Payment Terms

Question 1

beneficiary

Answer 1

seller

Question 2

applicant

Answer 2

buyer

Question 3

issuing bank

Answer 3

seller’s bank

Question 4

advising bank

Answer 4

buyer’s bank

Question 5

open account

Answer 5

exporter allows importer to pay for merchandise sometime in the (specified) future

most common method in int’l trade, but skewed by the fact that countries usually trade w/ their neighbors

most favorable payment method for the importer

usually between merchants with good history together

usually with a straight b/l because w/ open account you don’t care about control of payment

generally paid with wire or telegraphic transfer

Question 6

documents against payment (d/p)

Answer 6

buyer cannot take possession of the merchandise without paying the amount on the invoice

seller is not completely protected; buyer could still decide post-shipment that they do not want the merchandise

when buyer pays they are essentially just paying for documents (that represent proper quality/quantity)
= buyer’s risk

as an importer you don’t want to pay for d/p until a few days before the shipment arrives

slightly more risky for the buyer than d/a

used when seller doesn’t trust buyer

Question 7

documents against acceptance (d/a)

Answer 7

same as d/p except seller issues a time draft instead of a sight draft
= calls for payment on a specified date
(d/a [#])

buyer gives “acceptance” to bank
documents are released to buyer and then must be paid in the specified number of days

similar to open account except if you default the bank can sue you immediately

greater risk to exporter - buyer could default and would already have possession of goods

buyer STILL has legal obligation to pay
= not a chance to inspect goods

usually between firms with satisfactory history together

as exporter you should use the importer’s bank

very favorable to buyer because you are essentially being financed

Question 8

confirmed l/c

Answer 8

if the beneficiary insists the advising bank will add its confirmation onto the letter of credit and pay the seller before they are payed

rare circumstances but issuing bank could fail or advising bank could be prohibited from exporting currency by their government

Question 9

revocable l/c vs. irrevocable l/c

Answer 9

revocable: can be changed or revoked at any time
irrevocable: cannot be canceled or amended unless okayed by beneficiary

Question 10

advised l/c

Answer 10

advising bank agrees to give applicant a l/c if beneficiary produces evidence that goods are shipped on time and there are no discrepancies in l/c

not a contract, but based on an underlying contract

3 or 4 parties

• applicant: buyer
• beneficiary: seller
• issuing bank: seller’s bank
• sometimes advising bank: buyer’s bank

l/c is sent to the bank in the exporting country and says docs must be submitted evidencing shipment occurring on time

seller presents docs to issuing bank who sends them to the advising bank; when accepted by applicant = account is charged

if there is a discrepancy buyer can decide to not waive and will not pay or receive docs/goods

as a buyer you can’t wait to purchase docs like d/p or d/a
- you pay well ahead of arrival

Question 11

timed vs sight l/c

Answer 11

timed gives buyer more time to pay