5. Methods Of Payment In International Trade, Export And Import Finance 692j13
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9/11/12
Click to edit Master subtitleManagement style International Business
Mrs. Charu Rastogi, Asst. Prof.
Methods of Payment in International Trade/Export and Import Finance
The
World Bank's official goal is the reduction of poverty.
According
to the World Bank's Articles of Agreement (as amended effective 16 February 1989), all of its decisions must be guided by a commitment to promote foreign investment, international trade, and facilitate capital investment
The
World Bank comprises two institutions:
Mrs. Charu Rastogi, Asst. Prof.
The World Bank is an international financial institution that provides loans to developing countries for capital programs
9/11/12
World Bank
s
Receivable Financing
exporter that needs funds immediately may obtain a bank loan that is secured by an assignment of the receivable
(Cross-Border Factoring)
The
s receivable are sold to a third party (the factor), that then assumes all the responsibilities and exposure associated with collecting from the buyer.
Letters
of Credit (L/C)
These
are issued by a bank on behalf of the importer promising to pay the exporter upon presentation of the shipping documents.
Mrs. Charu Rastogi, Asst. Prof.
An
Factoring
9/11/12
Export and Import Finance Methods
Banker’s
Acceptance (BA)
This is a time draft that is drawn on and accepted by a bank (the importer’s bank). The accepting bank is obliged to pay the holder of the draft at maturity.
If the exporter does not want to wait for payment, it can request that the BA be sold in the money market. Trade financing is provided by the holder of the BA.
The bank accepting the drafts charges an all-in-rate (interest rate) that consists of the discount rate plus the acceptance commission.
In general, all-in-rates are lower than bank loan rates. They usually fall between the rates of short-term Treasury bills and commercial papers.
Capital Financing
Mrs. Charu Rastogi, Asst. Prof.
Working
9/11/12
Export and Import Finance Methods
Medium-Term
(Forfaiting)
Capital Goods Financing
importer issues a promissory note to the exporter to pay for its imported capital goods over a period that generally ranges from three to seven years.
The
exporter then sells the note, without recourse, to a bank (the forfaiting bank).
Countertrade
are foreign trade transactions in which the sale of goods to one country is linked to the purchase or exchange of goods from that same country.
Mrs. Charu Rastogi, Asst. Prof.
The
These
9/11/12
Export and Import Finance Methods
To
For
exporters, any sale is a gift until payment is received.
Therefore,
exporters want to receive payment as soon as possible, preferably as soon as an order is placed or before the goods are sent to the importer.
For
importers, any payment is a donation until the goods are received.
Mrs. Charu Rastogi, Asst. Prof.
succeed in today’s global marketplace and win sales against International trade presents a spectrum of risk, which causes uncertainty over the timing of payments between the exporter (seller) and importer (foreign buyer).
9/11/12
Methods of payment in international trade
Cash in Advance / Prepayments With
Wire
transfers and credit cards are the most commonly used cash-in-advance options available to exporters.
However,
requiring payment in advance is the least attractive option for the buyer, because it creates cash-flow problems. Foreign buyers are also concerned that the goods may not be sent if payment is made in advance.
Thus,
exporters who insist on this payment
Mrs. Charu Rastogi, Asst. Prof.
cash-in-advance payment , the exporter can avoid credit risk because payment is received before the ownership of the goods is transferred.
9/11/12
Methods of payment in international trade :
Letters of Credit Letters
An
LC is a commitment by a bank on behalf of the buyer that payment will be made to the exporter, provided that the and conditions stated in the LC have been met, as verified through the presentation of all required documents.
The
buyer pays his or her bank to render this service.
An
LC is useful when reliable credit information about a foreign buyer is difficult to
Mrs. Charu Rastogi, Asst. Prof.
of credit (LCs) are one of the most secure instruments available to international traders.
9/11/12
Methods of payment in international trade:
Documentary Collections/Drafts/Bills of Exchange) A
Funds
are received from the importer and remitted to the exporter through the banks involved in the collection in exchange for those documents.
D/Cs
involve using a draft that requires the importer to pay the face amount either at sight (document against payment) or on a
Mrs. Charu Rastogi, Asst. Prof.
documentary collection (D/C) is a transaction whereby the exporter entrusts the collection of a payment to the remitting bank (exporter’s bank), which sends documents to a collecting bank (importer’s bank), along with instructions for payment.
9/11/12
Methods of payment in international trade:
Open An
Obviously,
this option is the most advantageous option to the importer in of cash flow and cost, but it is consequently the highest risk option for an exporter.
