BUYING HOUSES

Buyer is a proper designation in most foreign

companies, who source products from other
countries.

The buyers are specialists in their own field

and they travel around the world to source
suppliers.

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 BUYING HOUSES
An exporter ,thus ,needs to find out such
persons/companies who represent any foreign
company as their buying agents in his line of work.

An aspiring exporter must keep trying with

determination because though the entry is tough,
once you are in , you are likely to get regular
business, unless you mess up in production, delivery
or otherwise.

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 BUYING HOUSES
• To begin with ,you will be asked to submit a copy of your
company profile with details about your existing business ,
production facilities , supplier base, finances , banker details
,list of existing foreign clients , infrastructural support and
manpower.

• The exporter has to make sure to keep this document to the

point, crisp and compact such that it leaves a certain
impression on reader/buyer. It should only contain true
information , as the buying companies will invariably
crosscheck each detail.

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 The process of initial dealings with buying
house
➢ Exporter submits profile with an introductory letter.

➢ The buying company reviews it and if satisfied calls

the exporter for a meeting.

➢ The exporter if found satisfactory during the meeting

, is asked to arrange for a factory visit.

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 The process of initial dealings with buying
house
➢ The buying house representatives inspect the
exporter’s facilities.

➢ If satisfied , the exporter might be asked to

create samples.

➢ The exporter creates and submits samples

with his price quotation.

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 The process of initial dealings with buying
house
➢ The samples are sent to buyers abroad.
➢ The buyer asks for certain changes.

➢ The exporter submits revised sample

➢ The foreign buyer approves the samples.

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 The process of initial dealings with buying
house
➢ The buying house places order after price
negotiation.

➢ The exporter accepts the order and starts work.

Effective communication is an essential part of

business .communicating with foreign buyers
effectively requires a thorough understanding of
their language , culture and social etiquette
(mannerism / decent / polite behavior).

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 GOLDEN RULE

The golden rule of communication is to be as

simple as possible without compromising on
relevant details and the exporter is best
advised to follow this rule.

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The Exports Contract Flow Diagram

Physical Delivery of goods abroad

Title to goods transferred

Exporter / Seller
Importer / Buyer
(Home Country)
(Home Country)
Promises to supply ordered
Promises to pay the agreed price
goods
against the promise of
against the promise of
delivery of ordered goods.
reciept of settled price

Physical transfer of funds abroad

Payment credited in sellers favour

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 Methods of payment
• While negotiating an export order , it is
essential that payment terms are also
discussed and finalized.

• These include the method or mode of

payment will be made by the buyer and
received by the exporter.

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 Methods of Payment
❑ Advance payment
❑ Open Account
❑ Consignment sales
❑ Documents against Acceptance (D/A)
❑ Documents against Payment (D/P)
❑ Letter of Credit (LC).

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 Advance payment
• It is the safest payment option where the importer
sends the payment in advance to the exporter either
through TT (Telegraphic Transfer) or through a
cheque or demand draft.

• The exporter is safe as , ship the goods only at a later

date .

• He needs to deposit the cheque/demand draft with

his bank and obtain an FIRC – Foreign Inward
Remittance Certificate.

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 Open Account
• This is an arrangement between the buyer and the exporter
where goods are shipped without the guarantee of payments.

• The odds heavily loaded in the favor of the importer as the

payment will be released at a later date.

• Chances of default or delay in payment are very high under

this system. The exporter must deal with trustworthy buyers
under this scheme.

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 Consignment Sales
• Goods are shipped by the exporter but he transfers the
ownership to the importer only when goods are actually sold.
This is borne by the exporter.

• The exporter’s funds are blocked throughout this period and

he is responsible for additional expenses such as interest ,
warehousing costs ,commissions, insurance charges etc. This
arrangement is full of uncertainties as the exporter is not sure
of the actual sale , timeframe and the price realization.

• Consignment exports offer a chance of earning higher in

markets abroad.

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 Documents against Acceptance (D/A)

• This system is based on documentation and thus falls

under the category of documentary credit.

• The exporter does not want to part with the

ownership of goods unless he is certain about the
receipt of payment of the same.

• The importer on the other hand, does not want to

pay , unless he is sure about the receipt of goods.

