Methods of Payment

1. Methods of Payment Areej Aftab Siddiqui

2. Importance of Terms of Payment

3. Determination of Terms of Payment

4. Key Players in International Trade Exporter’s Bank Importer’s Bank Exporter Importer International Carrier BORDER BORDER Export Clearance Import Clearance

5. Link when in an International Sales Contract Exporter’s Bank Importer’s Bank SALES CONTRACT Exporter Importer International Carrier BORDER BORDER Export Clearance Import Clearance How to secure the payment after shipment How to secure the delivery after payment

6. Methods of Payment Payment will be made after goods being sold in import country Delivery first before payment Delivery first before payment (through bank) A guarantee for payment by Bank Pay first before delivery Exporter’s Risk

7. Consignment Demand for payment is usually made by means of a clean draft( no documents attached). Payment typically occurs after the products have been resold by the buyer.

10. Application/Use • The consignee is reliable • The consignee has a good credit history • The consignee’s country has economic and political stability • The consignee is the branch office of the main company

11. Open Account • A term of payment in which no banks are involved, only an agreement between seller and buyer that payment will be made within an agreed period of time. • The buyer opens an account in the name of the seller in the buyer’s book and show values of the goods as an amount owing to the seller • Banks become involved through wire transfers, but no negotiations. • Normally one should use this method only when he/ she has confidence in the creditworthiness of the buyer. • The seller sends the goods to the buyer BEFORE the payment

12. Contractual Relationship Bank or FI 8. Payment Exporter Importer 7. Shipping Documents 1. Sale Contract 5. Bill of Lading Transportation 2. Contract of carriage 4. Shipment 6. Insurance Certificate Insurance 3. Insurance contract

15. Application/Use • There is long-term relationship and confidence between the • buyer and the seller • The seller is under pressure to sell his goods • The buyer has a very good reputation and is well-known in the market • The buyer is solvent

16. Cash in Advance (Advance Payment) • 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

17. Contractual Relationship Bank or FI 4. Advance payment Exporter Importer 8. Shipping Documents 1. Sale Contract 6. Bill of Lading Transportation 2. Contract of carriage 5. Shipment 7. Insurance Certificate Insurance 3. Insurance contract

20. Application/Use • The buyer lacks creditworthiness • The buyer is not able to offer sufficient security for payment • The buyer is located in a region of politic and/or economic instability • The product is so specialized that it is specifically made for the customer and cannot be easily sold to another customer

22. Documentary Collections A collection, which is accompanied by commercial documents. Means that the bank handles documents according to the instructions received. This payment method is most often used in international trade in the exchange of merchandise for money. With this method, the goods are shipped to the foreign country, but the documents are sent to the buyer’s bank. Bank has the only duty to collect the payment from the buyer in exchange for delivery of the shipping & financial documents Bank assumes no risk & responsibility associated with default payment AS LONG AS it follows the seller’s instruction

23. Types of collection

24. Drafts An unconditional order in writing prepared by one (drawer) and addressed to another (drawee) The draft is drawn by the beneficiary under the term of authorization in the letter of credit and in straight conformance with the conditions stated. The draft has to include the name of the issuing bank. Draft (in some countries) is said to be drawn to the account of the bank or buyer.

25. Types of Draft • With recourse means purchase by a banker or other financial institution of draft. • Without recourse means exact opposite. • Consignee fails for any original drawer of the draft.

26. Contractual Relationship (Clean Collection) Bank or FI 9. Payment 8 . Financial Documents 7. Shipping Documents Exporter Importer 1. Sale Contract 5. Bill of Lading Transportation 2. Contract of carriage 4. Shipment 6. Insurance Certificate Insurance 3. Insurance contract

27. Contractual Relationship (D/P) Bank or FI 9. Payment (simultaneously) 8 . Financial & Shipping Documents Exporter Importer 1. Sale Contract 5. Bill of Lading Transportation 2. Contract of carriage 4. Shipment 6. Insurance Certificate 3. Insurance contract Insurance

29. Contractual relationship (D/A) Bank or FI 9. Payment (at the future date) 8 . Financial & Shipping Documents Exporter Importer 1. Sale Contract 5. Bill of Lading Transportation 2. Contract of carriage 4. Shipment 6. Insurance Certificate Insurance 3. Insurance contract

31. Risk associated with Collection

33. What is a Letter of Credit? Document and undertaking issued by a bank At the request of the applicant (buyer, importer) In favor of a beneficiary (seller, exporter) Substitutes the bank’s name and credit risk for that of the applicant (buyer, importer) Guarantees payment of a customer’s draft up to a stated amount for a specified period if certain conditions are met

