Week eight - international payment instruments Flashcards
what is a payment instrument
financial instruments used to settle/pay foreign trade transactions
who are the issuers of financial instruments
banks
why is there a conflict of interest in the selection of a payment instrument
conflict between the exporter and importer:
- regarding date of payment
- regarding the commitment of the payment instrument (exporter wnats maximum security, importer wants minimum commitment)
what does the exporter take into account when selecting the payment instrument
they assume non-payment risk
- the solvency and reliability of the importer
- the situation of the importer country
- experience in previous orders
- total amount of the transaction
what are the variables considered when choosing the payment instrument
- safety, safer = more expensive
- cost, safer = more expensive
- ease in obtaining anticipation or advances, some financial instruments do not allow for anticipation or advances
- date of payment
risks of a personal cheque for the exporter
- no funds in the account of the importer
legal defects of the cheque (i.e. signature) - cheque sent arrives late or is lost
how to be confident with a personal cheque payment
- only accept with absolute confidence of the importer
- cheque must be crossed and nominative
- cashing the cheque has costs so checking the interest and bank changes can help
risks of a bank cheque for the exporter
- importer does not send the cheque or does it with a delay
- cheque is false
- issuing bank has no funds in the account
- country of the issuer bank has frozen payments abroad
advantages of a bank cheque for the exporter
- usually guarantee of payment is 100%
- quick to cash it in
how to be confident with a bank cheque payment
- only accept cheques issued by banks without difficulties
- request the cheque nominative and crossed
- cashing the cheque may have costs so calculating the interest and bank charges can help
risk of simple payment order for the exporter
- exporter send the goods before receiving the payment order
- issuing bank does not have funds
- country of the issuer bank freezes payments abroad
- the payment order is delayed
recommendations for the exporter when using a simple payment order
- requiest that the order will be transmitted by the SWIFT system, making the payment automatic
- the exporter should provide the importer the name and details of the account in its country
risks of the documentary payment order
the issuer bank has no funds
advantages of the documentary payment order for the exporter
- does not have to ship the goods until it receives the notification of the payment order
- receives the payment of the order when handling the documents
- exporter bank guarantees the quality of the payment order
recommendations for the exporter when using documentary payment orders
- do not ship the merchandise until there is a payment order issued by a trustable bank
- request a SWIFT payment order
- request that the payment order be sent directly to the bank
- request an irrevocable payment order
whcih security of payment is higher, a documentary payment order or a letter of credit, and why?
- the security of payment of a documentary order is lower
- because the payment order is generally recovable
- the documentary payment order also does not have its own regulation with international homogenous procedures for all banks
what are the risks for the exporter when using a clean (simple) remittance
- the exporter sends the goods and documents before receiving the payment of acceptance of the remittance
advantages of using clean remittance for the exporter
- in the event of a sale with deferred payment, there will be a bill of exchange accepted by the importer
recommendations for the exporter when using clean remittance
- give precise instructions to the bank on how to claim the letter, in the event of non-payment or non-acceptance by the importer
- specify who pays the expenses of the bank letter presenter
- for sales with a deferred payment, get a bank guarantee with the letter
define letter of credit
the documentary credit is an agreement where the importers bank (issuing bank) is committed to the beneficiary (exporter) to pay the bills
what are the most common documents seen with letter of credit
- commercial invoice
- transport documents
- insurance documents
why use a letter of credit
to coordinate buyer interest, they want to receive the goods according to the conditions negotiated in the contract and the seller interest, who does not want to send the goods without receiving the agreed price
main functions of the letter of credit
- security: the seller can claim for the payment, once he meets the terms agreed in the contact, for the buyer, security is given as the seller will not receive the payment until the bank checks all the documents are correct
- financing credit: the seller can get credit to produce the goods, the buyer can postpone the payment using the letter of credit as a guarantee
characteristics of the letter of credit
- most simple and flexible international financial instrument
- it has an international regulation ‘uniform customs and practise for documentary credits’
- implies basic obligation: delivery of goods and payment
- the obligations implying: timing, manner, place of delivery/payment
three types of letter of credit
- revocable, irrevocable
- confirmed
- spot, forward
what is a revocable/irrevocable letter of credit
- revocable: a credit that can be cancelled by the importer before the bank pays
- irrevocable: cannot be cancelled
what is a confirmed letter of credit
a 3rd bank adds a guarantee of payment in the event that the importer’s bank does not pay
what is a spot/forward letter of credit
- spot: payment is immediate
- forward: payment is postponed (after delivery)
what are the four operational managements of the letter of credit
1) contractual relationship
2) opening or issuance of credit
3) submission of documents
4) liquidation
5) negotiate the letter of credit to be irrevocable
what is a contractual relationship
parties agree in the sales contract to use a letter of credit
what is the issuance of credit
the applicant requests to a bank that the opening of the letter of credit favours the exporter
what is the submission of documents
the beneficiary ships the goods when the letter of credit is being opened, the revision of documents is important to avoid disagreements and reservations
what is liquidation
after finding no problem with the documents, the issuing bank will forward them to the importer who accepts them, merchandise is collected
