Methods of Payment

 Exporter sends the product to an importer on a

deferred payment basis; that is, the importer
does not pay for the merchandise until it is sold
to a third party.

 Title to the merchandise passes to the importer

only when payment is made to the exporter

 Used in cases involving an increasing demand

for a product or to test market productA
 Consignment Sales

The problem with this method includes:

 Delays in payment
 Risk of nonpayment
 Cost of returning merchandise
 Limited sales effort by importers
 Consignment Sales (cont.)

 Verify credit worthiness of importers

 Use credit agencies for information
 U.S. banks, government agencies also provide credit
info on overseas customers
 Credit insurance
 1. Cash in Advance
 A method of payment requiring the buyer to pay before
shipment is effected
Characteristics of Cash in Advance
Applicability Recommended for use in high-risk trade
relationships or export markets, and appropriate
for small export transactions
Risk Exporter is exposed to virtually no risk as the
burden of risk is placed almost completely on
the importer
Pros •Payment before shipment
•Eliminates risk of non-payment
Cons •May lose customers to competitors over
payment terms
•No additional earnings through financing
operations
When to use Cash in Advance?
 2. Open Account

 Definition:
 Exporter ships merchandise to overseas customer on

credit
 Payment is to be made within an agreed time after

receipt of merchandise
 Risk of delays or even default in payment.
 Characteristics of Open Account
Applicability Recommended for use (a) in low-risk trading
relationships or markets and (b) in competitive
markets to win customers with the use of one
or more appropriate trade finance techniques
Risk Substantial risk to the exporter because the
buyer could default on payment obligation after
shipment of the goods
Pros •Boost competitiveness in the global market
•Help establish and maintain a successful
trade relationship
Cons •Significant exposure to the risk of non-
payment
•Additional costs associated with risk
mitigation measures
Definition:
Collection are a means by which banks aid exporters to receive
settlement by handling documents on their behalf to collect
payment or the acceptance of a payment obligation from the
importer against documents
“Documents” means financial documents and/or commercial
documents:
1.“Financial documents” means bills of exchange, promissory
notes, cheques, or other similar instruments used for obtaining
the payment of money.

1.“Commercial documents” means invoices, transport

documents, documents of title or other similar documents, or
any other documents whatsoever, not being financial
documents.
Uniform Rules for Collections
1995 (URC) - (International
Chamber of Commerce Publication
No. 522)
 Documentary Collection

Contract

Exporter/ Importer/
(1)
Principal/ Drawee
Goods
Drawer
(2) (5a)
Advise acceptance Collection Order Docs
Documents Or remit payment Docs

(7) (5b) (4)

(6)
Remitting Advise acceptance or remit payment Collecting
bank (3) bank
Documents
Relating parties
 D/P vs D/A

 Documents against payment: A sight draft is

presented with other documents specified by the buyer
or the buyer’s country and the collecting bank will
provide these documents to the buyer upon payment.

 Documents against acceptance (D/A): The exporter

allows the overseas customer a certain period of time to
effect payment for the shipment.
 D/P vs D/A (con’t)

Criteria D/P D/A

Time of payment After shipment, but On maturity of draft at a
before documents are specified future date
released

Transfer of goods After payment is made at Before payment, but

sight upon acceptance of draft

Exporter’s risk If draft is unpaid, goods Has no control of goods

may need to be disposed and may not get paid at
due date
 Direct collection: Exporters can bypass the remitting
bank and send documents directly to the foreign
collecting bank for payment or acceptance.

 Liability and responsibility of banks: Banks act as

agents for collection and assume no responsibility for the
consequences arising out of delay or for loss in transit of
any messages, letters or documents.
Applicability Recommend for use in established trade
relationships, in stable export markets
Risk Riskier for the exporter, though D/C terms are more
convenience and cheaper than an LC to the importer
Pros •Bank assistance in obtaining payment
•The process is simple, fast, and less costly than
LCs
Cons •Banks’ role is limited and they do not guarantee
payment
•Banks do not verify the accuracy of the documents
Documentary Collection should be used only under the
following conditions:
The exporter and importer have a well-established relationship.

