9/11/12 Mrs. Charu Rastogi, Asst. Prof. Mrs. Charu Rastogi, Asst. Prof.

Methods of Payment in International Trade/Export and Import Finance

Click to edit Master subtitle style International Business Management

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World Bank

The World Bank is an international financial institution that provides loans to developing countries for capital programs World Bank's official goal is the reduction of poverty. to the World Bank's Articles of Agreement (as amended effective 16 February 1989), all of its decisions must be guided by a commitment to promote foreign investment, international trade, and facilitate capital investment World Bank comprises two institutions:

Mrs. Charu Rastogi, Asst. Mrs. Charu Rastogi, Asst. Prof. Prof.

The

According

The

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Export and Import Finance Methods

Accounts An

Receivable Financing
Mrs. Charu Rastogi, Asst. Mrs. Charu Rastogi, Asst. Prof. Prof.

exporter that needs funds immediately may obtain a bank loan that is secured by an assignment of the account receivable

Factoring The

(Cross-Border Factoring)

accounts receivable are sold to a third party (the factor), that then assumes all the responsibilities and exposure associated with collecting from the buyer.

Letters

of Credit (L/C)

These

are issued by a bank on behalf of the importer promising to pay the exporter upon presentation of the shipping documents.

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Export and Import Finance Methods

Bankers

Acceptance (BA)
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This is a time draft that is drawn on and accepted by a bank (the importers bank). The accepting bank is obliged to pay the holder of the draft at maturity. If the exporter does not want to wait for payment, it can request that the BA be sold in the money market. Trade financing is provided by the holder of the BA. The bank accepting the drafts charges an all-in-rate (interest rate) that consists of the discount rate plus the acceptance commission. In general, all-in-rates are lower than bank loan rates. They usually fall between the rates of short-term Treasury bills and commercial papers.

Working

Capital Financing

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Export and Import Finance Methods

Medium-Term

(Forfaiting)
The

Capital Goods Financing

Mrs. Charu Rastogi, Asst. Mrs. Charu Rastogi, Asst. Prof. Prof.

importer issues a promissory note to the exporter to pay for its imported capital goods over a period that generally ranges from three to seven years. exporter then sells the note, without recourse, to a bank (the forfaiting bank).

The

Countertrade These

are foreign trade transactions in which the sale of goods to one country is linked to the purchase or exchange of goods from that same country.

Methods of payment in international trade

To

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succeed in todays global marketplace and win sales against International trade presents a spectrum of risk, which causes uncertainty over the timing of payments between the exporter (seller) and importer (foreign buyer). exporters, any sale is a gift until payment is received. exporters want to receive payment as soon as possible, preferably as soon as an order is placed or before the goods are sent to the importer. importers, any payment is a donation until the goods are received.

Mrs. Charu Rastogi, Asst. Mrs. Charu Rastogi, Asst. Prof. Prof.

For

Therefore,

For

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Methods of payment in international trade :

Cash in Advance / Prepayments

With

cash-in-advance payment terms, the exporter can avoid credit risk because payment is received before the ownership of the goods is transferred. transfers and credit cards are the most commonly used cash-in-advance options available to exporters. requiring payment in advance is the least attractive option for the buyer, because it creates cash-flow problems. Foreign buyers are also concerned that the goods may not be sent if payment is made in advance. exporters who insist on this payment

Mrs. Charu Rastogi, Asst. Mrs. Charu Rastogi, Asst. Prof. Prof.

Wire

However,

Thus,

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Methods of payment in international trade:

Letters of Credit
Letters

of credit (LCs) are one of the most secure instruments available to international traders. LC is a commitment by a bank on behalf of the buyer that payment will be made to the exporter, provided that the terms and conditions stated in the LC have been met, as verified through the presentation of all required documents. buyer pays his or her bank to render this service. LC is useful when reliable credit information about a foreign buyer is difficult to

Mrs. Charu Rastogi, Asst. Mrs. Charu Rastogi, Asst. Prof. Prof.

An

The

An

Methods of payment in international trade:

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Documentary Collections/Drafts/Bills of Exchange)

A

documentary collection (D/C) is a transaction whereby the exporter entrusts the collection of a payment to the remitting bank (exporters bank), which sends documents to a collecting bank (importers bank), along with instructions for payment. are received from the importer and remitted to the exporter through the banks involved in the collection in exchange for those documents. involve using a draft that requires the importer to pay the face amount either at sight (document against payment) or on a

Mrs. Charu Rastogi, Asst. Mrs. Charu Rastogi, Asst. Prof. Prof.

