Unit 4 PAYMENT IN INTERNATIONAL TRADE Open account: Open account means the exporter ships the goods to the buyer and just waits till a fixed date as agreed in their contract for payment from the buyer. Normally, the exporter only accepts open account method of payment if he has known the buyer quite well and they have established a long-term and trustworthy business relationship. Documentary letter of credit: A document issued by a bank, whereby the bank replaces the buyer as the paying party. The exporter is basing his risk of getting paid on the bank rather than on the importer. The bank will have to be reimbursed by the importer. Revocable letter of credit ; A letter of credit that may be canceled at any moment without prior notice to the beneficiary Irrevocable letter of credit: A letter of credit that cannot be canceled nor amended without agreement of all parties Deferred payment letter of credit: A letter of credit under which the documents are forwarded to the importer’s bank, while sight draft is presented at a latter future date Red clause letter of credit: A letter of credit permitting the beneficiary to receive a sum prior to shipment Transferable letter of credit: A letter of credit that can be utilized by someone designated by the original beneficiary Revolving letter of credit: A letter of credit calling for renewed credit to be made available when the issuing bank informs the beneficiary that the buyer has reimbursed the issuing bank for the drafts already drawn. Back to back letter of credit: Two letter of credit with identical documentary requirements, except for the difference in the price as shown by the invoice and draft. 45Standby letter of credit: A letter of credit that can be drawn against, but only if another business transaction is not performed. Advised letter of credit: A letter of credit issued by a bank and forwarded to the beneficiary by a second bank in his area. The second bank validates the signatures and attests to the legitimacy of the first bank. Confirmed letter of credit: A letter of credit issued by one bank to which a second bank adds its commitment to pay. Usance draft ( Time draft): A draft that has been drawn to be payable after a specific number of days. Banker’s acceptance: A usance draft drawn on a bank that stamp ACCEPTED across the face, thereby making it a prime obligation of that bank to pay. It is used to finance specified short-term, self-liquidating transaction, including foreign trade. Bills for collection: A negotiation instrument, drawn by a company or individual, that is presented to the drawee bank for payment. Clean collection: A negotiable instrument presented for collection with no document attached. Documentary collection: A collection item with title documents that accompany the draft. The documents are released to the drawee, upon payment of the draft. Advance payment: the payment method that the buyer agree to make payment of whole grand values or part of values to the seller before sending the cargo. Match these terms with their definitions. invoice a) document that shows details of goods being transported; it entitles the receiver to collect the 2. clean collection : goods on arrival 3. documentary b) list of goods sold as a request for payment collection . . : c) bank that issues a letter of credit (i.e. the 4. bill of exchange importer’s bank) 465. 6. 7. 8. 9. bill of lading document of title issuing bank collecting bank confirming bank 10, letter of credit 4d) e) 8) h) d bank that receives payment of bills, ete. for their customer’s account (i.e. the exporter’s bank) document allowing someone to claim ownership of goods payment by bill of exchange to which documents are not attached signed document that orders a person or organization to pay a fixed sum of money on demand or on a specified date bank that confirms they will pay the exporter on evidence of shipment of goods method of financing overseas trade where payment is made by a bank in retum for delivery of commercial documents, provided that the terms and conditions of the contract are met payment by bill of exchange to which commercial documents (and sometimes a document of title) are attached Write your answer here: 3. 4, 5. 8 9. 10. Reading 1 Before you read Discuss these questions. 1, What are some of the risks involved in trading internationally? 2. What payment methods do you know that are used when exporting or importing goods? 3. What is the role of the banks in international trade? 