34. Letter of Credit Summary of a contract between seller and buyer with the bank(s) as referee Governed by UCP 600

35. Why Have A Letter Of Credit? IF I SHIP GOODS, WILL YOU PAY? IF I PAY, WILL YOU SHIP THE GOODS? Solves Issues Of Mutual Mistrust By Using Banks As Arbiters NEGOTIATE L/C TERMS BEFORE ENTERING A CONTRACT

36. Trade Finance Letter Of Credit Documents Banks do not deal in the merchandise which the letter of credit covers Banks deal only in DOCUMENTS SWIFT : Society for Worldwide Interbank Financial Telecommunication

37. Parties to the Documentary Credit 1. Sale Contract Exporter ( Beneficiary) Importer (Applicant) 4. Advice of L/C 2. Credit Application Advising Bank Issuing Bank (Guarantor) 3. Documentary Credit

39. THE BANK’S COMMITMENT IN THE LETTER OF CREDIT THE L/C SAYS WHAT IT MEANS & MEANS WHAT IT SAYS KEY ELEMENTS clarity clarity clarity PAYMENT WILL BE MADE ONLY WHEN ALL TERMS AND CONDITIONS ARE MET RESOLVE UNCLEAR ITEMS PRIOR TO SHIPMENT AMOUNT EXPIRY LATEST SHIPMENT DATE DOCUMENTS REQUIRED

40. Letter of Credit Process 1. L/C Application Exporter’s Bank Importer’s Bank Exporter Importer 3. Bill of Lading International Carrier BORDER BORDER 2. Shipment Letter of Credit - Guarantee for payment by bank under terms & conditions - Assure appropriate documents (B/L) are presented Need Guarantee for payment before delivery Need Bill of Lading to demand for the goods at the destination

41. Documentary Credit Procedure (1) Contract of Sale Buyer (Importer) Seller (Exporter) (5) Delivery of Goods (2) Request to Provide Credit (8) Documents & Claim for Payment (4) Letter of Credit Delivered (6) Documents Presented (7) Documents Presented to issuing Bank Importer’s Bank (Issuing Bank) Correspondent Bank (9) Payment (3) Credit Sent to Correspondent 41

42. Important Highlights of UCP 600 • The UCP 600 rules apply to any credit when stated that it is subject to these rules • They are binding on all parties unless modified or excluded by the credit.– Article 1 • A credit is irrevocable unless there is an indication • A document may be signed by handwriting, facsimile signature, perforated signature, stamp, symbol or any other mechanical or electronic method of authentication

43. ARTICLE 2 Definitions Banking Daya day on which a bank is regularly open at the place at which an act subject to these rules is to be performed. Complying Presentation a presentation that is in accordance with the terms and conditions of the credit, the applicable provisions of these rules and international standard banking practice. 43

44. ARTICLE 2 Honour: a.to pay at sight if the credit is available by sight payment. b. to incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment. c. to accept a bill of exchange (“draft”) drawn by the beneficiary and pay at maturity if the credit is available by acceptance. 44

45. ARTICLE 2 Negotiation: the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank. 45

46. ARTICLE 4 Credits v. Contracts An issuing bank should discourage any attempt by the applicant to include, as an integral part of the credit, copies of the underlying contract, proforma invoice and the like. The bank is not involved in the contract. A credit by its nature is a separate transaction from the sale or other contract on which it may be based. 46

47. Article 5 Banks deal with documents and not with goods, services or performance to which the documents may relate

48. Article 6- Availability, Expiry Date and Place for Presentation A credit must state the bank with which it is available or whether it is available with any bank. A credit available with a nominated bank is also available with the issuing bank. A credit must state whether it is available by sight payment, deferred payment, acceptance or negotiation. A credit must not be issued available by a draft drawn on the applicant. A credit must state an expiry date for presentation. The place of the bank with which the credit is available is the place for presentation. Except as provided in sub-article 29 (a), a presentation by or on behalf of the beneficiary must be made on or before the expiry date.

49. Article 7 & 8 • The Issuing Bank and Confirming Bank have to fulfill their undertakings of negotiation and honour.

50. Article 9- Advising of Credits and Amendments A credit and any amendment may be advised to a beneficiary through an advising bank. An advising bank that is not a confirming bank advises the credit and any amendment without any undertaking to honour or negotiate. An advising bank may utilize the services of another bank ("second advising bank") to advise the credit and any amendment to the beneficiary. A bank utilizing the services of an advising bank or second advising bank to advise a credit must use the same bank to advise any amendment too.