METHODS OF PAYMENT

consignment
consignment
 1. Documentary collection
• Goods are only handed over to the buyer when the amount
shown on bill of exchange is paid or when customer accepts the
bill as a contract to pay by a specified date
• In D/C, bank acts on instruction of exporter, & the exchange of
documents to title, takes place at customer place of business
• Once the exporter dispatch goods to customer, exporter
collects shipping documents, he draws ‘bill of exchange on the
buyer’
• This is made out to be payable either on sight (demand) or
within a specified time (90 days)
• The exporter sends the B/E & shipping documents to his bank,
which forwards them an advising bank in the customer’s
country
• This bank takes the documents to the customer
• If sight bill: customers pays the amount directly (D/P)
• If time/usance bill: payment within a specified time(D/A)
 2. Documentary credit
 The documentary credit is merely a credit opened with the bank in the
exporter’s favour (often called as letter of credit {L/C})
 The instructions come from customer and the exchange of documents
& payment takes place at the exporters place of business
 The customer opens the credit a/c at his bank for a certain sum of
money
 This is only paid under certain conditions:
 The goods & price will be as specified on the order
 The delivery or dispatch will be by a certain date
 Charges for freight, insurance, etc. will be as specified
 Two banks are involved in documentary credit process:
 The customers bank which opens the credit, is known as opening or
issuing bank
 The money is actually paid to exporter by another bank, located in his
own country known as advising or corresponding
 X LTD. CONFIRMS Y LTD. ARRANGES CREDIT
ACCEPTANCE OF ORDER & IN FAVOUR OF X LTD.
TERMS OF PAYMENT

OPENING BANK SENDS

ADVISING BANK ADVISES L/C TO ADVISING BANK
X LTD.OF IN X’S COUNTRY
DOCUMENTARY CREDIT

X LTD. SHIPS GOODS &

COLLECTS SHIPING DOCUMENTS
FROM SHIPPING LINE

ADVISING BANK RECEIVES SHIPPING OPENING BANK RECEIVES

DOCUMENTS &PAYS X LTD. SHIPPING DOCUMENTSAND
FORWARDS SHIPPING DOCUMENTS HANDS TO Y LTD.
TO OPENING BANK Y LTD. COLLECTS THE GOODS
 3. Cash-in-Advance
• With cash-in-advance payment terms, an exporter can
avoid credit risk because payment is received before the
ownership of the goods is transferred.
• Requiring payment in advance is the least attractive option
for the buyer, because it creates unfavorable cash flow.
• Foreign buyers are also concerned that the goods may not
be sent if payment is made in advance.
• Exporters who insist on this payment method as their sole
manner of doing business may lose to competitors who
offer more attractive payment terms.
 4. Open Account
• An open account transaction is a sale where the goods are
shipped and delivered before payment is due, which in
international sales is typically in 30, 60 or 90 days.
• This is one of the most advantageous options to the importer, but
it is consequently one of the highest risk options for an exporter.
• Exporters who are reluctant to extend credit may lose a sale to
their competitors.
• When offering open account terms, the exporter can seek extra
protection using export credit insurance.
 5. Consignment
• Payment is sent to the exporter only after the goods
have been sold by the foreign distributor to the end
customer.
• It is based on a contractual arrangement in which
the foreign distributor receives, manages, and sells
the goods for the exporter who retains title to the
goods until they are sold.
• It is very risky as the exporter is not guaranteed any
payment and its goods are in a foreign country in
the hands of an independent distributor or agent.
Advantages -
• UNDERSTANDING RISKS IN INTERNATIONAL PAYMENTS AND AVAILABLE RISK
COVERAGE TOOLS- CASE STUDY
Rama and Co is planning to promote business in African countries to expand their
export business. Company has started participation in the business fair/exhibitions
in the various countries of the Africa. It has also started market research, to find out
the main distributor in various countries of Africa.
Company has identify Tanzania, as the target country, to develop export of its fruit
juice products. Main distributor promised to place good purchase orders and
guarantee high volume business. But demands the credit period of 2 months. Goods
have to be sent directly to the name of the Tanzanian distributor on CIF terms.
To cater the demand in Tanzania and neighbouring countries, this buyer wants the
shipment of USD100000 on monthly basis. Tanzania has special bilateral free trade
agreement with some neighbouring countries, to trade among themselves with zero
custom duty, whereas, such trade transactions from India to those countries attracts
custom duty of 30%.
The balance of payment position of Tanzania is not good and there is always fear of
political unrest in this country. There is danger of disappearing the goods at
Tanzanian seaport because of presence and control of local notorious gangs on port
activities.
• Discuss best approach by exporter to safeguard the international trade payments.
 SELECT RIGHT METHOD OF PAMENT FOR EXPORT TRANSACTION
Exporter is a small sector manufacturing unit established about three years back. Initially
the unit was manufacturing men garments for local market. To increase turnover, it
started export business.
Unit experienced cash flow shortages due to delays in receiving export realizations. It
raised working capital financé from the bank. Unit realized that non payment or delays in
getting the export sale realization are is the main reason for shortage of cash in the
business.
To overcome these problems, it has been decided that each and every export order must
be analyzed properly for selecting payment method so to get full and final receipt of
payment. Unit has following orders in hand from foreign buyers doing business in
different countries:
1. First order of USD 10,000 from new customer from Tanzania. Customer has ensured more
business in future.
2. An order of USD 1,00,000 from a new customer in Italy. Buyer wants the credit period of
60 days from date of shipment.
3. Existing customer in U.K. placed an order of STG 50000, with credit period of 90days. Past
dealing with customer is very satisfactory. Party does not want to open letter of credit.
4. There is a very reputed buyer in USA with huge local turnover. Buyer is ready to place
repeated order of USD 100,000 each but demands credit period of 120 days from the
receipt of goods in USA.
• Suggest safe method of payment to the exporter.