Methods of Payment

 Exporter sends the product to an importer

on a deferred payment basis; that is, the
importer does not pay for the merchandise
until it is sold to a third party.

 Title to the merchandise passes to the

importer only when payment is made to the
exporter
 Used in cases involving an increasing

demand for a product or to test market

product
 Consignment Sales
The problem with this method includes:
Delays in payment
Risk of nonpayment
Cost of returning merchandise
Limited sales effort by importers
 Consignment Sales (cont.)
 Verify credit worthiness of importers
 Use credit agencies for information
 U.S. banks, government agencies also

provide credit info on overseas customers

 Credit insurance
 Open Account
Exporter ships merchandise to overseas
customer on credit
Payment is to be made within an agreed

time after receipt of merchandise

Risk of delays or even default in

payment.
 Documentary Collection
This is a documentary draft accompanied
by shipping documents
International rules governing

documentary collections:
- Uniform Rules for Collections 1995

(International Chamber of Commerce

Publication No. 522)
Documentary Collection Diagram
Major steps
1
Seller Buyer
2 5

7 4
3

Selling Bank Collecting Bank

6
 Documentary Draft
 Documents against payment: A sight draft is
presented with other documents specified by the
buyer or the buyer’s country and the collecting bank
will provide these documents to the buyer upon
payment.

 Documents against acceptance: The exporter allows

the overseas customer a certain period of time to
effect payment for the shipment.
 Direct collection: Exporters can bypass the remitting
bank and send documents directly to the foreign
collecting bank for payment or acceptance.

 Liability and responsibility of banks: Banks act as

agents for collection and assume no responsibility for
the consequences arising out of delay or for loss in
transit of any messages, letters or documents.
 Clean Collections
This is a documentary draft presented to
buyer for payment or acceptance without
being accompanied by shipping
documents
 Documentary Letter
of Credit (L/C)
A document in which a bank or other
financial institution assumes liability for
payment of the purchase price to exporter
on behalf of overseas customer
Documentary Letter of Credit Diagram
CARRIER

5 10

U.S. seller in New 1 Canadian buyer in

York Montreal

2 9 11
4 6

3
Advising/confirming bank in 7 Issuing Bank in
New York 8
Montreal
 Parties to the L/C Contract
 Sales contract: Exporter (beneficiary)
and importer (account party)
 Credit reimbursement contract: Importer
and issuing bank
 L/C contract: Opening bank and
beneficiary
 Confirmation agreement: Confirming
bank and beneficiary
 International Rules on L/C
The Uniform Customs Practices for
Documentary Credits (UCP), 1993
revision, International Chamber of
Commerce Publication No. 500

 Latest Revision was in 2007. UCP 600

has made certain changes over UCP 500.
 Time to examine documents

 Discrepant documents

 Honoring deferred payments

 Strict rules for refusing payments

 Banker’s (Trade) Acceptance
Ifa draft is drawn and accepted by a
bank, it is called banker’s acceptance

Ifa draft is accepted by nonbank entities,

such as importers, it is trade acceptance
 Role of Banks in L/C
 Banks should act equitably and in good faith:
Banks should honor the L/C if the documents
presented comply with the terms of the credit. For
example, banks cannot dishonor the L/C based on
the knowledge or reasonable belief that the goods
do not conform to the underlying contract of sale or
that it would not obtain reimbursement from its
insolvent customer. Banks can dishonor a L/C in
cases of fraud or forgery.
 Independent principle: Each of the four contracts
in a letter-of-credit transaction is entirely
independent. It is irrelevant to the bank whether the
seller/buyer has fully carried out its part of the
contract with the buyer/seller. It is subject to the
fraud exception.
 Rule of strict compliance: When conforming
documents are presented, the advising bank must
pay, the issuing bank must reimburse, and the buyer
is obliged to pay the issuing bank.
 Discrepancies
 Accidental discrepancies: These are discrepancies
that can easily be corrected by the exporter
(beneficiary) or the issuing bank. Such discrepancies
include typographical errors, omission to state the
L/C number, errors in arithmetic, and improper
endorsement or signature on the draft.
 Minor discrepancies: These are minor errors in
documents that contain the essential particulars
required in the L/C and can be corrected by obtaining
a written waiver from the buyer. Such errors include
failure to legalize documents, nonpresentation of all
documents required under the L/C, and discrepancy
between the wording on the invoice and the L/C.
 Major discrepancies: These are discrepancies that
fundamentally affect the essential nature of the L/C.
Certain discrepancies cannot be corrected under any
circumstances: presentation of documents after the
expiry date of the L/C, shipment of merchandise later
than the specified date under the L/C, or expiration of
the L/C. However, other major discrepancies can be
corrected by an amendment of the L/C. Amendments
require the approval of the issuing bank, the
confirming bank (in the case of a confirmed L/C), and
the exporter.
 Cash in Advance
A method of payment requiring the buyer
to pay before shipment is effected.
 Innovative online payment and financing
platforms are beginning to revolutionize the
way international trade is conducted.
Business e-commerce infrastructures include
Tradecard, Bolero, Tradebeam

 They have several advantages: Reduced

paperwork & enhanced visibility, cost savings
and value added services.
Common features
 Fraud by seller: Fraudulent seller ships

worthless goods or does not ship any

merchandise.
 Fraud by buyer: Fraudulent buyer forges

original documents for payment, fraudulent

buyer receives merchandise from carrier on
the strength of letter of indemnity
 Fraud by buyer, seller and other parties:
Buyer and seller conspire to defraud paying bank,
Seller and carrier falsify the actual order and
condition of the goods
 Measures by sellers: Verify the background
and credibility of your partner, Stipulate the
required documents, Check the validity of the
letter of credit as well as the credibility of the
issuing bank.
 Measures by buyers: Verify the background
and credibility of your partner, Choose FOB
trade term rather the CIF in a sales contract,
Use independent inspectors to verify the
quality and quantity of goods, use time drafts
 Measures by buyers cont’d
 Verify the authenticity of the documents,

Sellers can provide performance guarantee to

buyer to carry out its obligations.

 Measures by Banks: Banks can undertake an

investigation into the validity, genuineness or
accuracy of the documents before payment,
There are five primary methods of payment in
international trade that range from most to least
secure: cash in advance, letter of credit,
documentary collection or draft, open account
and consignment. Of course, the most secure
method for the exporter is the least secure for
the importer and vice versa. The key is to strike
the right balance for both sides.
https://www.youtube.com/watch?v=g71-
qrmmWXU
A letter of credit, also referred to as a
documentary credit, is a contractual agreement
whereby the issuing bank (importer's bank),
acting on behalf of the customer (the importer
or buyer), promises to make payment to the
beneficiary or exporter against the receipt of
complying stipulated documents. The issuing
bank will typically use intermediary banks to
facilitate the transaction and make payment to
the exporter.
 Other Letters of Credit
 Irrevocable  Green-clausecredit
 Revocable  Deferred-Payment
 Confirmed credit
 Transferable  Standby

 Back-to-Back  Straight

 Red-clause credit  Negotiable