Trade Operations Flashcards
What is international trade?
International Trade is the movement of goods and services across the borders of a nation and the payment for such goods and services.
What are some methods of payment under international trade?
- Advance Payment
- Open account
- Documentary collection
- Letters of Credit
- Guarantees
Describe the flow of the advance payments
Importer and exporter discuss goods and the importer sends money to Exporter through bank. Exporter sends goods and then mails documents. Importer uses mailed documents to clear importer surrenders goods. The clearing are sent to the bank to meet regulatory requirements.
Who has the highest risk in advance payments?
The importer /buyer because buyer sends money with no guarantee of receiving goods or being reimbursed
What are some things on The operational checklist for advance payment?
1.there should be a customer request
2. An invoice should be attached
3. Undertaking
4. Request letter should be signed by account mandate and signature verified by account manager
5. Confirmation of transaction by named staff
6. Vetted and approved by your supervisor
What is the message type for advance payment transactions?
MT103
What does the GPI code ACCC mean?
It refers to the final status of successful payment credited to the beneficiary’s account.
What does the GIP code ACSP mean?
It refers to the accepted, settlement in progress. Often it is an indicator that the payment is under manual review
What does UETR mean?
Unique-end-to-end Transaction Reference
What does the GPI code ACSP/G000, mean?
It means payment was transferred to the SWIFT GPI network bank
What does the GPI code ACSP/G001, mean?
It means payment was transferred to a
bank which is not a member of SWIFT GPI.
What does the GPI code ACSP/G002, mean?
It means pending credit may not be
same day. Often it means that the payment is under manual due diligence in the bank
What does the GPI code ACSP/G003, mean?
It means waiting for documents. It also can be indicator that there was a mistake in the beneficiary’s account details
What does the GPI code ACSP/G004, mean?
It means waiting for cover payment.
What does the GPI code RJCT, mean?
It means payment was rejected
Why do people opt for advance payment?
- The seller may be unwilling to ship goods to the country of the buyer because of country risk
- the buyer may wish to encourage the seller into a long-term relationship
- the seller may not have finances to buy and/or prepare the goods for shipment
- the buyer is comfortable with the relationship he has with the seller and with credit and country risk
How are advance payment and open account transactions processed?
The transaction is processed in part or in whole using Eximbills
When there is an enquiry or amendment in advance payment and open account what message type is used?
MT199
An account manager is advising a client to request for Advance Payment Guarantee from his supplier before sending out money.
This is to reduce risk of non-performance by supplier. Account manager is giving wrong advise. True or False?
False
A completed customer transfer request form and an invoice is enough for the bank to be able to do advance payment on behalf of
our customer. True/False?
True
Describe the flow of an open account
- The importer and exporter agree on the supply of goods.
- The exporter ships the goods to the importer, providing all necessary documents and allowing the importer some time to make payment.
- The importer uses the documents to clear the goods at the port.
- The importer instructs their bank to debit their account and transfer the payment to the exporter.
- The bank sends the money to the exporter’s bank according to the payment instructions.
- The exporter’s bank credits the exporter’s account, completing the transaction.
Who bears the risk in open account?
The exporter bears all the risks including transfer and transportation risks increased by the lack of certainty of payment date
When is open account trading typically used?
Open Account trading is mostly used in
situations where both the seller and the buyer
know each other well and have long-established trading relationship.
What messaging type is used in open account trading?
MT103
What are the merits of open account trading?
- Simple to administer and involves minimal banking fees or other costs.
- Attractive to buyers because it affords them the opportunity of examining the goods before payment
- Buyer obtains control of the goods and may have time to generate cash from sale before payment is due
What are the demerits of open account trading?
- Seller obtains no security for payment and have to rely on the credit worthiness and good faith of the buyer i.e. Has no control over the goods or buyer’s willingness to pay.
- Seller incurs cross border risk and possible foreign exchange risk.
- The seller may need to borrow
What does the operational checklist for open account entail?
- There should be a customer request
- A commercial invoice should be attached
- Other statutory documents like IDF, Customs entry forms etc.
- Request letter should be signed by account mandate and signature verified by account manager.
- Ensure the transaction has been confirmed by a named staff.
- Vetted and approved by your supervisor for
processing
What are the business requirements for open account?
- Completed Customer Request
- Commercial Invoice
- Customs entry form
- Import Declaration Forms (IDF
Open account (sending goods and waiting for payment later) extends secured credit terms to the seller. True/False?
