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CBI seminar TTT Honduras 28.01 – 01.02.2008, Tegucigalpa, Honduras by Günter Schranz

Payment Terms …make sure to get your money. CBI seminar TTT Honduras 28.01 – 01.02.2008, Tegucigalpa, Honduras by Günter Schranz. Payment Terms. Become aware of the risks to cover Get familiar with common payment terms Choosing the right payment term for your business.

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CBI seminar TTT Honduras 28.01 – 01.02.2008, Tegucigalpa, Honduras by Günter Schranz

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  1. Payment Terms …make sure to get your money CBI seminar TTT Honduras28.01 – 01.02.2008, Tegucigalpa, Honduras by Günter Schranz

  2. Payment Terms • Become aware of the risks to cover • Get familiar with common payment terms • Choosing the right payment term for your business

  3. Risks to cover • What financing covers your risk • best • sufficient

  4. Risks to cover • Credit risk • Inability and/or unwillingness to pay on the part of debtors and guarantors.For example:The buyer cannot or will not pay.

  5. Risks to cover • Country risk (political risk) • Risk that political events or measures may prevent the performance of contractual obligations.For example:War, rebellion, revolution, • annexation, civil unrest, • embargo, boycott, • government debt, • protectionism.

  6. Risks to cover • Country risk (transfer risk) • Impossibility of converting and transferring the amount paid in the national currency.For example:Payment ban, exchange controls, moratorium, consolidation, transfer ban.

  7. Risks to cover • Manufacturing and performance risk • Importer cancels or changes the order unilaterally, or importer is unable to perform the contractual obligations.For example:Due to production problems, financialdifficulties of the producer, latedelivery of goods or missing delivery.

  8. Risks to cover • Delivery risk • Contractual delivery is impossible or cannot be reasonably expected due to a subsequent increase in the credit and/or country risk, or due to lack of transportation.For example:No ship available.

  9. Risks to cover • Transport risk (insurance) • Goods lost or damaged in transit.

  10. Risks to cover • Currency risk • Appreciation and depreciation of a currency or fluctuations in the CHF/foreign currency exchange rate.For example:In the case of completion of a contract or invoicing in a foreign currency.

  11. Risks to cover • Technical risk • The product does not conform to contractual specifications or the machine supplied does not function correctly.For example:Manufacturing defect, defective assembly, poor quality.

  12. Risks to cover • Settlement risk • The key settlement risks:Non-compliance with deadlines, non-observance of national regulations, incompletedelivery, customs problems, missing or incorrect documentation.

  13. Risks to cover • Mailing risk • If a documentary credit or guarantee is validand/or payable abroad, there is a danger than the documents will arrive too late or will be lost. Result: the payment is delayed or may even not be effected.

  14. Risks to cover • Risk of increasing competition • Appreciation or depreciationof a currency comes up with direct price advantages for your competition.

  15. Conflict of objectives Importer Costs Risk Exporter

  16. Exporter Lowest Risk Highest Risk Cash in Advance Documentary Collection Open Account Letter of Credit L/C confirmed Documents against Payment D/P Documents Against Acceptance D/A Time Draft advised sight / period Importer Highest Risk Lowest Risk Payment Types and Terms

  17. Open Account • Exporter ships, then forwards his shipping documents directly to the buyer and awaits payment • Highest Risk for Exporter • Low costs • Payment after delivery of the goods • No security, 100% trust-based • If buyer does not pay, the seller has to pursue the payment through court or arbitration • Big Orders: Only within good and trustful partnerships • Small orders & save environment: Why not take a chance and win a client

  18. Documentary Collection: D/A, D/P Exporter ships and forwards his shipping documents via agent (usually a bank) to the buyer. • Documents against Acceptance (D/A): Buyer can access the shipment before paying (usually 60-180d). High risk for Exporter, because payment relies on Importer to pay the draft. • Documents against Payment (D/P): “At Sight” must be paid to the buyers bank at the moment of presentation. Buyer cannotaccess the shipment before paying. High risk for Exporter, because if draft is not paid, shipment must be returned or disposed. • Economical and political risk are present, no further security

  19. When would documentary collection be a good way? • Partnership for many years • Trust between seller and buyer • Buyer has ability to pay • Payment will not face any trade barriers (f.e. transfer ban, exchange control ..) • Why: • Simple and fast form of payment and document transfer • Notes: • D/P at first sight: for immediate payment, before passing customs • D/A: with period (i.e. 60 – 180 days) for payment,gives the buyer the chance to sell the products and refinance

  20. Letter of Credit L/C L/C is a (conditional) promise to pay from the buyer’s bank. It‘s giving its credit and good name for the sake of the buyer. Frequent used types of L/C: • Advised L/CBefore you ship you receive your buyer's bank's written (conditional) obligation to pay you, usually upon presentation of conforming shipping documents to the buyer's bank after shipment. • Confirmed L/CBefore shipping the exporter receives the importer‘s bank‘s written conditional obligation to pay. This is further "guaranteed" by the exporter‘s bank. To be paid the exporter only presents the conforming shipping documents to his bank.

