Chapter 2

1. Compare modes of payment in international trade:

 Payment on open account without security: sellers give buyers a loan
without charging any interest and will have an account to keep track of
all the deals, and after a few months, they will sum the whole amount
and send an invoice to the buyer
 Payment on open account secured by export credit insurance: sellers allow
buyers to purchase on credit and the transaction is secured by export credit
insurance, which means that if the buyers fail to make the payment, the
insurance company will compensate the sellers;
 Payment on open account secured by payment guarantee: sellers allow
buyers to purchase on credit and the transaction is secured by a payment
guarantee issued by a third party (such as a bank). If the buyers fail to make
the payment, the guaranteeing institution will fulfill the payment
obligation;
 Payment by letter of credit: the buyer's bank issues a letter of credit to the
seller, guaranteeing that the payment will be made if the agreed-upon
conditions are met.
Payment on Payment on Payment on Payment by
an open open account an open letter of
account secured by account credit
without export credit secured by a
security insurance payment
guarantee
Payment on Payment Payment Payment Payment on
delivery or against against against delivery
against invoice invoice invoice
invoice
Risk The buyers Risk for the Risk for the Risk for both
bear all the sellers is sellers is parties is
risks with no mitigated mitigated mitigated
guarantee through through the because
insurance payment payment is
coverage gurantee only made
when sellers
fulfill all
their
obligations
under the
L/C
Third-party no Insurance Financial Banks
company institutions
 (banks)
Fee of third- no Paid by the Paid by the Depends on
party security sellers buyers the situation

2. Procedures of payment by Letter of credit.

Step 1: The exporter and importer sign the contract
Step 2: The importer asks its bank (issuing bank) to issue and apply an L/C
Step 3: The issuing bank sends the Letter of Credit to the exporter’s bank
(advising bank)
Step 4: The advising bank advises L/C to the exporter
Step 5: When all terms in the L/C are agreed upon, the exporter ships the goods to
the importer.
Step 6: The exporter submits all necessary documents to the advising bank
Step 7: The advising bank sends the docs received from the exporter to the issuing
bank
Step 8: If all the documents are appropriate, the issuing bank makes payment to
the advising bank
Step 9: The advising bank makes payment to the exporter
Step 10: The importer makes payment to the issuing bank
Step 11: The issuing bank releases docs to the importer

3. Export credit insurance vs. Payment guarantee.

Export credit insurance vs Bank Guarantee?

Export credit insurance Bank Guarantee

Similarity both need third party in terms of payment for exporter

Differences

Third-party Insurance firm Bank

Who pays fee? Exporters Buyers

(fee here called premium)

4. Most commonly used guarantees in business:

● Payment guarantee (to cope with the risk of non-payment) - unconditional
+ The major risk for exporters is not being paid.
+ A payment guarantee simply commits the bank to pay if the buyer
defaults.
+ The payment guarantee is usually for 100% of the contract price. (vì
với doanh nghiệp tư thì khó tìm đc bên cung ứng khác và hàng đã
giao r nhưng k thanh toán đc nên vẫn p đền bù 100%)
 ● Tender guarantee/Bid bond-bảo lãnh thực hiện thầu- unconditional (to
cope with the risk of revocation-withdraw the deal)
+ Procurement contracts, especially at the government level, are put
up for tender or bid.
+ An exporter may well bid on a contract to supply goods or
materials to a government agency/department.
+ This department asks for a tender guarantee. This guards the
department against the risk of a project falling behind because a
tender is withdrawn.
+ A normal figure for a tender guarantee is between 1.5% and 5%
of the contract price. (% thấp vì the loss/damage to the
government is small, nếu supplier ở đây ko đáp ứng đc thì sẽ có
supplier khác)
● Performance guarantee - bảo lãnh thực hiện hợp đồng - unconditional
(to cope with the risk of non-performance)
+ This guarantee is typically used in case the supplier offers both
goods and services.
+ It simply says that if the supplier works badly or not at all, the
guarantor will pay, within stated limits, the costs of his failure to
perform.
+ A normal figure for a performance guarantee is between 5% and
10% of the contract price.
● Prepayment guarantee -bảo lãnh tiền trả trước - unconditional (to cope
with the risk of losing prepayment)
When shall manufacturers ask for an advance payment?
+ The prepayment guarantee promises the buyer that the bank will
return advance payments if the exporter fails to deliver the goods.
+ The guarantee is normally for 100% of the repayment decreasing
as deliveries are made

5. What does it mean by Conditional Guarantee?

A conditional guarantee contains serious, objective conditions that must be met
before payment before payment by the bank is possible.
6. 2 principles that make payment by L/C watertight.
- Autonomy (mang tính tự động): L/C is an agreement by a bank to pay money
against documents. It is a separate agreement from the sales contract and is
unconnected with it.
- Strict compliance: the bank will pay only if the shipping documents are exactly
in line with the buyer’s instructions stated in the terms of the L/C.