Because
of intense competition in export markets, foreign buyers often press exporters for open since the extension of credit by the seller to the buyer is more common abroad. Therefore, exporters who are
Mrs. Charu Rastogi, Asst. Prof.
open transaction is a sale where the goods are shipped and delivered before payment is due, which is usually in 30 to 90 days.
9/11/12
Methods of payment in international trade:
9/11/12
Comparison
Mrs. Charu Rastogi, Asst. Prof.
9/11/12
Comparison Cash in Advance Before Shipment
When shipment is made
Goods After payment available to After payment buyers
Risk to exporter
None
Risk to importer
Assured shipment Relies on but relies on exporter to exporter to ship ship goods as goods as described ordered in the documents
Very little - None
DC/BoE On presentation of draft After payment
Open
Mrs. Charu Rastogi, Asst. Prof.
Time of Payment
Letter of Credit
As agreed upon Before payment
Disposal of unpaid goods
Relies on buyer to pay as agreed upon
Relies on exporter to ship goods as described in the documents
None
9/11/12
Letter of credit: Procedure
2. Request for Credit
5. Deliver Goods
8. Documents and claim for payments
Importer’s bank (Issuing Bank)
7. Present Documents 3. Send Credit
Seller (Exporter)
6. Present Documents
Mrs. Charu Rastogi, Asst. Prof.
Buyer (Importer)
1. Sale Contract
4. Deliver Letter of Credit
Exporter’s bank (Advising Bank)
Irrevocable and revocable letters of credit
A revocable letter of credit can be changed or cancelled by the bank that issued it at any time and for any reason.
An irrevocable letter of credit cannot be changed or cancelled unless everyone involved agrees. Irrevocable letters of credit provide more security than revocable ones.
Confirmed and unconfirmed/Advised letters of credit
When a buyer arranges a letter of credit they usually do so with their own bank, known as the issuing bank. The seller will usually want a bank in their country to check that the letter of credit is valid.
For extra security, the seller may require the letter of credit to be 'confirmed' by the bank that checks it. By confirming the letter of credit, the second bank agrees to guarantee payment even if the issuing bank fails to make it. So a confirmed letter of credit provides more security than an unconfirmed one.
In case of unconfirmed LC, the advising bank forwards an unconfirmed letter of credit directly to the exporter without adding its own undertaking to make payment or accept responsibility for
Mrs. Charu Rastogi, Asst. Prof.
9/11/12
Types of Letter of Credit
Transferable letters of credit
A transferable letter of credit can be ed from one 'beneficiary' (person receiving payment) to others. They're commonly used when intermediaries are involved in a transaction.
Stand-by LC
A standby letter of credit is like a guarantee that is used as where an alternative, less secure, method of payment has been agreed.
It is an assurance from a bank that a buyer is able to pay a seller. The seller doesn't expect to have to draw on the letter of credit to get paid.
Mrs. Charu Rastogi, Asst. Prof.
9/11/12
Types of Letter of Credit
Revolving LC
The revolving credit is used for regular shipments of the same commodity to the same importer. It can revolve in relation to time or value. If the credit is time revolving once utilised it is re-instated for further regular shipments until the credit is fully drawn. If the credit revolves in relation to value once utilised and paid the value can be reinstated for further drawings.
Revolving letters of credit are useful to avoid the need for repetitious arrangements for opening or amending letters of credit.
Back to Back LC
A back-to-back letter of credit can be used as an alternative to the transferable letter of credit. Rather than transferring the original letter of credit to the supplier, once the letter of credit is received by the exporter from the opening bank, that letter of credit is used as security to establish a second letter of credit drawn on the exporter in favour of his importer.
Many banks are reluctant to issue back-to-back letters of credit due to the level of risk to which they are exposed, whereas a transferable credit will not expose them to higher risk than under
Mrs. Charu Rastogi, Asst. Prof.
9/11/12
Types of Letter of Credit
Explain all the modes of payment used in international business. Discuss various types of L/Cs.
Write short notes on:
Balance of payment vs. balance of trade
Asian Development Bank
Balance of payment
Types of Letter of Credit
Explain the role played by ‘International Monetary Fund’, ‘Asian Development Bank’ and World Bank in promotion of International Trade
Explain the functions of International Monetary Fund.
What are various methods of payment in International Trade?
Discuss the role of World Bank in International Financial Management.
Mrs. Charu Rastogi, Asst. Prof.
9/11/12
Possible Questions
9/11/12 Mrs. Charu Rastogi, Asst. Prof.