False because the seller lives with all the uncertainties and risks associated
Describe the process flow of documentary collections
Documentary collections in international trade follow these steps:
- The importer and exporter agree on the supply of goods.
- The exporter ships the goods to the importer’s port and sends the shipment documents to their bank, which forwards them to the importer’s bank with specific instructions on how the documents should be handled.
- The exporter’s bank sends the documents to the importer’s bank.
- The importer’s bank gives the documents to the importer, provided all the instructions from the exporter’s bank are followed.
- The importer then clears the goods from the port using the documents.
- The importer instructs their bank to make the payment for the goods.
- The bank sends the payment to the exporter’s bank.
- The exporter’s bank credits the payment to the exporter’s account, closing the deal.
What internal rules govern documentary collections?
ICC Uniform Rules for Collections, Publication No. 522(URC 522)
What is documents against payment?
In this type, the importer’s bank releases the shipment documents to the importer only after they make the payment for the goods.
Risk for Importer: The importer is required to pay immediately in order to receive the documents and clear the goods.
Risk for Exporter: This is relatively safer for the exporter, as they retain control of the goods and documents until the importer pays.
What is documents against payment upon arrival?
Documents Against Payment Upon Arrival is a situation where the buyer (importer) agrees to pay for the goods only after they have arrived and been inspected, not before. In simple terms, the buyer waits until the goods reach them and they are happy with what they received before making the payment. This agreement is made before the goods are shipped and should be stated in the collection order
What is documents against acceptance?
In this type, the importer is allowed to receive and clear the goods before making the payment, but they must sign a promise (acceptance) to pay on a future date. This can be done using an after sight draft (payable after a certain number of days (60-180 days) after the buyer receives the documents) or a time draft (payable on a specific date). In exchange for signing the draft or promissory note, the buyer receives the documents and takes possession of the goods, but the payment will only be made later.
Who are the parties involved in documentary collections?
- the principal/ remitter- exporter/ drawer who sends documents to their bank
- the remitting bank- The bank to which the principal entrusts the documents
- the collecting/ presenting banking - This bank takes charge of the actual collection or
the obtaining of an acceptance from the Drawee in accordance with the collection instructions of the remitting bank - the drawee- The buyer or importer to whom the collection
documents are presented
What financial documents are needed in documentary collections?
- bills of exchange,
- promissory notes,
- cheques, or other similar instruments used for obtaining the payment of money
What commercial documents are needed in documentary collections?
- invoices,
- transport documents,
- documents of title, or other similar documents, or any other documents whatsoever, not being financial documents
What is the payment message used to wire funds under documentary collection
MT202
What is avalisation?
Avalisation is a process where a third party (usually a bank) adds its guarantee to a draft or a bill of exchange, promising to pay the amount if the buyer (importer) doesn’t pay on time.
In simple terms, it’s like a backup guarantee. If the buyer fails to pay, the bank that provided the aval (the guarantee) will step in and pay instead.
The name Bills of exchange and Promissory note are used interchangeably on Documentary collection. True/ False
True
Grace insisted that, Trade must debit customer’s account before releasing any document marked as SIGHT. Grace is acting contrary to URC522. True/ False
False because Grace is right
The account manager is insisting that Unilever is a top client of the bank who is willing and able to pay debts so their SIGHT bills should be always released without necessarily taking from them instruction to debit. Account manager should have her way. True/ False?
False. The account manager is compromising the rules and endangering the bank to possible losses for non-compliance.
Keeping a signed receipt of shipping documents on our files are not very necessary in today’s banking. True/False?
False
What is a letter of credit?
A Letter of Credit (L/C) is a financial document issued by a bank that guarantees payment to the seller (exporter) once certain conditions are met. It acts as a promise from the buyer’s bank that the seller will be paid as long as they meet the terms outlined in the letter.
Describe the flow of an LC
- Buyer and Seller Agree on the Use of an L/C:
a. The buyer (importer) and seller (exporter) agree to use a Letter of Credit as the payment method for their transaction.
b. They outline specific conditions, such as required shipping documents, delivery deadlines, and payment terms.
- Buyer Requests L/C from Their Bank (Issuing Bank):
a. The buyer applies for an L/C at their bank (called the issuing bank), providing details of the transaction.
b. The issuing bank evaluates the buyer’s creditworthiness and may require collateral or a deposit before issuing the L/C.
