Professional Documents
Culture Documents
1. What is payment by open account? What are the risks for the exporter if he accepts payment by 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.
The biggest risk for the exporter in open account payment is non-payment as he has no protection at all,
just relying on the honour of the buyer in payment.
2. What is Export credit insurance?
Export credit insurance is a guarantee of payment for the exporter from a third party, an insurance
company, which issues an export credit insurance policy covering the risk of non- payment. The exporter
has to pay the costs for that guarantee. The insurance company will pay the exporter in case the buyer
fails to do so.
3. What is a bank guarantee?
A bank guarantee is a guarantee of payment for the exporter from a third party, a bank. The bank may
issue a bank guarantee, assuring that the bank will pay for the exporter in case the buyer fails to do so.
The buyer has to pay the costs of that guarantee.
4. Distinguish Export credit insurance and Bank Guarantee?
Both of them are guarantee of payment from a third party, providing the exporter with some level of
security in terms of payment.
For Export Credit Insurance, the exporter has to pay for that guarantee while it is the buyer who pays for a
Bank Guarantee. The third party offering export credit insurance is the insurance company while the bank
offers a bank guarantee.
5. What are some limitations of Export Credit Insurance?
Firstly, there is always a long wait between the time when the buyer fails to pay and the time when the
insurance company compensates the exporter, says six months typically.
Secondly, when compensation is paid, it is unlikely to cover 100% of the original invoice price.
So, with Export Credit Insurance, the exporter is covered against the worst.
6. If shipment is made on CIF or CIP terms, how much is normally the insurance coverage on that
shipment?
110% of the CIF or CIP value of the goods.
7. What method of payment makes late payment impossible?
11. Why do exporters greatly prefer confirmation of credit from their bank?
Because the bank in his own country not only handles the paperwork but also makes payment itself and
recovers the funds from the buyers bank.
12. Distinguish Partial shipments and Shipment in installments.
Shipment in installments means that an agreed schedule has been set up, for example, three equal
shipments in March, August and October 2012.
A partial shipment is simply an incomplete shipment with some part of the goods to follow later.
13. Explain the two principles that make letters of credit safe for both exporter and buyer: Autonomy and
Strict compliance.
Autonomy means that the L/C is a contract in its own right, entirely separate from the contract for the sale
of goods.
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.