  21. Letter of Credit L/C Frequent used types of L/C: • Irrevocable L/C • An irrevocable letter of credit cannot be amended or cancelled without the consent of the issuing bank, the confirming bank, if any, and the beneficiary. • The payment “is guaranteed“ by the bank if the credit terms and conditions are fully met by the beneficiary. • The words "irrevocable documentary credit" or "irrevocable credit" may be indicated in the L/C. • In a confirmed letter of credit, the exporter or the importer pays an extra charge, called the confirmation fee, which may vary from bank to bank within a country.

  22. Letter of Credit L/C Other types and variations (for the records) • Revocable:A revocable letter of credit may be amended or cancelled by the issuing bank at any moment and without prior notice to the beneficiary. There is no security of payment in a revocable letter of credit (L/C). The words "this credit is subject to cancellation without notice", "revocable documentary credit" or "revocable credit" usually are indicated in the L/C. (very unusual) • Sight:Payment is at sight, which means that with the presentation of the drafts and documents the payment must be executed without delay.

  23. Letter of Credit L/C Other types and variations (for the records) • Time, Usance:The draft will be accepted for payment at a future date. The Payment is delayed until the maturity of the draft. • Unconfirmed:Bears only the obligation of the issuing bank (buyer’s bank). The beneficiary must look to the credit worthiness of the issuing bank. • Transferable:Can be transferred by the original beneficiary to one or more other parties. It is normally used when the first beneficiary does not supply the merchandise himself, but is a middleman and wants to transfer all or part of his rights to the actual supplier.

  24. Cash in Advance • The exporter receives cash from the buyer before shipping • Low risk for the exporter • Low cost, importer is the financier

  25. 30:00 Assignment: A successful participation Ricardo Flores is the Manager of a family owned middle sized company which manufactures hand tools used inconstruction and gardening, such as shovels, hammers and different types of cutters. Visiting the first time the DEUBAU, the International Fair for Construction and Gardening in Essen, Germany, he was quite successful. Ricardo made a lot of new contacts and even more important – he brought home some instant orders from buyers he met at the fair. Back at home Ricardo is not that sure if he has negotiated the right payment terms for his business and he wants to discuss them with you. What would be your advise?

  26. The Corazzi-Order – fast money? Doing some small talk with another visitor Ricardo heard, that an Italian company, Corazzi, S.L., is looking to buy a smaller shipment of shovels. Ricardo has heard earlier from that company. Corazzi S.L. is one of the bigger ones in the business and it sounds financially well. He really wanted to bring home the 11.000 € order, especially as he has enough shovels on stock to ship immediately As Corazzi is a new client - should he ask for a confirmed L/C or better request a payment in advance? Should he take the risk and ship on open account, - just to get the order? What are the pro’s and con’s?

  27. The Perdonisi Challenge During the fair Ricardo was introduced to the Owner of the Bolivian Perdonisi SA. The Owner looks very experienced and presents his company as a wholesaler, which provides DIY-Chains nationwide with tools. Ricardo is more than happy as Perdonisi puts a 48.000 US$-order (EXW) on their first meeting. After the market in Bolivia has started to be somehow complicated, Ricardo is very happy to have a larger order from this country, but still he is not sure if he should have agreed with the buyers demand of a 180 day payment term Should he better ask for payment in advance? What about a part payment / intermediate payment? Under what conditions could he accept the demanded 180 d-period? What to do in general?

  28. The new market At the opening cocktail Ricardo has met Roman from Bulgaria. From the first moment the relationship was very open and interesting. The next day Roman showed up with a colleague at Ricardo’s place. After some negotiations they agree on a 29.000 US$ trade. Roman needs a 180 day payment period, but he tells Ricardo to be fine with a confirmed L/C. Although Ricardo does not even know where exactly Bulgaria is, he sees no rub in the business and confirms to send the order confirmation. Checking out his other compromises, back at home, Ricardo becomes aware of that he has not enough cash flow to wait until the 180 days will have passed. What could he do? Does he has to cancel the order and place it at a later date? Another credit in the meantime? Which one? Or should he just request a sight L/C?

  29. Business - nearly as usual Back home again Ricardo finds an order coming from Jean-Claude, a French business man, he knows for years as a good client. He asks him for a shipment of various accessories. The order is about 14.000 US$ and with confidence to his client, Ricardo decides to go for a documentary collection. Ricardo knows that Jean-Claude prefers a 60 day payment term, but he still things about the collection mode. Should he fix a “documents against payment” collection (D/P) or better go for a “documents against acceptance” collection (D/A)? How to assure that the client will be satisfied?

  30. You got it ?

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