Thank You
Click to edit Master subtitleManagement style International Business
Mrs. Charu Rastogi, Asst. Prof.
Methods of Payment in International Trade/Export and Import Finance
The
World Bank's official goal is the reduction of poverty.
According
to the World Bank's Articles of Agreement (as amended effective 16 February 1989), all of its decisions must be guided by a commitment to promote foreign investment, international trade, and facilitate capital investment
The
World Bank comprises two institutions:
Mrs. Charu Rastogi, Asst. Prof.
The World Bank is an international financial institution that provides loans to developing countries for capital programs
9/11/12
World Bank
s
Receivable Financing
exporter that needs funds immediately may obtain a bank loan that is secured by an assignment of the receivable
(Cross-Border Factoring)
The
s receivable are sold to a third party (the factor), that then assumes all the responsibilities and exposure associated with collecting from the buyer.
Letters
of Credit (L/C)
These
are issued by a bank on behalf of the importer promising to pay the exporter upon presentation of the shipping documents.
Mrs. Charu Rastogi, Asst. Prof.
An
Factoring
9/11/12
Export and Import Finance Methods
Banker’s
Acceptance (BA)
This is a time draft that is drawn on and accepted by a bank (the importer’s bank). The accepting bank is obliged to pay the holder of the draft at maturity.
If the exporter does not want to wait for payment, it can request that the BA be sold in the money market. Trade financing is provided by the holder of the BA.
The bank accepting the drafts charges an all-in-rate (interest rate) that consists of the discount rate plus the acceptance commission.
In general, all-in-rates are lower than bank loan rates. They usually fall between the rates of short-term Treasury bills and commercial papers.
Capital Financing
Mrs. Charu Rastogi, Asst. Prof.
Working
9/11/12
Export and Import Finance Methods
Medium-Term
(Forfaiting)
Capital Goods Financing
importer issues a promissory note to the exporter to pay for its imported capital goods over a period that generally ranges from three to seven years.
The
exporter then sells the note, without recourse, to a bank (the forfaiting bank).
Countertrade
are foreign trade transactions in which the sale of goods to one country is linked to the purchase or exchange of goods from that same country.
Mrs. Charu Rastogi, Asst. Prof.
The
These
9/11/12
Export and Import Finance Methods
To
For
exporters, any sale is a gift until payment is received.
Therefore,
exporters want to receive payment as soon as possible, preferably as soon as an order is placed or before the goods are sent to the importer.
For
importers, any payment is a donation until the goods are received.
Mrs. Charu Rastogi, Asst. Prof.
succeed in today’s global marketplace and win sales against International trade presents a spectrum of risk, which causes uncertainty over the timing of payments between the exporter (seller) and importer (foreign buyer).
9/11/12
Methods of payment in international trade
Cash in Advance / Prepayments With
Wire
transfers and credit cards are the most commonly used cash-in-advance options available to exporters.
However,
requiring payment in advance is the least attractive option for the buyer, because it creates cash-flow problems. Foreign buyers are also concerned that the goods may not be sent if payment is made in advance.
Thus,
exporters who insist on this payment
Mrs. Charu Rastogi, Asst. Prof.
cash-in-advance payment , the exporter can avoid credit risk because payment is received before the ownership of the goods is transferred.
9/11/12
Methods of payment in international trade :
Letters of Credit Letters
An
LC is a commitment by a bank on behalf of the buyer that payment will be made to the exporter, provided that the and conditions stated in the LC have been met, as verified through the presentation of all required documents.
The
buyer pays his or her bank to render this service.
An
LC is useful when reliable credit information about a foreign buyer is difficult to
Mrs. Charu Rastogi, Asst. Prof.
of credit (LCs) are one of the most secure instruments available to international traders.
9/11/12
Methods of payment in international trade:
Documentary Collections/Drafts/Bills of Exchange) A
Funds
are received from the importer and remitted to the exporter through the banks involved in the collection in exchange for those documents.
D/Cs
involve using a draft that requires the importer to pay the face amount either at sight (document against payment) or on a
Mrs. Charu Rastogi, Asst. Prof.
documentary collection (D/C) is a transaction whereby the exporter entrusts the collection of a payment to the remitting bank (exporter’s bank), which sends documents to a collecting bank (importer’s bank), along with instructions for payment.
9/11/12
Methods of payment in international trade:
Open An
Obviously,
this option is the most advantageous option to the importer in of cash flow and cost, but it is consequently the highest risk option for an exporter.
