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Methods of payment

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The project describes different methods of payment while international trade.

Published in: Law
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Methods of payment

  1. 1. Methods of Payment Presented by: Shruti Mittal 13DM180 Sonakshi Govil 13DM186 Sreevatsan Natarajan 13DM190 Tarun Mangal 13DM204 Udit Jain 13DM206 Vanshika Gupta 13DM212 Presented To: Prof. Abha Rishi
  2. 2. Exporter receives payment for trade deals before: • The shipment of good from his country •The actual transfer of ownership Cash in advance
  3. 3. Advantages • For Exporter: • Safe and secure • No credit risk • Most desirable and acceptable option • Funds can be used for business purposes immediately Disadvantages • For Exporters: • May lead to loss of customers • For Importers: • Not safe and secure • Risk of non delivery • Least attractive
  4. 4. Suitability •Exporter has sole monopoly in the market •Importer has dire need of goods •Importers credit worthiness can’t be ascertained/not good. •Political and commercial risk is very high importer’s country.
  5. 5. Examples Teleshopping Internet-based firms
  6. 6. Ways Wire Transfer Credit Cards Payment by Check
  7. 7. Factors Wire Transfer Credit Card Payment by Check Cost Costly for importer Cost effective Little costly Time Least time : 16 seconds Least time Takes time: 4 to 6 weeks Safety Most safe Fraudulent use is possible Safe but bank could be fake Ease in use Very easy to use Easy to use Require some effort How it works Through SWIFT system Through Online, Fax and via telephone Lengthy process
  8. 8. Letter of Credit
  9. 9. • A letter of credit is a document issued by a financial institution or a similarly accredited professional party. The letter assures payment to a seller of goods or services provided certain documents have been presented to the bank. • "Letters of Credit" are documents that prove the seller has performed the duties specified by an underlying contract (e.g., the sale of goods contract) and the goods/services have been supplied as agreed. • In return for these documents, the beneficiary receives payment from the financial institution that issued the letter.
  10. 10. • Letters of credit are used primarily in international trade for transactions between a supplier in one country and a purchaser in another. • Most letters of credit are governed by rules promulgated by the International Chamber of Commerce known as Uniform Customs and Practice for Documentary Credits (latest version: UCP 600). • A letter of credit may either be irrevocable and thus, unable to be changed unless both parties agree; or revocable where either party may unilaterally make changes. • A revocable letter of credit is inadvisable as it carries many risks for the exporter.
  11. 11. Involved Parties • Applicant = Buyer/ Importer • Beneficiary = Seller/Exporter • Opening Bank = Importer’s Bank >> Issues L/C • Advising Bank= Exporter’s Bank >> Advises L/C • Confirming Bank = Advising Bank or 3rd Party Bank >> Confirms L/C • Paying Bank = Any Bank as Specified in L/C >> Pays the Draft
  12. 12. A sight LC causes payment to be made immediately to the beneficiary/seller/exporter upon presentation of the correct documents. A time or date LC specifies when payment is to be made at a future date and upon presentation of the required documents Advising Bank — advises the beneficiary at the request of the issuing bank. Applicant — the party on whose request the issuing bank issues a credit . Beneficiary — the party who is to receive the benefit (payment) of the LC. The consignee of an LC and the beneficiary may not be the same. The credit is issued in the beneficiary's favour.
  13. 13. Confirming bank — adds confirmation to an LC. It does so at the request of the issuing bank and taking authorization from the issuing bank. Issuing bank — issues the LC.
  14. 14. A Typical Letter of Credit Transaction Here are the typical steps of an irrevocable letter of credit • After the exporter and buyer agree on the terms of a sale, the buyer arranges for its bank to open a letter of credit that specifies the documents needed for payment. The buyer determines which documents will be required. • The buyer's bank issues, or opens, its irrevocable letter of credit includes all instructions to the seller relating to the shipment. • The buyer's bank sends its irrevocable letter of credit to the bank and requests confirmation. The exporter may request that a particular bank be the confirming bank, or the foreign bank may selected as a correspondent bank.
  15. 15. • The bank prepares a letter of confirmation to forward to the exporter along with the irrevocable letter of credit. • The exporter reviews carefully all conditions in the letter of credit. The exporter's freight forwarder is contacted to make sure that the shipping date can be met. If the exporter cannot comply with one or more of the conditions, the customer is alerted at once. • The exporter arranges with the freight forwarder to deliver the goods to the appropriate port or airport. • When the goods are loaded, the freight forwarder completes the necessary documentation.