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 Documents against Acceptance (D/A)
• Under the D/A method ,the exporter sends the
shipment documents along with the draft (Bill of
exchange ) through his bank to the importer’s bank
that gets the draft accepted by the importer before
handing him over the title documents.

• The arrangement seems fine as a concept. There is a

great risk for the exporter as the bill may not be
honored by the buyer on presentation normally after
30/45/60/90 days.

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 Documents against Payment (D/P)
• Like in D/A arrangements , here too the documents are sent
the buyer’s are sent to the buyer’s bank with a draft (bill of
exchange ).

• This is a sight draft and not usance draft .This has to be paid
immediately on sight and only after the receipt pf payment
the shipment title documents are released.

• It means that the importer gets possession of the ownership

documents of the shipment only after the making payments
for the same.

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 Letter of Credit (LC)
• A letter credit is a very a popular form of
documentary credit .Majority of international
business transactions use LC.

• The letter of credit is a letter established by the

importer through his bank to the benefit of the
exporter promising payments of drafts drawn against
this letter if the exporter complies with the specific
conditions prescribed in the LC.

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 Letter of Credit (LC)
• Defined as “ A binding document that a buyer can
request from his bank in order to guarantee that the
payment for goods will be transferred to the seller.
Basically, a letter of credit provides reassurance to
the seller that he will receive the payment for the
goods. In order for the payment to occur, the seller
has to present the bank with the necessary shipping
documents conforming the delivery of goods with in
a given time frame. It is often used in international
trade to eliminate risks such as unfamiliarity with the
foreign country , customs or political Instability”

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 Letter of Credit ( LC)

• All LC should be drawn as per guidelines of

UCP 500 (uniform customs and practices for
documentary credits) of the international
chambers of commerce (ICC). These were last
revised in 1993 and the latest revision is
currently under progress.

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 Benefits of LC (Exporters)
✓ LC minimizes the credit risk provided the issuing
bank is reputed and carries a sound track record.

✓ LC eliminates risk of payment delays due to

uncertain factors like political instability.

✓ LC affords financing for the exporter. All nationalised

banks in india are more than willing to finance an
exporter who has an export order backed by an LC
from a reputed foreign bank.

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 Benefits of LC (Exporters)
✓ LC normally will have a stablizing effect on
production by the exporter as the exporter is
bound to ship by a certain date as per the LC ,
failing which the order will stand cancelled.

✓ LC minimizes uncertainty and provides a clear

picture to the exporter regarding all the
requirements for payments.

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 Benefits of LC (Importers)
▪ The importer placing orders on exporters
backed by LC commands a great respect and
bargaining power. He is in a position to ask for
better prices and faster deliveries.

▪ Use of LC will attract a large number of good

suppliers offering the importer a lot of choice.

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 Benefits of LC (Importers)
▪ The importer is assured of timely shipment of the
specified quality and quantity of ordered
merchandise.
▪ The importer can refuse payment if he finds any
even a very minor mistake/oversight in any of the
required documents.
▪ Importers risk of losing money in case the supplier is
unable or unwilling to effect a proper shipment is
totally eliminated.

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 Types of LCs
❖ Documentary and Clean LCs.

❖ Revocable and Irrevocable LCs.

❖ Confirmed and Unconfirmed LCs.

It is important for an exporter to know all the types so

that while finalizing an export deal , he/she will be in
a better position to ask for the right kind of LC from
the importer.

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 Documentary LC
• A documentary LC is the one that requires the
exporter to submit certain documents like
commercial invoice , packing list , customs
invoice , inspection certificate, certificate of
origin , etc.

• Most of the LC s used in export/import fall

under this category.

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 Clean LC
• A Clean LC , on the other hand, is the one that
does not require presentation of any
documents .

• Clean LC are normally used for escrow

arrangements and bank guarantees.

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 Revocable LC
• An LC is revocable when it is used only as a
means of arranging payment and carries no
guarantee .

• It can be withdrawn without any notice at any

time up to the time of presentation of drafts
under LC for the payment to the issuing bank.

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 Irrevocable LC
• An Irrevocable LC , to the contrary, carries
both the payment arrangement and
guarantee of payment and therefore , cannot
be revoked without the consent of all parties
involved including the exporter .