The exporter is confident that the importing country is politically

and economically stable.

An open account sale is considered too risky, and an L/C is

unacceptable to the importer.

 As defined in URC 522, "financial documents" means:
A. Invoice and certificate of origin

B. Invoice, transport documents and documents of title.

C. Bill of exchange and invoice

D. Bill of exchange
The Uniform Rules for Collections govern all collections.

A.True

B.False
URC 522 takes precedence over local laws and regulations in
relation to the operation of documentary collections.

A.True

B.False
Which of the following best defines the role of the remitting
bank?

A.The remitting bank must examine the documents in detail and

undertakes to make settlement with documents that comply with
URC 522.
B.The remitting bank should follow the instructions of the
principal as outlined in the collection instructions but makes no
undertaking to make settlement to the principal.
 4. Documentary Letter
of Credit (L/C)

 Definition of Letter of Credit:

A documentary letter of credit is a bank's promise to pay a
seller on behalf of the buyer so long as the seller
complies with precisely defined terms and conditions
specified in the credit.
 Steps of Letter of credit

-9- Payment
Issuing Advising
bank bank/Negotiating
-7- Documents
bank
-3- Issuing L/C
-2- -8- -6-
Payment
Documents Docs
L/C
application and
release -4- -9-
docs Advising Payment
L/C

Applicant Beneficiary
-5- Shipping of goods

-1- Contract
Parties to the L/C Contract
Parties to the L/C Contract
Applicability Recommended for use in higher-risk situations or
new or less-established trade relationships when
the exporter is satisfied with the creditworthiness of
the buyer’s bank
Risk Risk is spread between exporter and importer,
provided that all terms and conditions as specified
in the LC are adhered to
Pros •Payment made after shipment
•A variety of payment, financing and risk mitigation
options available
Cons •Labor intensive process
•Relatively expensive method in terms of
transaction costs
 Independent principle: Each of the four contracts in a
letter-of-credit transaction is entirely independent. It is
irrelevant to the bank whether the seller/buyer has fully
carried out its part of the contract with the buyer/seller. It is
subject to the fraud exception.

 Rule of strict compliance: When conforming documents

are presented, the advising bank must pay, the issuing
bank must reimburse, and the buyer is obliged to pay the
issuing bank.
“A credit by its nature is a separate transaction from the
sale or other contract on which it may be based. Banks
are in no way concerned with or bound by such contract,
even if any reference whatsover to it is included in
the credit…”

“…An issuing bank should discourage any attempt by the

applicant to include, as an integral part of the credit
copies of the underlying contract, proforma invoice and
the like”.
 The LC is a separate contract from the sales contract on
which it is based; therefore, the banks are not concerned with
the quality of the underlying goods or whether each party
fulfills the terms of the sales contract.

 The bank’s obligation to pay is solely conditioned upon the

seller’s compliance with the terms and conditions of the LC. In
LC transactions, banks deal in documents only, not goods.

 Unless the conditions of the LC state otherwise, it is always

irrevocable, which means the document may not be changed
or cancelled unless the importer, banks, and exporter agree.
 International Rules on L/C

 The Uniform Customs Practices

for Documentary Credits (UCP),
2007 revision, International
Chamber of Commerce
Publication No. 600

 However, in order for the

UCP600 rules apply to a
documentary credit, it must
clearly indicate that it is subject to
the rules.
 Time to examine documents

 Discrepant documents

 Honoring deferred payments

 Strict rules for refusing payments

 Role of Banks in L/C

 Banks should act equitably and in good faith: Banks

should honor the L/C if the documents presented comply
with the terms of the credit.

