International Payment

Presentation Outline
Cash Advance Letters of Credit (L/C) Documentary Collections Open Account

Trade Statistics
According to U.S. Department of Commerce (October, 1999), U.S. exports to Taiwan amounted to U.S.$ 10.466 billion from January to July of this year, while during the same period only U.S.$ 7.466 billion worth of American products were sold to mainland China.
The United States exported 1.4 times more goods to Taiwan than to the mainland. Mainland China is, however, 265 times the geographical size of Taiwan with a population 58 times larger.

Cash in Advance
Buyer pays before shipment Used in new relationship Transactions are small and buyer has no choice Maximum security to sellers No guarantee that goods are shipped

Draft: A bill of exchange-- an unconditional promise drawn by party (exporter), instructing the importer (buyer) to pay the face amount of the draft upon presentation

Letters of Credit
What is L/C?
A document issued by a bank stating its commitment to pay someone (seller or exporter) a stated amount provided the seller or exporter meets specific terms and conditions

also called the documentary letters of credit Most common payment method in international trade

International Methods of Payment: Advantages and Disadvantages

Method cash in advance Sight draft Risk L M/L Chief Advantage No credit extension required Chief Disadvantage Can limit sales potential, disturb some potential customers. If customer does not or cannot accept goods, goods remain at port of entry and no payment is due If revocable, terms can change during contract work.

Letters of credit Irrevocable Revocable Time draft

M M/H M/H

Consignment sales

M/H

Open account

Retains control and title; ensures payment before goods are delivered Banks accept responsibility pay; payment upon presentation of paper; costs go to buyer Lowers customer resistance Same as sight dragt, plus goods by allowing extanded payment delivered before payment is due after receipt of goods or received Facilitates delevery; lowers Capital tied up until sales; must customer resistance establish distributor's creditworthiness need political rish insurance in some countries; increased risk from currency controls Simplified procefure; no High risk; seller must finance customer resistance production; increased risk from currency controls

Methods of Payment
Risk Protection
Min

Buyer

Max

Confirmed Unconfirmed Sight Draft Max Time Draft Open Account

Seller
Cash in Advance Letter of Credit Documentary Collection

Min

Steps in Obtaining L/C

Buyer and seller agree on the terms of a sale, seller requests buyer to arrange for his bank to open a L/C The buyers bank (issuing bank) prepares a L/C The buyers bank then sends the L/C to its corresponding bank (buyers bank), which is called the advising bank The advising bank forwards the L/C to the buyer for approval-- terms can be amended

After final terms (agreed), goods shipped

 L/C (continued) Shipping documents Bill of Lading:

title documentcontract between carrier and shipper shippers receipt of the goods document assigns control of goods

Commerce Invoice:
description of the product, price and others

 Packing list:
outlines things to be filled

Certificate of Insurance Certificate of Origin

Documentary Credit Procedure

(1) Contract of Sale (5) Delivery of Goods

Buyer (Importer)

Seller (Exporter)

(2) Request to Provide Credit

(8) Documents & Claim for Payment

(6) Documents Presented

(4) Letter of Credit Delivered

Importers Bank (Issuing Bank)

(7) Documents Presented to issuing Bank (9) Payment (3) Credit Sent to Correspondent

Correspondent Bank

Irrevocable
Documentary (Commercial) Letter of Credit (L/C) Advised or Confirmed

Documentary Letter of Credit

Conditional, legal obligation of bank to pay beneficiary Bank places its internationally accepted credit rating before customers Eliminates commercial risk

Principal Parties to Letter of Credit

Applicant (importer/buyer/account party) Beneficiary (exporter/seller) Issuing Bank (guarantor) Correspondent Bank

Use a Letter of Credit to Seller when:

Credit standing of buyers is uncertain Your ability to absorb risk is low Merchandise is custom-made or high value Economic, political conditions unstable Use does not harm you competitive stand

To the seller, having a Letter of Credit means:

Issuing bank eliminates commercial risk of buyer Confirmation eliminates economic, political, foreign bank risk Streamlines pre-export financing

To the buyer, having a Letter of Credit means:

Payment made upon full compliance of L/C term Possible import/export financing (bankers acceptance) Buyer must tie up credit availability (potential loan)

The life of a Typical Bankers Acceptance

Mr. Jones (Importer)
9. Payment - Face Value of B/A

1. Purchase Order 5. Shipment of Cars

Mr. Susuki (Exporter)

9. Payment-Discounted Value of B/A

Prior to B/A Creation At and just after B/A Creation At maturity date of B/A

3. L/C 7. Shipping documents & Time Draft American Bank Draft Accepted (B/A Created) 8. Payment - Discounted Value of B/A

Japan Bank

15. B/A Presented at Maturity 16. Payment - Face Value of B/A Money Marker 13. Payment-Discounted Value of B/A Investor 12. B/A

Where We Go Wrong:
L/C expired Late shipment Documents discrepancy
Amount differs with invoice Amount in excess of L/C Signatures missing Drawn on wrong party

Where We Go Wrong Commercial Invoices

Good description differs from L/C Extension of cost wrong Partial shipment not authorized Term of shipment missing

Where We Go Wrong Insurance Certificates

Required risks not covered Amount of coverage not enough Currency not consistent with L/C Effective date later than bills of lading

Exporter Trouble Shooting

Can you meet documentary requirements
Can you meet shipping/expire/dates? Is description of goods accurate? Are names and addresses correct?

Exporter Trouble-Shooting
Is credit irrevocable? Is credit confirmed? Is credit amount correct? Is credit tenor correct? Is L/C negotiable?

A Letter of Credit Does Not:

Replace a contract
Substitute for buyers confidence in seller and vice versa Constitute a guarantee of performance Assure payment if an condition not meet

Advantages to both parties:

Flexible document
Governed by internationally accepted set of rules

The Uniform Customs and Practice for Documentary Credits (The UCP)

Problems of L/C
Shipping schedule is not met stipulations concerning freight cost are unacceptable price is insufficient due to FX rate changes unexpected quantity of product description of product insufficient or too detailed documents are impossible to obtain specified in L/C

Documentary Collections (DC)

Three Types of DC Documents against Payment (D/P) Documents against Acceptance (D/A) Collection with Acceptance (Acceptance D/P)

 Documents against Payment (D/P)

Buyer may only receives the title and other documents after paying for the goods

Documents against Acceptance (D/A)

the buyer may receive the title and other documents after signing a time draft promising to pay at a later date.

Acceptance Documents against Payment (Acceptance D/P)

the buyer signs a time draft for payment at a later date. Goods remain in escrow until payment is made

Why DC?
Easier to use and lower bank fee collection procedure entails risk Conditions to use DC
No doubt on buyers integrity buyers country is stable and safe No foreign exchange control goods are marketable (exporter resell goods)

DC Procedure
Exporter ships the goods exporter forwards the documents to seller bank (remitting bank),which in turns gives the document to the buyers bank (collecting bank) Collecting bank informs the importer the conditions of the document or contract

Export Incentive Programs

Export-Import Bank of the U.S. (Exim-Bank)
set up in 1934 to facilitate finance and export of American goods and services and maintain American companies in oversea market offers programs like guarantees, bank insurance and export credit insurance

Foreign Export Credit Insurance

provide insurance to exporters (nonpayment and preshippment risk

Small Business Administration (SBA)

provide business loans and financing for small companies

Export Incentive Programs

Commodity Credit Corporation (CCC)
provide assistance in production/marketing of US agricultural products overseas

Overseas Private Investment Corporation(OPIC)

formed in 1971 insuring direct US investments in foreign countries provide medium and long-term financing

Private Export Funding Corporation (PEFCO)

consortium of commercial banks and industrial companies provides medium to long-term financing to foreign buyers

United States Export Assistance Center (USEAC)