Funds

D/Cs

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Methods of payment in international trade:

Open Account
An

open account transaction is a sale where the goods are shipped and delivered before payment is due, which is usually in 30 to 90 days. this option is the most advantageous option to the importer in terms of cash flow and cost, but it is consequently the highest risk option for an exporter. of intense competition in export markets, foreign buyers often press exporters for open account terms since the extension of credit by the seller to the buyer is more common abroad. Therefore, exporters who are

Mrs. Charu Rastogi, Asst. Mrs. Charu Rastogi, Asst. Prof. Prof.

Obviously,

Because

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Comparison

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Comparison
Cash in Advance Time of Payment Before Shipment Letter of Credit When shipment is made DC/BoE On presentation of draft After payment Open Account As agreed upon Before payment

Mrs. Charu Rastogi, Asst. Mrs. Charu Rastogi, Asst. Prof. Prof.

Goods After payment available to After payment buyers

Risk to exporter

None

Very little - None

Disposal of unpaid goods

Relies on buyer to pay as agreed upon

Risk to importer

Assured shipment Relies on but relies on exporter to exporter to ship ship goods as goods as described ordered in the documents

Relies on exporter to ship goods as described in the documents

None

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Letter of credit: Procedure

Buyer (Importer)
1. Sale Contract 5. Deliver Goods

Seller (Exporter)

Mrs. Charu Rastogi, Asst. Mrs. Charu Rastogi, Asst. Prof. Prof.

2. Request for Credit

8. Documents and claim for payments

6. Present Documents

4. Deliver Letter of Credit

Importers bank (Issuing Bank)

7. Present Documents 3. Send Credit

Exporters bank (Advising Bank)

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Types of Letter of Credit

Irrevocable and revocable letters of credit

A revocable letter of credit can be changed or cancelled by the bank that issued it at any time and for any reason. An irrevocable letter of credit cannot be changed or cancelled unless everyone involved agrees. Irrevocable letters of credit provide more security than revocable ones.

Mrs. Charu Rastogi, Asst. Mrs. Charu Rastogi, Asst. Prof. Prof.

Confirmed and unconfirmed/Advised letters of credit

When a buyer arranges a letter of credit they usually do so with their own bank, known as the issuing bank. The seller will usually want a bank in their country to check that the letter of credit is valid. For extra security, the seller may require the letter of credit to be 'confirmed' by the bank that checks it. By confirming the letter of credit, the second bank agrees to guarantee payment even if the issuing bank fails to make it. So a confirmed letter of credit provides more security than an unconfirmed one. In case of unconfirmed LC, the advising bank forwards an unconfirmed letter of credit directly to the exporter without adding its own undertaking to make payment or accept responsibility for

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Types of Letter of Credit

Transferable letters of credit

A transferable letter of credit can be passed from one 'beneficiary' (person receiving payment) to others. They're commonly used when intermediaries are involved in a transaction.

Mrs. Charu Rastogi, Asst. Mrs. Charu Rastogi, Asst. Prof. Prof.

Stand-by LC

A standby letter of credit is like a guarantee that is used as support where an alternative, less secure, method of payment has been agreed. It is an assurance from a bank that a buyer is able to pay a seller. The seller doesn't expect to have to draw on the letter of credit to get paid.

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Types of Letter of Credit

Revolving LC

The revolving credit is used for regular shipments of the same commodity to the same importer. It can revolve in relation to time or value. If the credit is time revolving once utilised it is re-instated for further regular shipments until the credit is fully drawn. If the credit revolves in relation to value once utilised and paid the value can be reinstated for further drawings. Revolving letters of credit are useful to avoid the need for repetitious arrangements for opening or amending letters of credit.

Mrs. Charu Rastogi, Asst. Mrs. Charu Rastogi, Asst. Prof. Prof.

Back to Back LC

A back-to-back letter of credit can be used as an alternative to the transferable letter of credit. Rather than transferring the original letter of credit to the supplier, once the letter of credit is received by the exporter from the opening bank, that letter of credit is used as security to establish a second letter of credit drawn on the exporter in favour of his importer. Many banks are reluctant to issue back-to-back letters of credit due to the level of risk to which they are exposed, whereas a transferable credit will not expose them to higher risk than under

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Possible Questions

Explain all the modes of payment used in international business. Discuss various types of L/Cs. Write short notes on:

Mrs. Charu Rastogi, Asst. Mrs. Charu Rastogi, Asst. Prof. Prof.

Balance of payment vs. balance of trade Asian Development Bank Balance of payment Types of Letter of Credit

Explain the role played by International Monetary Fund, Asian Development Bank and World Bank in promotion of International Trade Explain the functions of International Monetary Fund. What are various methods of payment in International Trade? Discuss the role of World Bank in International Financial Management.

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Thank You