7. Revocable L/C vs. Irrevocable L/C.

- Revocable L/C: can be canceled any time by the buyer or by the issuing bank.
- An irrevocable L/C cannot be cancelled without agreement by the buyer and
the issuing bank and the exporter. Once it has been issued, it shall be binding
on the issuing bank to pay the exporter for the goods as long as the exporter
submits the correct shipping documents as stated in the L/C
8. Common discrepancies reported by banks relating to problems with L/C, with Bill
of Lading; with Insurance; and with inconsistencies among these documents.
- Problems with the Letter of Credit
+ Documents required by the credit are missing.
+ Documents required to be signed are not signed.
+ The credit amount is exceeded.
+ The credit has expired.
+ Documents are not presented within the required time.
+ Shipment was short.
+ Shipment was late.
- Problems with the Bill of Lading
+ The bill of lading is "unclean"-it has comments on it relating to damage to
or other deficiencies in the goods.
+ A marine bill of lading is required, but the bill does not state that the
goods were "shipped on board" a named vessel.
+ The bill of lading shows shipment between ports other than those
specified in the credit
+ The bill of lading shows that the goods were shipped on deck. "This is
normally forbidden unless the credit expressly allows it.
+ The bill of lading offers no evidence that freight was paid by the exporter
fir this was required).
+ There is no endorsement (if endorsement is necessary).
- Problems with Insurance
+ The insurance document is not of the type specified in the credit (e.g., a
certificate of insurance is produced while the credit calls for a policy).
+ The insurance risks are not those specified in the credit.
+ Insurance cover is expressed in a currency other than that of the credit.
This is forbidden unless the credit expressly allows it.
+ The sum insured is below the figure required.
+ Insurance cover does not begin on or before the date of the runspot
document.
- Inconsistencies among the Documents
+ Description of the goods on the invoice and in the credit are different.
+ Weights differ between two documents.
+ Marks and numbers differ between the two documents.
9. Confirmed L/C vs. unconfirmed L/C.
- A confirmed letter of credit is a letter of credit with a second guarantee obtained
by a borrower in addition to the first letter of credit. The second guarantee is
issued by a confirming bank in the exporter’s country. The confirming bank has
an absolute obligation to pay the exporter according to the terms of credit.
A confirmed letter of credit is typically used when the issuing bank of the first
letter of credit may have questionable creditworthiness and the seller seeks to get
a second guarantee to assure payment.
- If the first letter of credit is not backed by a second guarantee, then it may be
considered unconfirmed.

10. How are they different?

 Settlement by sight payment: the exporter presents the necessary,
documents to the paying bank (normally a confirming bank); the bank
checks the documents. If they are in order, the bank pays the full face value
of the letter of credit. This is usually what the exporter wants.
 Settlement by deferred payment:
+ The letter of credit is not payable until a number of days
(180 days perhaps) after delivery. Payment is safe, but it
is delayed.
+ The letter of credit cannot be paid, but it has an
obvious value; if the exporter needs ready money, he can
realize some part of this value - probably most of it. The
exact figure he can discuss with any bank. On the face of
it, this arrangement is less advantageous for the exponer
than settlement by payment, but circumstances may
make such a deal necessary.
 Settlement by acceptance:
So far the bank has paid cash to the exporter against the
documents. Another approach is to use a bill of
exchange. A bill of exchange is like a check (cheque); it
allows the beneficiary (the exporter) to make a draft for a
given sum of money on the buyer. In international trade,
this bill of exchange is usually a time draft that can be
collected only after a certain date. That is obviously a
danger for the exporter. Accordingly, the accepting bank
will the bill of exchange and agree to pay it at full face,
value when it falls clue. A bill of exchange. that is
 accepted can be "negotiated," i.e., sold at a discount to
any bank if the exporter needs ready money.
 Settlement by negotiation.
The bank with whom the exporter deals is called the
negotiating bank. In settlement by negotiation, a bill of
exchange again allows the exporter to make a draft on
the buyer, but this bill must be negotiated—the advising
(or other) bank has no authority to pay it at its full face
value. This kind of settlement is the least satisfactory for
the exporter, and in practice, it is a rarity.
11. Some special problems associated with transport documents. (p.101, 102)
- Shipment by sea:
'On board' or 'on deck - sàn tàu'?
If the L/C does not allow the goods to be shipped on deck, the bank will
reject the shipping document.
- Shipment by air:
+ The air waybill: 03 originals and 09 copies. Only the 2nd original goes to
the consignee (buyer). If L/C requires a full set of original air waybills,
this is a mistake. The exporter never provides the complete set.
+ A correctly completed waybill cannot show the date of the flight (another
incorrect requirement) - vì bay phụ thuộc vào nhiều yếu tố ko chắc chắn
đc ngày bay nên hay để trống
- Shipment by rail: (bản gốc k đưa cho ng xuất khẩu)
The original rail consignment note does not come into possession of the
exporter so an L/C demanding the original shall cause delay in payment.

12. Partial shipment vs. Shipment in installments

Partial Shipment - giao một phần (1) vs. Shipment in installments - giao hàng
từng chặng (2)
(1) = Incomplete shipment with some part of the goods to follow later.
(2) = An agreed and scheduled shipment has been set up.