For example, banks cannot dishonor the L/C based on

the knowledge or reasonable belief that the goods do not
conform to the underlying contract of sale or that it would
not obtain reimbursement from its insolvent customer.
Banks can dishonor a L/C in cases of fraud or forgery.
 Discrepancies

 Accidental discrepancies: These are discrepancies that can

easily be corrected by the exporter (beneficiary) or the issuing
bank. Such discrepancies include typographical errors,
omission to state the L/C number, errors in arithmetic, and
improper endorsement or signature on the draft.
 Minor discrepancies: These are minor errors in documents
that contain the essential particulars required in the L/C and
can be corrected by obtaining a written waiver from the buyer.
Such errors include failure to legalize documents,
nonpresentation of all documents required under the L/C, and
discrepancy between the wording on the invoice and the L/C.
 Major discrepancies: These are discrepancies that
fundamentally affect the essential nature of the L/C. Certain
discrepancies cannot be corrected under any circumstances:
presentation of documents after the expiry date of the L/C,
shipment of merchandise later than the specified date under
the L/C, or expiration of the L/C. However, other major
discrepancies can be corrected by an amendment of the L/C.
Amendments require the approval of the issuing bank, the
confirming bank (in the case of a confirmed L/C), and the
exporter.
 Innovative online payment and financing platforms are
beginning to revolutionize the way international trade is
conducted. Business e-commerce infrastructures include
Tradecard, Bolero, Tradebeam

 They have several advantages: Reduced paperwork &

enhanced visibility, cost savings and value added services.
 Common features
 Fraud by seller: Fraudulent seller ships worthless goods or
does not ship any merchandise.
 Fraud by buyer: Fraudulent buyer forges original documents
for payment, fraudulent buyer receives merchandise from
carrier on the strength of letter of indemnity
 Fraud by buyer, seller and other parties: Buyer and seller
conspire to defraud paying bank, Seller and carrier falsify the
actual order and condition of the goods
 Measures by sellers:
- Verify the background and credibility of your partner
- Stipulate the required documents
- Check the validity of the letter of credit as well as the credibility of the
issuing bank.
 Measures by buyers:
- Verify the background and credibility of your partner
- Choose FOB trade term rather the CIF in a sales contract,
- Use independent inspectors to verify the quality and quantity of goods,
use time drafts
- Verify the authenticity of the documents,
- Sellers can provide performance guarantee to buyer to carry out its
obligations.
-
 Measures by Banks: Banks can undertake an investigation
into the validity, genuineness or accuracy of the documents
before payment,
An issuing bank is irrevocably bound by the terms of the
amendment as of the time:
A.the issuing bank issues the amendment

B.the advising bank receives the amendment

C.the confirming bank agrees to confirm the amendment

D.the beneficiary receives the amendment

An irrevocable Credit can neither be amended nor cancelled
without the agreement of:
A.The issuing bank, the confirming bank, (if any), and the
applicant.
B.The applicant, the issuing bank and the beneficiary.

C.The issuing bank, the confirming bank, (if any), and the
beneficiary
 Which of the following statement is correct?

A. In letter of credit operation all parties concerned deal with

documents.
B. In letter of credit operation all parties concerned deal with
performance and services.
C. In letter of credit operation all parties concerned deal with
goods and payment
Typically, a Letter of Credit is issued:

A.Before the beneficiary ships the goods

B.After the beneficiary ships the goods

C.When the applicant receives the goods

When an issuing bank determines that a presentation is
complying, it must honour its undertaking to make settlement to
the beneficiary even if the importer has not yet received the
goods.

A.True

B.False
From the importer’s viewpoint, which one of the following
methods of settlement involves the least risk?
A.Documentary credit

B.Documentary collection

C.Open account

D.Advance payment
An issuing bank must honour a presentation of documents that
complies with the terms and conditions of the credit and the
details of the sales agreement or contract between the seller
and buyer.

A.True

B.False
 Other Letters of Credit

 Irrevocable  Green-clausecredit
 Revocable  Deferred-Payment
 Confirmed credit
 Transferable  Standby

 Back-to-Back  Straight

 Red-clause credit  Negotiable