Because
of intense competition in export markets, foreign buyers often press exporters for open since the extension of credit by the seller to the buyer is more common abroad. Therefore, exporters who are
Mrs. Charu Rastogi, Asst. Prof.
open transaction is a sale where the goods are shipped and delivered before payment is due, which is usually in 30 to 90 days.
9/11/12
Methods of payment in international trade:
9/11/12
Comparison
Mrs. Charu Rastogi, Asst. Prof.
9/11/12
Comparison Cash in Advance Before Shipment
When shipment is made
Goods After payment available to After payment buyers
Risk to exporter
None
Risk to importer
Assured shipment Relies on but relies on exporter to exporter to ship ship goods as goods as described ordered in the documents
Very little - None
DC/BoE On presentation of draft After payment
Open
Mrs. Charu Rastogi, Asst. Prof.
Time of Payment
Letter of Credit
As agreed upon Before payment
Disposal of unpaid goods
Relies on buyer to pay as agreed upon
Relies on exporter to ship goods as described in the documents
None
9/11/12
Letter of credit: Procedure
2. Request for Credit
5. Deliver Goods
8. Documents and claim for payments
Importer’s bank (Issuing Bank)
7. Present Documents 3. Send Credit
Seller (Exporter)
6. Present Documents
Mrs. Charu Rastogi, Asst. Prof.
Buyer (Importer)
1. Sale Contract
4. Deliver Letter of Credit
Exporter’s bank (Advising Bank)
Irrevocable and revocable letters of credit
A revocable letter of credit can be changed or cancelled by the bank that issued it at any time and for any reason.
An irrevocable letter of credit cannot be changed or cancelled unless everyone involved agrees. Irrevocable letters of credit provide more security than revocable ones.
Confirmed and unconfirmed/Advised letters of credit
When a buyer arranges a letter of credit they usually do so with their own bank, known as the issuing bank. The seller will usually want a bank in their country to check that the letter of credit is valid.
For extra security, the seller may require the letter of credit to be 'confirmed' by the bank that checks it. By confirming the letter of credit, the second bank agrees to guarantee payment even if the issuing bank fails to make it. So a confirmed letter of credit provides more security than an unconfirmed one.
In case of unconfirmed LC, the advising bank forwards an unconfirmed letter of credit directly to the exporter without adding its own undertaking to make payment or accept responsibility for
Mrs. Charu Rastogi, Asst. Prof.
9/11/12
Types of Letter of Credit
Transferable letters of credit
A transferable letter of credit can be ed from one 'beneficiary' (person receiving payment) to others. They're commonly used when intermediaries are involved in a transaction.
Stand-by LC
A standby letter of credit is like a guarantee that is used as where an alternative, less secure, method of payment has been agreed.
It is an assurance from a bank that a buyer is able to pay a seller. The seller doesn't expect to have to draw on the letter of credit to get paid.
Mrs. Charu Rastogi, Asst. Prof.
9/11/12
Types of Letter of Credit
Revolving LC
The revolving credit is used for regular shipments of the same commodity to the same importer. It can revolve in relation to time or value. If the credit is time revolving once utilised it is re-instated for further regular shipments until the credit is fully drawn. If the credit revolves in relation to value once utilised and paid the value can be reinstated for further drawings.
Revolving letters of credit are useful to avoid the need for repetitious arrangements for opening or amending letters of credit.
Back to Back LC
A back-to-back letter of credit can be used as an alternative to the transferable letter of credit. Rather than transferring the original letter of credit to the supplier, once the letter of credit is received by the exporter from the opening bank, that letter of credit is used as security to establish a second letter of credit drawn on the exporter in favour of his importer.
Many banks are reluctant to issue back-to-back letters of credit due to the level of risk to which they are exposed, whereas a transferable credit will not expose them to higher risk than under
Mrs. Charu Rastogi, Asst. Prof.
9/11/12
Types of Letter of Credit
Explain all the modes of payment used in international business. Discuss various types of L/Cs.
Write short notes on:
Balance of payment vs. balance of trade
Asian Development Bank
Balance of payment
Types of Letter of Credit
Explain the role played by ‘International Monetary Fund’, ‘Asian Development Bank’ and World Bank in promotion of International Trade
Explain the functions of International Monetary Fund.
What are various methods of payment in International Trade?
Discuss the role of World Bank in International Financial Management.
Mrs. Charu Rastogi, Asst. Prof.
9/11/12
Possible Questions
9/11/12 Mrs. Charu Rastogi, Asst. Prof.
Thank You
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