- Issuing Bank Sends L/C to the Seller’s Bank (Advising Bank) via Correspondent Bank (if needed)
a. If the issuing bank has a direct relationship with the seller’s bank, it sends the L/C directly.
b. If no direct relationship exists, a correspondent bank is involved. The issuing bank sends the L/C to the correspondent bank, which then forwards it to the seller’s bank (called the advising bank).
c. The advising bank notifies the seller that the L/C has been issued.
- Seller Reviews L/C and Ships Goods:
The seller checks the L/C terms to ensure they match the sales agreement. If acceptable, the seller ships the goods to the buyer according to the terms of the L/C.
- Seller Submits Documents to Their Bank (Advising Bank):
a. After shipment, the seller prepares and submits all required documents (e.g., invoice, bill of lading, packing list, etc.) to their bank.
b. The advising bank checks if the documents comply with the L/C terms.
- Documents Sent to the Issuing Bank (Via Correspondent Bank if Involved):
If no correspondent bank is involved, the advising bank sends the documents directly to the issuing bank.
If a correspondent bank is involved:
a. The advising bank sends the documents to the correspondent bank.
b. The correspondent bank reviews and forwards the documents to the issuing bank.
- Issuing Bank Verifies Documents and Authorizes Payment:
a. The issuing bank checks if the documents meet the L/C conditions.
b. If everything is correct, the issuing bank processes the payment.
- Payment is Transferred to Seller (Via Correspondent Bank if Involved):
a. If no correspondent bank is involved, the issuing bank sends the payment directly to the advising bank.
b. If a correspondent bank is involved:
The issuing bank sends the payment to the correspondent bank.
c. The correspondent bank then forwards the payment to the advising bank.
d. The advising bank credits the seller’s account.
- Buyer Collects Documents and Clears Goods:
a. Once the issuing bank verifies the documents and processes payment, the buyer gets the documents needed to clear the goods from customs.
b. The buyer takes possession of the goods.
What does it mean “to honor”
- To pay at Sight; or
- To incur a deferred payment undertaking
and pay at maturity; or - To accept a draft and pay at a future date
What is a compliant presentation?
It means presenting documents that are consistent with the terms and conditions specified in a credit, the applicable provisions of these rules and the international banking practices.
According to article _______a credit is by nature
separate transaction from the sales contract or other contracts on which it is based
4 of UCP
According to article _______, banks deal with documents and not goods or service or performance to which the credit may relate
5 of UCP600
Who are the parties to an LC?
- applicant- the importer or receiver of the service
- issuing bank- the importer’s bank who issues the L/C
- Beneficiary- this is the exporter whose favour the L/C is issued
- Advising bank- the bank to which the issuing bank sends the L/C. this is the beneficiary’s bank
- nominated bank- The bank authorized by the issuing bank to honor i.e to pay at sight, to incur a deferred payment undertaking and pay at maturity, or to accept a bill of exchange and pay at maturity) or to negotiate documents. It is often the advising bank although it is not necessarily so
- confirming bank- This bank, at the request of the issuing bank, adds its own guarantee to the Letter of Credit (L/C). This means it promises to pay the seller if the issuing bank or buyer fails to do so.
- Reimbursing bank- The bank that at the request of the issuing bank is authorized to pay or accept and pay time drafts under the L/C.
What are the settlement methods under LCs?
- Sight payment
- Deferred payment
- by acceptance
- by negotiation
Describe the sight payment settlement methods under LCs
This is when payment must be made immediately when the documents are presented and checked. This means the seller gets paid on demand. This may or may not require a draft (request document) to be presented.
Describe the deferred payment settlement methods under LCs
Deferred payment means that the seller does not receive payment immediately but at a later date, as specified in the Letter of Credit. To receive payment, the seller must submit a draft along with the required documents. The payment date is usually set for a certain period after the shipping documents are issued or after the documents are presented to the bank. This gives the buyer extra time to pay while ensuring the seller will be paid at the agreed time.
Describe the by acceptance settlement methods under LCs
An acceptance credit means the seller does not receive payment immediately but at a later date when the draft (payment request) matures. To get paid, the seller must submit a draft along with the required documents. Once the draft is accepted, the seller can either wait until the due date for payment or choose to get money earlier by selling the accepted draft at a discount to a bank or financier. This allows the seller to access funds before the actual payment date while ensuring the buyer has time to pay.
