• Rapid expansion in Global trade has to be

supported by efficient , timely, payment

arrangements

• Alternately it is likely to create liquidity problems

with the exporting countries

• Exporters are at a risk of non payment

• Importers are at a risk of bad quality delivery or

untimely delivery
 Payment Methods
• Concerns of an importer ( he gets the goods as
promised, timely, in good condition)

• Concerns of an exporter ( he gets the payments

ASAP)

• Lack of personal contact

• No easy legal re- course as different regulatory

environments
 Payment Methods
 Least Risk----(risk to the exporter)--------------------------------------High Risk
 High cost-(cost to the Buyer)------------------------------------------least cost

 Cash In Advance
 confirmed irrevocable L/C
 Irrevocable L/C/
 Bank collection sight Draft( D/P)
 Bank collection time Draft (D/A)
 Consignment sales and Open Account
 Cash in Advance
 Cash in Advance ( getting the cash in full or a % before the actual
shipment by the exporter.
 Payment made thro, SWIFT ( Society for World Wide Interbank
Financial telecommunication.
 The Risk is completely on the importer

 Expected in good faith that the exporter will make the shipments

 Generally done for those countries where political stability is uncertain

or a past record
 Consignment sales/ Open Account
 Open Account
 Sends the goods beforehand on a deferred payment
basis
 Importer does not make payments until material is
sold to a third party
 Title is passed to the importer once payment is made
 Exporter puts full faith in the importer.
 No risk to the importer but high risk to exporter
 ( It is estimated that 35 to 50 % of the exports
between USA and UK are sold on open account or
consignment basis (Cheeseright,1994)
 Consignment sales/ Open Account
 Problems associated with this,
 Risk of non Payment
 Delays in payment
 Merchandise may be returned so cost associated with it
 Limited sales efforts by the importers

 When is it used?
 Rarely used in unrelated parties ( Goldsmith, 1989)
 Used when exporter wants to test market in a new country
 Method frequently used by multinationals to sell to their subsidiaries
 Check your buyers credit ratings before you go in for consignment sales or
open account
 FIG: Documentary Collection
1. Agreement on terms of sale and payment.
Seller.(India) Buyer(Paris)
Seller ships goods and prepares documents

5. Buyer
7, Remitting bank advices 4. Collecting bank accepts or
2. Seller presents seller of acceptance or presents documents to pays on
documents to remit payment buyer presentation of
remitting bank documents to
collecting bank

3. Remitting bank. forwards document to collecting bank.

Seller’s Buyer’s
6. Collecting bank advices remitting bank of acceptance
bank or bank or
remitting or remits payment collecting
bank bank
 Documents Against Payment
 The Buyer will not get the documents of title, B/L or thus
the possession of the goods, till he makes the payment.

 Widely used in International transactions , called D/P .

 Safer than D/A, but there is a potential risk to the exporter,

 Buyer may change his mind
 Policy of the government may change
 Sometimes the only choice left is ship the goods to home
country or divert it
 Documents Against Acceptance
 Documents of the Title of goods will be released by the
banker even by way of acceptance by the importer.

 D/A is on usance basis. (While negotiating if the condition

works like on DA basis on sight, the collection will become
DP.)

 Essentially D/A works on usance and DP works at sight

 Both in D/A or D/P , the bank is just a facilitator and no
proper verification process of the documents is done and
limited liability in case of non payment of the goods
 Documentary letter of Credit
 Documentary Letter of credit
 Most safe method of payment in International trade
 Definition: Bank or other financial institution assumes liability for
payment of the invoice value to the seller on behalf of the buyer
 Is a contractual agreement between the advising bank and the
beneficiary
 Uniform Customs and Practice for Documentary credit UCP 600 given
by International Chamber of Commerce (ICC, Paris) The guide given
by the International chamber of commerce.
 Payments based on documents and does not take into account of the
physical condition of the goods.
 Amendments in an L/C
FIG. DOCUMENTARY LETTER OF CREDIT