  16. 16. • The exporter (or the freight forwarder) presents the documents, evidencing full compliance with the letter of credit terms, to the confirming bank. • The bank reviews the documents. If they are in order, the documents are sent to the buyer's bank for review and then transmitted to the buyer. • The buyer (or the buyer's agent) uses the documents to claim the goods. • A draft, which accompanies the letter of credit, is paid by the buyer's bank at the time specified or, if a time draft, may be discounted to the exporter's bank at an earlier date.
  17. 17. The original bill of lading (BOL) is normally the document accepted by banks as proof that goods have been shipped Documents that can be presented for payment •Financial Documents — Bill of Exchange, co-accepted draft •Commercial Documents — Invoice, packing list •Shipping Documents — Transport document, insurance certificate, commercial, official or legal documents •Official Documents — License, embassy legalization, origin certificate, inspection certificate •Transport Documents — Bill of lading (ocean or multi-modal or charter party), airway bill, lorry/truck receipt, railway receipt, CMC other than mate receipt, forwarder cargo receipt •Insurance documents — Insurance policy or certificate, but not a cover note
  18. 18. Types of Letter of Credit Back to Back Confirmed Straight Negotiation Sight Standby Transferable
  19. 19. Documentary collections Exporter sends the shipment to the importer, submits the trade documents to his bank and entrusts it collection of a payment from the importer Exporters bank-remitting bank Importers bank-collecting bank Remitting bank submits the trade documents to the collecting bank for making the payment and handing over the documents to the importers.
  20. 20. Rules for the collection of documents has been laid down by Universal Rules for Collection of Documents under URC-522 After receiving the documents. They handed over to the importer in exchange of money which are remitted by the collecting bank to the remitting bank and finally to the exporter. Handing over the documents after receiving the money is known as Sight drafts or documents against payments whereas credit extended by the exporter in a transaction is known as Time or date of draft or Documents against Acceptance.
  21. 21. Parties in the collection of Drafts • Drawer: He is the exporter who issues the bill of exchange for a trade transaction and to whom payment is made. The other party who discounts the draft is entitled to make the payments and is known as payee. • Drawee: It is the party who is entitled to make the payments. He is a importer, a buyer, an acceptor and the payer of the draft in a documentary collection mode of payments. • Remitting Bank: It is the bank to which the exporters sends the bill of exchange along with all transport, shipping documents, and instructions for documentary collections. The role of the bank is of a facilitator without any risks and responsibility for ensuring the payments from importer or his bank.
  22. 22. • Collecting/presenting Bank: It is the bank of the importer and facilitates in trade transaction by getting the documents from collecting bank and handing them to the importer after receiving the payment..The role of the bank is of a facilitator without any risks and responsibility for the payments of trade transaction.
  23. 23. Types of documentary collection payments • Documents against payments: This is considered to be the best option as it involves minimal risks to both the parties. Under this , the exporter retains the title to the shipment until the goods has reached the importers country and payment for the same has been made. Importer also makes the payment on arrival of the goods in his country . However , this payment option can be used effectively only when an original , clean bill of lading is used, because it carries the title of goods and importer needs to submit it to the shipping company to receive the goods . Airways bill does not carry the title of goods.
  24. 24. Risk Involved • Importer may change his mind • Become insolvent • May be unable or unwilling to make the payment as his creditworthiness has suffered from the time of the shipment and presentation of documents for payment by the exporter bank. • Trade policies may change resulting in the ban on import or export of that item also on flow of foreign exchange.
  25. 25. Documents against Acceptance • Credit extended by exporter to win the buyer and to penetrate new markets. • Payment is made on the mutually agreed future date , usually 30 to 90 days . Thus known as Time Draft. • Helps the importer to sell goods in the local market and thus make payments to the exporter.
  26. 26. Risk Involved • More risky for the exporter • Importer may refuse to make payment. • To be used only after thoroughly verifying and cross-checking the credit worthiness of importer and his country’s economic and political situation. • Exporter can transfer the draft to the bank and risk of non-payment is shifted to the bank • Exporter can also use date draft to cover his risk.
