Methods

Of
Payment

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 Introduction:
Several types of receiving payments for products sold abroad
are:
• Cash in advance

• Letter of credit

• Documentary collection of draft

• Open account

• Other payment mechanisms like consignment sales

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 Cash in advance:
• Payments are received in advance

• Safest mode from the point of view of exporter

• Exporter needs to have strong trading position

• Importer has to rely on the integrity of exporter.

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 Evidence:
• Certificate of foreign inward remittance.(CFIR)

• Certificate issued by exporters bank.

• Issued once amount is credited to exporters account.

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 Open account:
• Satisfactory only when the buyer is well established.

• The customer is simply billed.

• The payment is made under agreed terms at a future date.

• Some of the largest firms abroad make purchases only on

open account.

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 Risks involved:
• Absence of documents

• Exporter may have to pursue collection abroad

• Drafts and other evidence of indebtness are unavailable.

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 Documentary collection:
• Buyers may be concerned that goods may not be received
for payments sent in advance.

• To protect interest of both documentary letters of credit

are issued.

• Documents are required to be presented before payments

are made.

• Involves collection of sum of money from importer against

delivery of certain documents.

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 Parties involved:
• The exporter

• The collecting bank

• The remitting bank

• The importer

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 Forms of Documentary collection:

• Documents against payment { D/P}

• Documents against acceptance {D/A}

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 Collection under D/P:

●
Sends the shipment; obtaining shipping doc. from C&F
●
Submits all doc. to his bank

Exporter

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 Collection under D/A:

●
Sends the shipment; obtaining shipping doc. from C&F
●
Submits all doc. to his bank

Exporter

A. Acceptance of Usance Draft

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●
Exporter waits for the expiry of usance period & submit acceptance to
his bank for collection of payment

Exporter

B. Payment against acceptance

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 Precautions to be taken by the exporter:

• Obtain a credit report of the importer through the bank.

• Consign he goods to the importer’s bank instead of importer.

• Obtain credit risk insurance policy.

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 Letters of credit:
• The D/P or D/A are still uncertain.

• both the parties lack degree of confidence.

• Letter of credit provides assurance to the parties.

• The assurance in the form of undertaking is provided by the

importer’s bank.

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 Working:
• The letter adds a bank’s promise of paying the exporter.

• The foreign buyer applies for issuance of letter to exporter

thus is called the applicant

• The exporter is called the beneficiary

• The payment under letter of credit is based on documents

and not terms of sales.

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 Role of local bank:

• Letter of credit issued by foreign bank is confirmed by a local

bank.

• It ensures the exporter from risk of foreign bank.

• It also protect from the economic or political risk of the

country.

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 A typical letter of Credit transaction:

• After exporter & customer agree on terms of sale, the customer

arranges for letter of credit.
• Buyer’s bank prepare a letter of credit.

• Then forwards it to sellers bank.

• The exporter may request a local bank to confirm it.

• The local bank prepares a letter of confirmation.

• The exporter has to make sure with freight forwarder that shipping
date is met.
• When goods are loaded, the forwarder completes necessary doc.

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• The exporter presents local bank documents indicating full
compliance.

• Bank reviews doc. , &airmail them to buyers bank.

• The buyer gets the doc. that are needed to claim the goods..

• A draft, with letter of credit, is paid by exporter's bank at the specified

time.

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 Types of draft:

Drafts :
• Also called a bill of exchange.
• Its like checks used in domestic commerce.

Sight Drafts:
• Used by seller to retain the title of shipment until it is paid for.
• Buyer need to present the original bill to obtain the goods

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 Risk involved with Sight drafts:

• The buyer’s ability to pay might change between the time the
goods are shipped & time drafts are cashed.

• The policies of the importing country may change.

• If buyer don’t claim the goods, then returning or disposing

them becomes a problem for exporter.

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Time drafts & date drafts:

• Time drafts states that the payment is due after a certain

time after buyer accepts draft & receive goods.

• A date draft specifies a date on which the payment has to

be made.

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 Other payment mechanism:
Consignment sales:

• Procedure similar to local market.

• Material is shipped to foreign distributor.

• The exporter retains the title to the goods until they are
sold by distributor.

• Once goods are sold, payment is sent to the exporter.

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Thank you

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