5014 - Finance of International Trade - International Methods of Payment p237 - 300 Flashcards
Securing payment from abroad can be problematic because of…
- Different legal systems
- Costly to chase slow payers abroad
Four Major Methods of Payment
- Open Account
- Collections
- Letter of Credit
- Payment in Advance
Payment in Advance
The importer pays in advance of receiving the goods from the exporter, this is favourable to the exporter as they have security
Open Account
Exporter sends his goods to importer who pays for them at an agreed date in the future after goods received and inspected most EU trade is done like this
On what payment terms are most EU trades conducted with
Open Account
Open Account Risks (Exporter)
- Non-Acceptance of goods
- Failure to pay
- Lose control over goods
- Possible cashflow problems
- Exchange rate risk
Reducing the Risk of Open Accounts
- Don’t use one (miss sales)
- Only use with trusted customers
- Insure against bad debts with ECGD/NCM
- Negotiate better terms of payment depending on negotiating power
When using Collection or Letters of Credit….
A bank or financial institution stand in between the exporter and importer, governed by international rules by the ICO
What is a collection
Refers to money owed to a business by a customer and the subsequent collection of that owed money
An exporter retains control of his goods until they are able to either…
Payment - Documents against payment - D/P
Accepted Bill of Exchange - Documents against acceptance - D/A
What do Documents of Title and Incoterms prove?
They prove you have the Legal Title to the Goods, so shows ownership
Bill of Landing (or Airway Bill)
A receipt given to the exporter by the shipping company when goods placed on board
Certificate of Origin
Confirms where the goods originate from
Bill of Exchange
Similar to a cheque but the payee makes it and presents it to the person making payment either on demand (Sight) or at a determined future date after Sight
Acceptance
Acceptance is when the Bill of Exchange is signed to signify that he accepts his liability and that he will pay the bill on the due date
What are INCOTERMS
Internationally recognized trade terms recognized by the United Nations Commission on International Trade Law
What do INCOTERMS signify?
Who is responsible for the cost of transporting, insurance, tax and duties
Where the goods should be picked up from and where they will go
Who is responsible for the goods at each step during transport
Standard Process for Collections
Step 1: Obtain Documents of Title
Step 2: Send the Goods
Step 3: Exporter hands Documents of Title and Collection Order to Remitting Bank
Step 4: Remitting Bank sends the Document of Title to presenting bank
Step 5: Importer gives either Payment or Accept the Bill of Exchange
Step 6: Payment or Accepted Bill sent to exporter
Documents Against Acceptance D/A meaning
- Settlement by means of collection
- Document of Title which allow the importer to collect the goods and will be handed to the importer after they accept the Bill of Exchange, making him legally liable to pay
Documents Against Payment
- Settlement by means of collection
- Document of Title which allows the importer to collect the goods from port and will not be handed to the importer until they pay the Bill Of Exchange
D/A & D/P from the Exporter’s Point of View
- D/P, they control goods until they receives payment
- Under D/P importer cant get Document of Title until payment received
- Under D/A importer gets Document of Title and so the goods after Bill of Exchange Accepted