  27. 27. Features of Documentary Collections • Exporter ships the goods to the importer but retains the title of goods . It is less risky and complicated. • He shall resent the documents to the remitting bank and keep a close eye on the financial position of the importer and his country’s political ,economic and regulatory environment. • Banks act as the facilitator. Exporters shall verify that the negotiating bank may not grant any undue favor to the importer in case of default. • Such a mode of payment can only be used in case of a established trade relationships between an importer and exporter and in economically stable export markets.
  28. 28. OPEN ACCOUNT
  29. 29. • Also called open credit • Involves delivery of your goods or services to the buyer with an invoice requesting payment at a certain time after delivery. • The time given to the buyer to pay is called the credit term. What is it? • Because of intense competition in export markets, foreign buyers often press exporters for open account terms. • Exporters who are reluctant to extend credit may lose a sale to their competitors. How it is important these days?
  30. 30. Contract Documents Sent Goods Shipped Payment Option 1 Payment Option 3
  31. 31. How does it work? In negotiating an export contract, the exporter agree with the buyer the amount, currency, timing and method of payment. When he ships the goods or provide the services, the buyer receives an invoice setting out those payment details. Control of the goods passes to the buyer before you receive payment. The credit term agreed with the buyer is also stated on the invoice. For example, if a buyer has 30 days’ credit, the invoice will state when the 30 days begin—on the date of invoice, the date of delivery or another date. When a payment is due, your buyer will usually send it by • Telegraphic (wire) transfer through a bank or • International bank cheque (bank draft)
  32. 32. What costs are involved? • The cost is usually paid by the sender (buyer) Telegraphic transfers • Depends on the bank of whether collection charges apply. International cheques • costs of reducing non-payment risk, such as taking out export credit insurance, or of raising working capital. Other costs
  33. 33. What are the pros and cons? Pros Cons May increase market competitiveness, as this payment method has no risk for overseas buyers and it may also help their cash flow The relatively high risk of non-payment makes open account suited to long standing, trouble-free trading relationships International telegraphic transfers and bank cheques are cheaper and more straightforward payment methods for both seller and buyer than a documentary collection or documentary credit As seller don’t receive payment until after he has shipped the goods, payment on open account terms may strain his cash flow, especially if he provides extended payment terms If the export contract is in a foreign currency, seller is exposed to exchange rate risk from the date of the sale contract to the time of payment
  34. 34. How Exporters tackle the risk? Using one or more of the appropriate trade finance techniques The exporter who lacks sufficient liquidity needs export working capital financing that covers the entire cash cycle from purchase of raw materials through the ultimate collection of the sales proceeds. Loan or revolving line of credit Export Working Capital Financing Able to obtain needed facilities from commercial lenders when financing is otherwise not available. Government- Guaranteed Export Working Capital Programs Provides protection against commercial losses-default, insolvency, bankruptcy, and Political losses-war, nationalization, Currency inconvertibility Export Credit Insurance Discounting of a short-term receivable (up to 180 days). Usually works with consumer goods Export Factoring Allows the exporter to sell its medium term receivables (180 days to 7 years) to the forfeiter at a discount, in exchange for cash Forfaiting
  35. 35. How risky is it? A range of payment methods is used in international trade, with payments taking place at a different stage of the export transaction in each. Each method has a different level of non- payment risk for the exporter, and non-delivery risk for the buyer. EXPORTER Safest Riskiest Riskiest Safest Cash in advance Letters of Credit Documentary Collections Open Account IMPORTER
  36. 36. Countertrade Exchanging of Goods and Services
  37. 37. Countertrade Barter System Pepsico & Russian Vodka (Stolichnaya)
  38. 38. Countertrade Compensation Indo-Iraq Oil for Food Program
  39. 39. Countertrade Buy-Back Arrangement National Textile Corporation bought Looms from Soviet Union & buyback ratio was 75% textile produce and remaining cash
  40. 40. Countertrade Tolling Arrangement
  41. 41. Countertrade Switch Trading
  42. 42. Offset
  43. 43. Countertrade Pros • When there is a shortage of foreign exchange reserves, the countertrade is the best option for importing countries. • Countertrade helps in the sales of surplus stocks produced or stored. • For example: Developed countries can sell their stock, which have become outdated or obsolete at home due to the advancement in technology to the developing or poor countries of the world. Cons • A major drawback of countertrade is that the value proposition may be uncertain, especially in cases where the goods being exchanged have significant price volatility. • It often includes complex negotiations, potentially higher costs and logistical issues
  44. 44. THANK YOU..!!

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