Presentation on theme: "Getting Paid. Payment Methods (Ranked from Most Secure for Exporter to Least Secure) 1.Cash 2.Letter of Credit 3.Collections (Payment against documents,"— Presentation transcript:
Payment Methods (Ranked from Most Secure for Exporter to Least Secure) 1.Cash 2.Letter of Credit 3.Collections (Payment against documents, cash against documents) 4.Open Account
MethodGoods Available to Buyers Usual Time of Payment Exporter RiskImporter Risk CashAfter PaymentBefore Shipment LeastMost Letter of Credit After PaymentWhen Documents are available after shipment NoneNone if Inspection Report Req. Collection Against Documents After fulfilling payment terms At sight when documents delivered or at predetermine d number of days from date of shipment High if foreign bank or forwarder is unreliable Minimal particularly if allowed to inspect goods Open AccountBefore payment As AgreedMostLeast
Letter of Credit The letter of credit (L/C) is essentially the purchase of bank credit in favor of the seller by the buyer. The bank issuing the L/C assumes the credit risk of the buyer. The exporter can draw a draft against the bank issuing the credit and receive payment with presentation of the proper shipping documentation. The importer initiates the letter of credit.
Letter of Credit Diminishing in popularity due to cost and complexity; 90% wo LC (L/C) is issued by a bank for the importer to assure a the exporter that if the exporter conforms to all details specified in the letter of credit, he will be paid by that bank even if the importer defaults. Under a documentary L/C, before payment is made the bank responsible for making payment verifies that all documents are exactly as required by the L/C. If a discrepancy exists, it must be rectified before payment can be made.
Irrevocable letter of credit - If the buyer has no right of inspection and no right of rejection. Revocable letter of credit - Either party may unilaterally make changes. Rarely used due to the high risk inherent to the exporter. If a revocable letter of credit is used, the buyer can, at will, cancel the order at the exporter's expense.
Steps of at sight L/C ( 1 of 2) 1.After you (the exporter) and buyer agree on terms of sale, buyer arranges for its bank to open a l/c that specifies documents needed for payment. Buyer determines which documents will be required. 2.Buyer’s bank issues l/c, which includes all instructions to seller relating to the shipment. 3.Buyer’s bank sends l/c to U.S. bank and requests confirmation. 4.U.S. bank prepares letter of confirmation to forward to you along with l/c. 5.You review carefully all conditions in the l/c; contact the freight forwarder to make sure shipping date can be met. 6.You arrange with the freight forwarder to deliver the goods to the appropriate port or airport.
Steps of L/C ( 2 of 2) 7.Following shipment, the documents proving that shipment was made, and made in conformance with l/c are sent you. 8.You present the documents, showing full compliance with the lc to the U.S. bank. Your are paid. 9.U.S. 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. 10.The buyer (or the buyer’s agent) uses the documents to claim the goods.
Compliance with all L/C terms is crucial. You should carefully review the L/C and make sure the price and terms are the same agreed to in price quotes and other documents. If the L/C terms are not precisely met, the bank might not pay. Also, the bank will only pay the amount in the L/C, even if higher charges for shipping, insurance, or other factors are documented. If the L/C terms can't be met, or it has errors or even misspellings, you should contact the buyer immediately and ask for an amendment to the L/C to correct the problem. You must also present the documents by the date specified. The bankers can advise whether there’s enough time to meet a presentation deadline. You should always request that the L/C specify that partial shipments and transshipment will be allowed. This will avoid unforeseen problems at the last minute.
Drafts Draft – “an unconditional order in writing prepared by one party (drawer) and addressed to another (drawee) directing the drawee to pay a specified sum of money to the order of a third person (the payee), or to the bearer, on demand or at a fixed and determinable future time.
Steps in Foreign Collection 1.Exporter ships goods and gathers documentation 2.Exporter sends completed collection letter form and documents to his bank 3.Exporter’s bank forwards collection letter and documents to importer’s bank 4.Importer’s bank notifies importer that documents are available and presents exporter’s draft 5.Importer either pays or accepts draft 6.Upon payment or acceptance, bank releases shipping documents to importer 7.Bank remits draft amount to exporter’s bank 8.Exporter’s bank credits exporter’s account
Drafts Sight Draft – Supposed to be paid when it upon determination of proper presentation to the drawee Time Draft - Buyer is given a specified time to pay after receiving the goods, such as 30 or 60 days after acceptance of the draft.