both.
- 9. PAYMENT TERMS Sight Drafts - (D/P) or CAD Documents Against Payment (D/P) or Cash Against Documents (CAD) are terms where exporters make shipments and entrusts documents to a bank with instructions to release them to importer only upon payment of draft Applications – • Importer has good or excellent credit rating • Small shipments with broad demand • Low Risk Import Country (or Export countries where open terms are not allowed) Advantages – • Low Cost, Documents released only after payments Disadvantages – • Risk of importer country’s political condition, Risk of refused shipments
- 10. PAYMENT TERMS Time or Date Draft – Document Against Acceptance (D/A) Exporters make shipments and entrusts documents to a bank with instructions to release them to importer only upon acceptance of draft (Importer acknowledges the debt and promises to pay in future) Applications – • Importer has established a good payment history • Short term financing needed to make a sale • Low Risk Import Country Advantages – • Low Cost, Receivables may be financed by exporter’s bank Disadvantages – • Risk of importer making slow payment, Exporter needs to finance for usance
- 11. PAYMENT TERMS Open Account Exporter makes shipment and awaits payment directly from importer. Documents needs to be sent directly to importer. Generally used –O30, 060, O120 days Applications – • Importer is long term well known, excellent credit rating • Small shipments with good margins • Very Low risk country Advantages – • Easy Documentation, Competitive, Low Cost Disadvantages – • Full exposure to loss, No assurance against refusal to pay
- 12. PAYMENT TERMS PAYMENT TERM COMPARISON Method of Payment Timing Goods Availability - Clean Collection Before shipment At destination arrival - Sight LC Presentation of docs When LC is paid - Usance LC Maturity of Acceptance Acceptance of draft - D/P Collection Docs at foreign bank When payment made - D/A Collection Draft matures At time draft is accepted - Open Account Buyer’s discretion Upon arrival
- 13. PAYMENT TERMS QUIZ to recall discussed payment terms Advance Payment 30% Advance, Balance Against Documents Standby Letter of Credit / Bank Guarantee Open Credit Documents against Acceptance with Usance Payment after Shipment Against Letter of Credit – Sight or Usance Cash Against Documents / Documents on Presentation SAFE UNSAFE SAFE UNSAFE UNSAFE UNSAFE SAFE SAFE
- 15. CREDIT RISK ANALYSIS Types of Risks Commercial Risks – • Payment /Default • Bankruptcy • Shipment Contract Repudiation (Contract Termination ) Currency / Bank Risks – • Currency Inconvertibility • Government Legislation • Natural Disaster • Bank Default • Currency Fluctuation / Devaluation
- 16. CREDIT RISK ANALYSIS Managing Credit Risk • Quantify the risk in deal • Decide which Risk to take and which to hedge • Choose your tool – • Standby L/Cs / Independent or Demand Guarantee • Contract Guarantees • Factoring • Forfeiting • Credit Insurance (ECGC)
- 18. For any queries, please feel free to reach me at • Email ID – kartikjhamb123456@gmail.com • Phone / Whatsapp – +91 94160-94170 KARTIK JHAMB
Editor's Notes
- https://www.pashabank.az/corporate_documentary_operations,782/lang,en/
- Under 'With Recourse" letter of credit, the negotiating bank can make the exporter liable, in case of default in payment by the opening bank or importer. For this, negotiating bank has to obtain suitable undertaking from the exporter for refund of amount paid, in the event of not getting reimbursement from the issuing bank. Under "Without Recourse" letter of credit, the negotiating bank has no recourse to the exporter. But, if the confirming bank happens to be the negotiating bank, it cannot have recourse to the exporter. A confirmed letter of credit is without recourse to the beneficiary. Unconfirmed or negotiable credit is always with recourse to the beneficiary.
- https://www.pashabank.az/corporate_documentary_operations,782/lang,en/