Describe the negotiation settlement method under LCs
This is when the nominated bank (importer’s bank) buys the drafts (payment requests) or documents from the seller (exporter), even if the drafts are from a different bank. The bank agrees to give the seller money before the day it’s supposed to be reimbursed, as long as the documents meet the required conditions.
What are the different types of LCs?
- irrevocable LC
- Confirmed LC
- Transferable LC
- Back-to-back LC
- Standby LC
- Revolving credit
What is an irrevocable LC?
An irrevocable Letter of Credit (L/C) is a type of L/C that cannot be changed or canceled once it has been issued, unless both the buyer (importer) and the seller (exporter) agree to the changes. This means that the bank’s commitment to pay the seller is guaranteed as long as the terms and conditions of the L/C are met.
What is a confirmed LC?
A confirmed L/C means that, in addition to the promise made by the buyer’s bank (the issuing bank) to pay the seller, another bank (called the confirming bank) also guarantees the payment. The seller might not trust the buyer’s bank, especially if it’s in another country, so they ask for this extra guarantee from a bank in their own country to feel more secure.
If the seller wants the L/C confirmed, they need to let the buyer know, and the buyer should agree to it in the sales contract.
What is a silent confirmation?
A silent confirmation is when a bank adds its support to a Letter of Credit (L/C) without officially confirming or guaranteeing the payment. In simple terms, it means the bank agrees to handle the documents but does not take on the responsibility to pay the seller if the buyer’s bank fails to do so
What is a transferrable LC?
A transferrable Letter of Credit (L/C) is an L/C that allows the seller (beneficiary) to transfer some or all of the credit to another party, often a supplier or subcontractor, to help fulfill the order.
Describe how a transferable LC works
Agreement Between Buyer and Seller: The buyer and seller agree on a deal, and the buyer asks their bank to create an L/C for the seller.
L/C Sent to Seller’s Bank: The buyer’s bank sends the L/C to the seller’s bank, promising to pay the seller once they meet the conditions.
Seller Receives the L/C: The seller gets the L/C from their bank and sees it has a special option: they can transfer it to another company (like a supplier) who will help deliver the goods.
Seller Transfers the L/C: The seller asks their bank to transfer the L/C to the supplier or a third party.
Supplier Receives the L/C: The supplier gets the L/C, which guarantees payment from the buyer, and uses it to get paid when they deliver the goods.
Supplier Delivers the Goods: The supplier sends the goods to the buyer and provides the necessary documents to the bank.
Supplier Gets Paid: If everything checks out, the bank pays the supplier and then gets the money from the buyer’s bank. The seller also gets paid according to the L/C.
What is a back-to-back LC?
A back-to-back Letter of Credit (L/C) is a type of L/C arrangement where the seller (beneficiary) uses one L/C (received from the buyer) as security to obtain a second L/C from their bank. The second L/C is used to pay the supplier or another party who provides the goods or services needed to fulfill the order for the buyer.
Describe the flow of a back-to-back LC
Buyer and Seller Agree: The buyer and seller agree on a contract, and the buyer opens a Letter of Credit in favor of the seller.
Seller Receives the L/C: The seller gets the L/C from the buyer’s bank. However, the seller needs to pay someone else (a supplier) to get the goods needed to complete the order.
Seller Applies for a Second L/C: The seller then goes to their own bank and asks for a second L/C using the first L/C they received from the buyer as collateral or security. This second L/C will go to the supplier, guaranteeing the payment.
Supplier Gets the Second L/C: The seller’s bank issues the second L/C to the supplier, who will now provide the goods or services required by the seller.
Supplier Delivers Goods: The supplier delivers the goods to the seller, and the seller provides the necessary documents to their bank.
Documents Presented: The supplier presents the required documents to the seller’s bank, just like in a regular L/C transaction.
Payment to the Supplier: Once the seller’s bank confirms the documents, it pays the supplier from the second L/C. The buyer’s bank will pay the seller based on the first L/C.
What is a standby LC?
A Standby Letter of Credit (L/C) is a type of L/C that serves as a backup payment or guarantee. It’s used to ensure that a payment will be made if the buyer or the party that the letter is issued for fails to meet their obligations, such as making payment or completing a contract.
In simple terms:
- A standby L/C is like a safety net or fallback that only gets used if something goes wrong.
