FMS- Method of international payment

Question 1

why is international payment important

Answer 1

payment can be complicated by the fact that global businesses may be dealing with someone who:
 they have never seen
 who speaks another language
 uses a different monetary system
 who abides by a different legal system
 who may prove difficult to deal with if problems occur later on

Question 2

Concerns

Answer 2

one major worry for the exporter is that if the products are shipped before payment is received, there may be no guarantee that the importer will pay

on the other hand, the buyer is faced with a similar situation. The importer may worry that if payment is sent before the products are received, there is similarly no guarantee that the exporter will receive payment

Question 3

methods of international payment

Answer 3

there are FIVE basic methods of international payment from which a business can select

1. payment in advance
2. letter of credit
3. clean payment
4. bill of exchange – bill against payment
5. bill of exchange – bill against acceptance

Question 4

payment in advance

Answer 4

Allows the exporter to receive payment and then arrange for the goods to be sent

It exposes the exporter to virtually no risk and is often used if the other party is a subsidiary or when the credit worthiness of the buyer is uncertain

it exposes the importer to the most risk – they have no guarantee that they will receive what they ordered

Question 5

letter of credit

Answer 5

A document issued by the importers bank guaranteeing to the exporter that payment will be made upon confirmation of the shipment of the goods

The exporter has reduced their risk as the importer bank will guarantee payment even if the importer cannot pay. Importer has lower risk because of shipment confirmation

The exporter will receive payment usually before goods have arrived with importer

Question 6

clean payment

Answer 6

Involves the exporter shipping the goods before payment has been received along with an invoice with a nominated credit term (period of time to pay)

This method is the riskiest for the exporter and the most advantageous for the importer

It would normally take place when the exporter has confidence in the importers reliability.

Question 7

bill of exchange

Answer 7

a document drawn up by the exporter demanding payment from the importer at a specified time

this method for payment is one of the most widely used and allows the exporter to maintain control over the goods until payment is either made or guaranteed

there are two types of bill of exchange
o bill against payment
o bill against acceptance

Question 8

bill against payment

Answer 8

document only allows the importer to receive the goods only after paying for them

the exporter draws up a bill of exchange for the importer as well as documents for goods pick up it hands to the importers bank

these documents will be given to the importer by their bank when payment is received. The importers bank will then transfer to the exporters bank

Question 9

bill against acceptance

Answer 9

using this method, the importer may collect the goods before paying for them

the same process applies as with documents against payment except the importer must simply agree to the terms of the bill of exchange to receive the documents that allow them to pay for the goods at a later date

Question 10

Greater risk of non-payment or late payment than letter of credit

A potential risk may be the importer may not collect the documents nor pay for the goods

Answer 10

Bills against payment

Question 11

Greater risk of non-payment or late payment than letter of credit

Expose the exporter to much greater risk than

Answer 11

Bills against acceptance