• Most international transactions use

irrevocable LC.

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 Confirmed and Unconfirmed LCs
• A letter of credit may be confirmed or unconfirmed.

• A confirmed letter of credit creates obligations on both the

issuing as well as confirming bank to honor the commitment
under the LC.

• In fact , it works as a double protection for the beneficiary.

• An unconfirmed LC creates this obligation only on the issuing

bank.

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• The Confirming bank could either be
a local bank in the country of the exporter or a
foreign bank , depending on the arrangements that
the issuing bank has.

The issuing bank issues the LC and another bank

confirms it. These banks undertake to comply with
the provisions of the LC .

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• Exporters , generally prefer an irrevocable
confirmed LC issued by a prime bank.

• For Ex. If the LC issued by Citi Bank is further

confirmed by State Bank of India’s local branch in
Delhi ,and if Citi bank does not honor the LC , our
Delhi exporter can always go to SBI’s confirming
branch and claim his payment.

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 Special LCs
▪ Revolving LCs .

▪ Transferable LCs.

▪ Back - to - Back LCs.

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 Revolving LC
• Are those where the maturity period or the
amount prescribed automatically gets
renewed subject to the mutually agreed terms
and conditions at the time of setting up of the
LC under the export contract.
• Revolving LC can be two types Cumulative
and Non –cumulative.

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• Cumulative revolving LC will automatically
apply/add the unutilized amount during a given time
and the same will be carried over to the next period.

• Non-cumulative LC will consider the unutilized

amount in a given time as lapsed and will not add
this to be carried over to the next period.

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 Transferable LC
• Are those under which the beneficiary is given the
right to transfer the benefits available under the LC
to one or more secondary beneficiaries .

• NO LC can be transferred unless it specifically

authorizes the beneficiary to do so and also contain
transferability clause.

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• This has functional advantages .The exporter can use
the LC transfer to enable his suppliers to raise
working capital on the strength of the LC.

• This saves him the entire process of arranging

finance to pay his suppliers to buy goods from them .
This is also very practical and convenient .

• The suppliers also can make use of creditworthiness

of the original buyer.

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 Back –to-Back LC
• Are those where exporters are able to use the
original LC as a cover to open another LC in
favor of their local suppliers.

• The original LC serves as a security to the

issuing the back-to-back LC in favor of the
exporters suppliers.

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• This arrangement is quite convenient as the
exporter is able to use his buyers credit to finance
his suppliers operations.
• The Back – to – Back LC issuing bank assumes double
risk that of the exporter’s as well as of the primary
bank’s . Due to this reason, many banks are not too
keen on issuing back –to- back LC.

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 TIPS to Exporters regarding LC
• Always go for an irrevocable , confirmed LC
issued by a prime bank.
• Ensure that the LC is transferable and allows
transshipments.
• Before the LC is actually opened , please ask
the importer to fax you a draft, which covers
the following points.

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• The names and addresses are correct and
complete .
• The description and quantity of goods are
correct .
• Terms of shipment like FOB/C&F/CIF are
clearly stated and are as agreed upon.
• The price per unit is correct and the same as
in the export order.
• The amount is correct.

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• The LC currency is correct and agreed upon.
• Partial shipments are allowed (if agreed upon ) .
• The Last date of shipment is as agreed upon.
• The expiry date of the LC allows sufficient time for
presentation of documents to the bank.
• The documents required are understood and
compliance thereof is possible.

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• Inspection agency is correctly specified and is
the same as agreed upon .
• All other terms and conditions are same as
agreed upon and can be fulfilled without
incurring additional expenses.
• Discrepancy charges are clearly mentioned .
• Charges for the buyer and the exporter are
clearly demarcated.

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• Penalty , if any , for delays in shipment is clearly spelt out.

• Finally, the LC must conform to UCP 500 of the ICC and be

governed by its provisions.

• The Exporter must also show this draft to his banker and the
C&F agent to make sure that no unusual conditions are
present and that every thing is in order.

• This exercise is important because any change in an LC

(known as amendment) once it is established, is very difficult
to make and carries high bank charges at the buyer’s end. This
will not please the buyer at all, Exporter must ask for any
changes at this stage itself.