Carrier
5 10

U.S.seller in 1 Canadian buyer

New York in Montreal

4 6 2 9 11

3
Advising/confirming 7 Issuing bank
bank buyer in in Montreal
8
New York
 Letter of credit
 The essence of L/C is in its documentary character. Also called as the
Documentary Payment obligation
 Legally enforceable commitment
 Goods are represented by a bill of lading/ AWB an are used for
financing a transaction
 There are two principles associated with this type of credit,
 Autonomy of L/C also The independent Principle ( goods and
document two different things). Bank will go only by the documents
 Doctrine of Strict Compliance

 “There is no room for documents which are almost the same or which
will do just as well”. Lord Sumner in the judgement of Equitable trust
company of NY vs Dawson partners Ltd
 The Independent Principle
 It is not the banks duty to ascertain whether the goods
mentioned in the documents have been shipped or
whether they conform to the contract

 Only concern is with the presentation of Documents

 The principle is subject to fraud exception

 Rule of Strict compliance
 Linkage of Documents- The documents (B/L, draft,
invoice, insurance certificate are linked to the same
merchandise

 Description of Goods goods must be fully described in

the invoice. Documents in total must be the same
description in L/C and the B/L
Concept of Discrepancy of an L/C
 Most discrepancy occur if the exporter does not follow the
L/c conditions
 Accidental discrepancy- some minor typographical errors
only
 Minor discrepancy , discrepancy in wording on the invoice
and L/C – amendments may be required
 Major discrepancy – presentation of documents after the
expiry date of L/c, shipment date is another common
discrepancy. Amendments done and they require the
approval of issuing, confirming and the advising bank
 Advantage of an L/C
 Seller and buyer both are satisfied by their competing
demands
 Buyers avoid the need for advance or part pre- payment
 Scrutiny of the documents done by the bank , so its an
assurance to the exporter that he will get the money in due
course
 Sure way of getting the export proceeds through the
appropriate channel
 Buyer can put L/C conditions, in a way to safeguard his
interest
 Letter of Credit and its Types
 Revocable or ir-revocable L/C ( by default the L/C is a irrevocable one.
 Confirmed or unconfirmed one
 Transferable L/C ( can be transferred to the supplier, but the identity of
the buyer would not be given if required by the merchant exporter).
Issuing bank should designate the amount as ‘transferable’, masking
the identity is possible
 Revolving L/C (free flow of credit at intervals until the expiry date of
the credit)

 Back to back L/C when an L/C is opened on the strength of the first
one. Exporter opening an L/C for its importation of raw materials.
 Stand by L/C . It’s the safest one where the bank also gives an
additional assurance. Its like a performance guarantee, an assurance
given to the beneficiary that bank will be responsible for the payments.
 All the Incoterms , 2010

 Also are the Terms of Delivery

INCOTERMS
Three letter terms

Published by International Chamber of Commerce

Last reviewed and changed in 2010

For the ease of business, easily understood across the world,

lessening the dispute, lessening transaction costs, of
international trade
First published in 1936
INCOTERMS
 Any mode of transport
EXW – Ex Works (named place of delivery)


 FCA – Free Carrier (named place of delivery)

 CPT – Carriage Paid To (named place of destination)
 CIP – Carriage and Insurance Paid to (named place of
destination)
 DAT – Delivered at Terminal (named terminal at port or place
of destination)
 DAP – Delivered at Place (named place of destination)
 DDP – Delivered Duty Paid (named place of destination)
– Sea and inland waterway transport
 FAS – Free Alongside Ship (named port of shipment)
 FOB – Free on Board (named port of shipment)
 CFR – Cost and Freight (named port of destination)
 CIF – Cost, Insurance and Freight (named port of destination
 Two categories based on the method of delivery

 Any mode of transport- 7 terms

 Exworks
 Thank you & discussion