47Open Account The goods, and relevant documents, are sent by the exporter directly to the overseas buyer, who will have agreed to remit payment of the invoice back to the exporter upon arrival of the documents or within a certain period after the invoice date. The exporter loses all control of the goods, trusting that payment will be made by the importer in accordance with the original sales contract. Documentary Credit Documentary Credit is often referred to as a Letter of Credit. This is an undertaking issued by an overseas bank to a UK exporter through a bank in the UK, to pay for the goods provided that the exporter complies fully with the conditions established by the Documentary Credit. Additional security can be obtained by obtaining the ‘confirmation’ of a UK bank' to the transaction, thereby transferring the responsibility from the importer’s bank overseas to a more familiar bank in the country of the exporter. Very few risks arise for the exporter because the potential problem areas of the buyer risk and country risk can be eliminated. However, the exporter must present the correct documents and comply fully with the terms and conditions of the credit. Failure to do so could result in the exporter losing the protection of the credit. Bills for Collection Trade collections are initiated when an exporter draws a bill of exchange on an overseas buyer. This is forwarded by the exporter’s bank in the importer’s country. Such collections may be either ‘documentary’ or ‘clean’. A documentary collection is one in which the commercial documents and, if appropriate, the documents of tifle to the goods are enclosed with the bill of exchange. These are sent by the exporter’s bank to a bank in the importer’s country together with instructions to release the documentation against either payment or acceptance of the bill. The risks that the exporter has to face are that the importer fails to accept the bill of exchange or dishonours an accepted bill® upon maturity. This means that the exporter may have to consider shipping the goods back to the UK, finding an alternative buyer or even abandoning the consignment, all of which could be expensive. 48In many areas of the world it is common practice to defer presentation’, payment or acceptance until arrival of the carrying vessel. Collection and remittance charges can also be relatively high. If the exporter retains control over the goods by remitting a full set of Bills of Lading® through the intermediary of the banking system, control of the goods will be handed over to the importer only against payment or acceptance of the bill by the importer. If the documents are released against the importer’s acceptance of the bill, control of the goods is lost and the accepted bill of exchange may be dishonoured at maturity. Advance Payment Exporters receive payment from an overseas buyer in full, or in part, before the goods are dispatched. This means that the exporter has no risks associated with non-payment. | This bank is then known as the confirming bank. ? Clean means that no documents are involved, 3 The importer does not pay, although he had previously agreed to pay. ‘ This means to delay passing the bill to the importer. * This means sending all the necessary shipping documents. Understanding main points Read the above text about payment methods for exporters and write the four methods in the correct positions according to their risks for the exporter. Least secure Payment method: 1. open account. t 2. 3. Most secure 4. Understanding details Mark these statements T (true) or F (false) according to the information in the text. Find the part of the text that gives the correct information. 4950 Open Account 1. The importer pays for the goods after receiving the documents. 2. There is no contract involved. 3. The exporter must be able to trust the buyer. Documentary Credit 4. If a letter of credit is issued, the importer’s bank agrees to pay for the goods without conditions. 5. Ifa letter of credit is confirmed, the exporter’s bank takes responsibility for payment. Bills for Collection 6. Commercial documents and the document of title are always enclosed with a bill of exchange. 7, Importers may not accept the bill of exchange until the goods arrive. 8. Exporters can keep control of goods by sending bills of lading through the banking system. 9. Exporters reduce risk if documents are released against acceptance of the bill rather than payment. Advance Payment 10. This means that the importer has to pay before any goods are dispatched. Word search Find a word or phrase in the text that has a similar meaning. 1. promise or guarantee given to or by a bank 2. load of goods sent to a customer G... 3. person or company that acts as a middleman in a transaction 4. date when a bill of exchange is due for paymentReading 2: How a letter of credit works 1. Read about the first four steps in a transaction involving a letter of credit, and number the steps 1 to 4, using the diagram below to help you. a. The advising bank authenticates the letter of credit and sends the beneficiary (the seller) the details. The seller examines the details of the letter of credit to make sure that he or she can meet all the conditions. If necessary, he or she contacts the buyer and asks for amendments to be made. b. The applicant (the buyer) completes a contract with the