- If the buyer doesn’t pay, or the terms of the contract aren’t met, the standby L/C allows the seller to claim payment from the bank.
3.The seller can only use the standby L/C if the buyer doesn’t fulfill their promise—it’s not used for regular payments, but only if there’s a default.
What is a revolving LC?
A Revolving Letter of Credit (L/C) is a type of L/C that automatically renews or resets after it’s used, typically for a series of payments or shipments over a period of time. It allows the buyer and seller to conduct multiple transactions without needing to open a new L/C each time.
What are the two main types of revolving LCs where its reinstatement is dependent upon value?
- cumulative revolving LC
- non-cumulative revolving LC
What is a cumulative revolving LC?
- In a cumulative revolving L/C, the unused balance of the credit amount is carried over to the next period.
- For example, if the buyer and seller agree on a revolving L/C with a limit of $100,000 over 12 months, and in the first month only $30,000 is used, the remaining $70,000 can be added to the next month’s credit limit.
- This means the total amount can accumulate over time, allowing more credit to be used as it “revolves” each period.
What isa non-cumulative revolving LC?
- In a non-cumulative revolving L/C, any unused balance does not carry over to the next period.
- For example, if $30,000 is used in the first month of a $100,000 L/C, the remaining $70,000 will not roll over to the next period.
The L/C limit resets to $100,000 each period, whether or not the full amount was used. - This type is typically used when the buyer and seller want a fixed credit limit each period.
What is a red clause LC?
A Red Clause Letter of Credit (L/C) is a type of L/C that allows the seller (beneficiary) to receive partial payment in advance before they have shipped the goods, based on the terms of the L/C.
What are some risks of LCs for the exporter?
- There is country risk if not confirmed
- There is credit risk of the issuing bank if not confirmed
What are some risks of LCs for the nominated bank?
- non-reimbursement by the issuing bank
- payment to the beneficiary against discrepant documents
What are some risks of LCs for the issuing bank?
- Non-payment by the applicant
- Payment to the beneficiary against discrepant
documents
What are some advantages of LCs for the exporter?
- Protection against non-payment or non-acceptance
- Protection against country risk, if confirmed
3.Immediate availability of funds in case of an L/C available by negotiation - Immediate availability of funds through discount of a Banker’s Acceptance
- Immediate availability of funds through prepayment of a Deferred Payment Undertaking Pre-export financing
What are some advantages of LCs for the importer?
It ensures documentary compliance with the L/C terms and the contract of sale, provided the L/C terms reflect the terms and conditions of the contract of sale
What does the incoterm EXW mean?
EX Works
What does the incoterm FCA mean?
Free Carrier
What does the incoterm CPT mean?
Carriage Paid To
What does the incoterm CIP mean?
Carriage and insurance paid to
What does the incoterm DPU mean?
DELIVERED AT PLACE UNLOADED
What does the incoterm DAP mean?
DELIVERED AT PLACE
What does the incoterm DDP mean?
DELIVERED DUTY PAID
What does the incoterm FAS mean?
FREE ALONGSIDE SHIP
What does the incoterm FOB mean?
FREE ON BOARD
What does the incoterm CFR mean?
COST AND FREIGHT
What does the incoterm CIF mean?
COST INSURANCE AND FREIGHT
What are the main features of a guarantee?
- it is irrevocable
- it is usually a passive instrument since once issued it is not expected to be drawn on. It however remains valid until it expires
What are the types of guarantees?
- performance guarantee
- advance payment guarantee
- tender or bid bond guarantee
- retention guarantee
- warranty guarantee
- facility guarantee
- shipping guarantee
What is a performance bond guarantee?
A Performance Bond Guarantee is a financial guarantee issued by a bank or insurance company to ensure that a contractor or supplier completes a project or fulfills a contract as agreed. If the contractor fails to meet their obligations, the bond provides compensation to the buyer or project owner.
What is a payment guarantee?
A Payment Guarantee is a financial guarantee issued by a bank or guarantor to ensure that a buyer (importer) pays the seller (exporter) on time and in full for goods or services received. If the buyer fails to make the payment, the bank steps in and pays the seller on behalf of the buyer.
What is a shipping guarantee?
A Shipping Guarantee is a financial document issued by a bank that allows an importer to take delivery of goods from the shipping company before receiving the original bill of lading. It is commonly used when goods arrive at the port before the necessary documents.
