Unit 4: Financing international trade Flashcards
What is an open account?
Open account means the exporter ships the goods to the buyer and just waits till a fixed date as agreed in their contract for payment from the buyer.
Normally, the exporter only accepts open account method of payment if he has known the buyer quite well and they have established a long-term and trustworthy business relationship.
Why open account?
Is only used for transactions between exporters and importers which have already established a trust-worthy and long-term business relation
Saving time for both exporter and importer as they deal directly with each other – not much involvement of banks.
Types of open account
Open account with bank guarantee
Open account with export credit insurance
What is documentary letter of credit?
A document issued by a bank, whereby the bank replaces the buyer as the paying party. The exporter is basing his risk of getting paid on the bank rather than on the importer. The bank will have to be reimbursed by the importer.
What is a sight draft?
A draft that has been drawn to be payable at the time of presenting the document
What is a usane draft/time draft/term draft?
A draft that has been drawn to be payable after a specific number of days.
What is banker’s acceptance?
A usance draft drawn on a bank that stamp ACCEPTED across the face, thereby making it a prime obligation of that bank to pay. It is used to finance specified short-term, self-liquidating transaction, including foreign trade.
What are documents required under typical letter of credit?
commercial invoice
transport documents
insurance document
certificate of origins
certificate of inspection
packing list
weight list
What is a commercial invoice?
Must be made out to the applicant for the letter of credit. The amount shown on the invoice should not be more than the amount permitted by the letter of credit; if it is, the bank may refuse to accept the invoice.
What are transport documents?
Sea transport – full set marine bill of lading;
Air transport – air waybill;
Rail transport – railway consignment note;
Road transport – road consignment note;
Combined transport – combined transport bill of lading.
What is an insurance document?
If shipment is made on CIF or CIP terms, the letter of credit will call for an insurance Policy/certificate.
What are parties in the letter of credit?
- Applicant: the buyer – open the letter of credit;
- Beneficiary: The seller – present documents and receive payment;
- Issuing/Opening bank: The bank that the buyer asks to open a letter of credit (open/issue L/C as the buyer’s request);
- Advising bank: The bank notifying the exporter that the letter of credit has been opened (advice L/C to the beneficiary);
- Confirming bank: Commit to pay beneficiary and bear the risk of issuing bank;
- Paying bank;
- Accepting bank;
- Negotiating bank.
What are the principles of letter of credit?
Autonomy and Strict Compliance
What is autonomy?
Autonomy means that the L/C entirely separates from the contract for the sale of goods. This means the bank is obliged to pay – whatever the dispute between the buyer and the exporter.
What is strict compliance?
Strict Compliance means that the exporter must present to the bank shipping documents that comply in all respects with the terms of the credit. Small deviations will result in refusal by the bank to pay.
Note for letter of credit
If the credit requires documents that the exporter cannot furnish or if compliance is impossible for some other reason, then the letter of credit must be amended – a process that requires the cooperation of the buyer.
What is an irrevocable LC?
A letter of credit that cannot be canceled nor amended without agreement of all parties
What is a revocable LC?
A letter of credit that may be canceled at any moment without prior notice to the beneficiary
What is a sight Letter of credit?
If payment is to be made at the time of presenting the document then it is referred as the Sight Letter of Credit. In this case banks are allowed to take the necessary time required to check the documents
What is a time letter of credit?
If payment is to be made after the lapse of a particular time period as stated in the time draft then it is referred as the Time Letter of Credit.
What is a deferred payment LC?
A letter of credit under which the documents are forwarded to the importer’s bank, while sight draft is presented at a latter future date
What is a red clause LC?
A letter of credit permitting the beneficiary to receive a sum prior to shipment
What is a transferable LC?
A letter of credit that can be utilized by someone designated by the original beneficiary
What is a revolving LC?
A letter of credit calling for renewed credit to be made available when the issuing bank informs the beneficiary that the buyer has reimbursed the issuing bank for the drafts already drawn
What is a back to back LC?
Two letter of credits with identical documentary requirements, except for the difference in the price as shown by the invoice and draft
What is a traveler LC?
A letter of credit issued by a bank, addressed to all its correspondents, permitting the bearer to draw drafts up to the total amount named in the letter
What is a standby LC?
A letter of credit that can be drawn against, but only if another business transaction is not performed
What is a bid or performance bond?
A financial guarantee, given by a contracting company, which states that it has the capability to start and satisfactorily complete the project
What is an adviced LC?
A letter of credit issued by a bank and forwarded to the beneficiary by a second bank in his area. The second bank validates the signatures and attests to the legitimacy of the first bank
What is a confirmed LC?
A letter of credit issued by one bank to which a second bank adds its commitment to pay
Documentary credit
- Being used worldwide
- Safer for exporter as it makes sure he will get his money for the goods sold provided that he presents the correct documents
- Ensure the importer that he will get the goods bought as long as he pays for them or agreed to pay in a fixed date in the future.
- Greatly supportive involvement of banks in the transaction process.
- Taking more time than other methods of payment
Bills for collection
Clean collection: more risky as the importer can use the documents of the title to receive the goods only by agreeing to pay in a fixed date in the future
Documentary collection: safer as the importer has to pay in return of the documents of title to receive the goods after all.
More passive roles of the banks. They only do what is required.
What are documents against payment D/P?
In this case documents are released to the importer only when the payment has been done.
What are documents against Acceptance D/A?
In this case documents are released to the importer only against acceptance of a draft.
What is an advance payment?
- Safest for the exporter if the importer has to fully pay for the good bought in advance
- Still safe if the importer pays in part in advance
- Time saving
- Being used if there is more demand than supply for that kind of commodity.
Best for importer
The most secured method of payment – the least secured method of payment
* Open account
* Bill for collection
* LC
* Advanced payment
Best for exporter?
The most least secured method of payment – the most secured method of payment
* Open account
* Bill for collection
* LC
* Advanced payment