seller. c. The issuing bank (the buyer’s bank) approves the application and sends the letter of credit details to the seller’s bank (the advising bank). d. The buyer fills in a letter of credit application form and sends it to his or her bank for approval. eat * a Advice of @ /* Seller Buyer \ @ Letter of letter of credit credit application Advising/ Confirming bank we Issuing bank 2. Now read about the next six steps, and number them 5 to 10 using the diagram below. e. If the documents are in order, the advising bank sends them to the issuing bank for payment or acceptance. If the details are not correct, the advising bank tells the seller and waits for corrected documents or further instructions. £. The advising/confirming bank pays the seller and notifies him or her that the payment has been made. g. The issuing bank advises the advising (or confirming) bank that the payment has been made. h. The issuing bank (the buyer’s bank) examines the documents from the advising bank. If they are in order, the bank releases the documents to the buyer, pays the money promised or agrees to pay it in the future, and 51advises the buyer about the payment. (If the details are not correct, the issuing bank contacts the buyer for authorization to pay or accept the documents.) The buyer collects the goods. i, The seller presents the documents to his or her bankers (the advising bank). The advising bank examines these documents against the details of the letter of credit and the International Chamber of Commerce rules. k. When the seller (beneficiary) is satisfied with the conditions of the letter of credit, he or she ships the “Gs al = dal a Buyer y a] Release documents b) Pay immediately orpromise to pay at maturity Advise acceptance / payment @ | eit ng La 8 Advise acceptance / pay Exercise 1: Information search Match the risks (a-g) with the payment methods. tssuing bank 1. Open account a) Exporters must comply with the conditions of 2. Documentary credit the credit documents. 3. Bills for collection _b) Importers may delay payment. 4, Advance payment ¢) Importers may not pay at all. d) It takes a long time to process payment in some countries. e) Importers may not accept the bill of exchange. f) Bank charges may be high. g) Exporters must take care to present the correct 52.Write your answer here: 1. 2. 3. 4, Exercise 2: Complete the sentence Use an appropriate form of the words in the box to complete the sentences which describe the procedure for documentary collection. draw accept dishonour release remit forward dispatch _present . The first step the exporter takes is to ask his bank to . a bill of exchange on the overseas buyer. 2. The exporter’s bank . the bill of exchange, together with the commercial documents, to the importer’s bank. 3. At the same time, the exporter... .++. the goods. > The exportor must take care to ...., the bank. ++..the correct documents to the 5. When the importer......the bill of exchange, the bank will. documents of title to the goods. 6. If the importer. the bill, the exporter may have to find an alternative buyer or ship the goods back again. 7. In some parts of the world, banks may be slow to .... .- payment to the exporter’s bank. 1, The above reading describes the risks of each payment method from the exporter’s point of view. What are the risks for the importer? Which methods will be secure and why? 532. Imagine you are a banker talking to one of your customers who has never exported before. Explain how documentary credit works. 3. Prepare a list of recommendations for either exporters or importers. Review If you work in a bank’s letter of credit section and each of the following statements is made by a customer, explain the type of letter of credit you would recommend. Write down the words or clause you would insert in a letter of credit to make your suggestion effective. 1. “My purchasing manager is going to Japan to buy dinner sets from a number of manufactures, each of whom will want a letter of credit. I want him to take one letter of credit with him for this. 2. Our company’s overseas purchasing manager live in Brazil. | need to get money to him so he can purchase coffee from inland growers and then ship it on a letter of credit. 543. I have a contract to purchase sugar from Haiti over the next six months. I know my credit line is only for $50,000, but how can I get a letter of credit for the entire shipment of $200,000? 4, The buyer of my motorcycles needs six months before he can pay me. I can’t wait that long for my money, but I want to make this sale. 5. I just received this letter of credit from Jamaica. Is the bank good? How do I know I’ll get paid? 6. I am the agent for New York’s largest department store. It wants to buy furs from Russia, but it doesn’t want the Russian to know it is buying, so I will make the purchase in my name. The Russians want a letter of credit. The complete order is $1,000,000. What do I do? 55