5014 - Finance of International Trade - International Methods of Payment p237 - 300

Question 1

Securing payment from abroad can be problematic because of…

Answer 1

• Different legal systems

- Costly to chase slow payers abroad

Question 2

Four Major Methods of Payment

Answer 2

• Open Account
• Collections
• Letter of Credit
• Payment in Advance

Question 3

Payment in Advance

Answer 3

The importer pays in advance of receiving the goods from the exporter, this is favourable to the exporter as they have security

Question 4

Open Account

Answer 4

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

Question 5

On what payment terms are most EU trades conducted with

Answer 5

Open Account

Question 6

Open Account Risks (Exporter)

Answer 6

• Non-Acceptance of goods
• Failure to pay
• Lose control over goods
• Possible cashflow problems
• Exchange rate risk

Question 7

Reducing the Risk of Open Accounts

Answer 7

• 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

Question 8

When using Collection or Letters of Credit….

Answer 8

A bank or financial institution stand in between the exporter and importer, governed by international rules by the ICO

Question 9

What is a collection

Answer 9

Refers to money owed to a business by a customer and the subsequent collection of that owed money

Question 10

An exporter retains control of his goods until they are able to either…

Answer 10

Payment - Documents against payment - D/P

Accepted Bill of Exchange - Documents against acceptance - D/A

Question 11

What do Documents of Title and Incoterms prove?

Answer 11

They prove you have the Legal Title to the Goods, so shows ownership

Question 12

Bill of Landing (or Airway Bill)

Answer 12

A receipt given to the exporter by the shipping company when goods placed on board

Question 13

Certificate of Origin

Answer 13

Confirms where the goods originate from

Question 14

Bill of Exchange

Answer 14

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

Question 15

Acceptance

Answer 15

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

Question 16

What are INCOTERMS

Answer 16

Internationally recognized trade terms recognized by the United Nations Commission on International Trade Law

Question 17

What do INCOTERMS signify?

Answer 17

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

Question 18

Standard Process for Collections

Answer 18

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

Question 19

Documents Against Acceptance D/A meaning

Answer 19

• 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

Question 20

Documents Against Payment

Answer 20

• 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

Question 21

D/A & D/P from the Exporter’s Point of View

Answer 21

• 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