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Basics of exim
This document discusses various payment methods in international trade and their associated risks for buyers and sellers. It begins by explaining cash in advance, where payment is made before shipment. It then covers open account, where payment is due 30-90 days after shipment. This method carries risk of buyer default for the seller. The document also summarizes documentary collection and letters of credit, which shift more risk to the buyer. It provides details on the parties, documents, and processes involved in letters of credit. Overall, the summary discusses key trade payment methods and their impact on risk transfer between international buyers and sellers.
Basics of exim
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- 2. Buyer Risk Seller Risk •Open Account High Low •Documentary Collection •Letter of Credit Low •Cash in Advance High
- 3. • Meaning:- Anamount 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 in a) import of books b) life saving payment apparatus c) capital goods d) 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.
- 4. • Time ofPayment Before Shipment • Goods Available to Buyer After Payment • Risks to Seller None • When Appropriate Seller has negotiating strength to demand cash in advance
- 5. A transaction wherethe payment is due 30 to 90 days after the shipment 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
- 6. Collection by abank of funds due from a buyer against the delivery of documents. The bank acts as an agent for the seller. • The bank presents documents to the buyer (the importer) through that party's bank. In exchange, the seller's bank receives payment of the amount owed, or a promise to pay at a particular date. •Allows exporters to retain ownership of the goods until they receive payment or are reasonably certain they will receive it •Bank assumes no risk but must act in good faith and exercise reasonable care
- 7. Seller Buyer $ Documents Documents $ Documents $ Seller’s Bank Buyer’s Bank
- 8. • 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.
- 9. When a drawee(buyer) acknowledges in writing on the face of the 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
- 10. • Time ofPayment • 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
- 12. • 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
- 13. • Letters ofCredit (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
- 14. • 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
- 15. • General provisions and definitions. • Form and notification of credits. • Liabilities and responsibilities of parties. • Documents of commerce. • Miscellaneous provisions. • Transferability of letters of credit.
- 16. • 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
- 17. Letter of CreditIssuance Contract Exporter Step 1 Importer Step 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
- 18. Letter of CreditPayment Step 3 Issuing / Documents Advising/ Step 4 Opening Confirming Step 2 Bank Money Bank Documents Money Money Documents Buyer Importer Seller/ Exporter Step 5 Step 1 Account Party Beneficiary Surrenders Receives Receives Surrenders Bill of Goods Bill of Lading Lading Goods Carrier
- 19. 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 draft Goods 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
- 20. Risks toSeller • 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
- 21. • Revocable • Irrevocable • Back to Back • Transferable • Revolving • Red Clause • Installment credit
- 22. Question Letter of Credit Collection Open Account What is customer relationship New Established Parent/Sub Impact of total loss ($) Substantial Normal Small Nature of order Custom Normal Excess Inventory Production Political situation – buyer’s Unstable Stable Strong country Economic situation – buyer’s Unstable Stable Strong country Competition to sell goods No Some Heavy Changing price environment Yes No No Experience in preparing Extensive Some None documents Company policy for protection Strong Medium Unwritten
- 23. • Countertrade • i.e. barter, counterpurchase, compensation • Factoring • Outright sale of short term receivables • Forfaiting • Outright sale of medium term (large) obligation
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