INTERNATIONAL

PAYMENTS METHODS
CHAPTER 5
METHODS OF INTERNATIONAL
PAYMENTS
 1. CASH IN ADVANCE
 2. OPEN ACCOUNT

 3. COUNTER TRADE

 4. COLLECTION

 5. REMITTANCE

 6. CASH AGAINST DOCUMENTS

 7. DOCUMENTARY CREDITS
1. CASH IN ADVANCE

 The goods will not be shipped until the buyer has

paid the seller.
 Time of payment : Before shipment

 Goods available to buyers : After payment

 Risk to exporter : None

 Risk to importer : Relies completely on exporter
to ship goods as ordered
2. OPEN ACCOUNT

 The exporter ships the merchandise and expects

the buyer to remit payment according to the
agreed-upon terms.
 Time of payment : As agreed upon

 Goods available to buyers : Before payment

 Risk to exporter : Relies completely on buyer to
pay account as agreed upon
 Risk to importer : None
2. OPEN ACCOUNT

 1. The seller delivers

goods and sends
(3)
documents to the Bank S Bank B
buyer
 2. The seller
announces liability (3)
(3)
debt of the buyer
(2)
 3. The buyer pays the
seller when time is Seller (1) Buyer
due.
3. COUNTER TRADE

 These are foreign trade transactions in which the

sale of goods to one country is linked to the
purchase or exchange of goods from that same
country.
 Common countertrade types include barter,
compensation (product buy-back), and counter-
purchase.
 The primary participants are governments and
multinationals.
COUNTER TRADE TRANSACTIONS

 1. Barter Trade
 Two parties directly exchange goods deemed to be
approximately equivalent value without any
exchange of money taking place.
 2. Product Buy Back
 Obligate the seller of plant, machinery, or technology
or materials to buy from the importer a portion of
finished products during a certain period (5 to 25
years).
 3. Counter –Purchase
 Obligate the seller to purchase from the buyer goods
and services unrelated to the goods and services sold
during a certain period (1 to 5 years)
4. DOCUMENTARY
COLLECTION
Characteristics
 Allows exporters to retain ownership of the goods
until they receive payment or are reasonably
certain they will receive it

 Bank acts as agent for exporter by holding the

title documents

 Bank assumes no risk but must act in good faith

and exercise reasonable care
DOCUMENTARY COLLECTION
Seller (Principal) Buyer (Drawee)

$ Documents Documents $

Documents

$
Seller’s Bank Buyer’s Bank
(Collecting Bank) (Presenting
Bank)
 DRAFTS (BILLS OF EXCHANGE)
 These are unconditional promises drawn by the
exporter instructing the buyer to pay the face
amount of the drafts.
 Banks on both ends usually act as intermediaries
in the processing of shipping documents and the
collection of payment. In banking terminology,
the transactions are known as documentary
collections.
DRAFTS (BILLS OF EXCHANGE)

• Sight drafts (documents against payment) :

When the shipment has been made, the
draft is presented to the buyer for payment.
 Time of payment : On presentation of draft
 Goods available to buyers : After payment

 Risk to exporter : Disposal of unpaid goods

 Risk to importer : Relies on exporter to ship goods
as described in documents
DRAFTS (BILLS OF EXCHANGE)

• Time drafts (documents against acceptance)

: When the shipment has been made, the
buyer accepts (signs) the presented draft.
 Time of payment : On maturity of draft
 Goods available to buyers : Before payment

 Risk to exporter : Relies on buyer to pay

 Risk to importer : Relies on exporter to ship goods
as described in documents
DRAFT OR BILL OF EXCHANGE USED IN
DOCUMENTARY COLLECTION

______________________________________ ________________________________ NO.___________

(CITY) (DATE)
AT _____________________________________________________ SIGHT OF THIS BILL OF EXCHANGE

PAY TO THE ORDER OF ________________________________________ ___________________

(AMOUNT IN FIGURES)
THE SUM OF___________________________________________________________________________

______________________________________________________________________________________

TO ________________________________________ ______________________________________
DRAWER
_________________________________________
_________________________________________ ______________________________________
DRAWEE BY: AUTHORIZED SIGNATURE
TYPES OF ‘BILLS FOR COLLECTION’
 Documents against payment (DP), also called
Cash against documents (CAD)
 The shipping documents are delivered to the
importer only after the payment is released by
him
 In case of air freight the goods can be
consigned to the bank with their prior
approval. They will then hand over to the
importer only after receipt of payment

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DOCUMENTARY COLLECTION
- D/P
 Time of Payment
 On presentation of sight draft by a bank to buyer
 Goods Available to Buyer
 After payment
 Risks to Seller
 Buyer’s nonacceptance of shipment
 Payment delays due to unavailability of foreign exchange
in buyer’s country
 Payment blocked due to political actions in buyer’s
country
DOCUMENTARY COLLECTION
- D/P
 When Appropriate
 Seller is confident that buyer will accept shipment
 Seller is confident that importing country will not impose
regulations deferring or blocking transfer of payment
TYPES OF ‘BILLS FOR COLLECTION’ (CONTD.)
 Documents Against Acceptance/DA
 Used where a credit period (e.g. 30/60/90 days sight
of documents from the date of shipment) is agreed
between the exporter and the importer
 Until the point of acceptance, exporter retains control
of goods. After acceptance, the exporter is financially
exposed until the buyer actually initiates payment
through their bank.

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DOCUMENTARY COLLECTIONS - D/A
 Time of Payment
 At maturity of accepted draft
 Goods Available to Buyer
 Before payment
 Risks to Seller
 Buyer’s default on payment obligation
 Delays in availability of foreign exchange and
transferring of funds from buyer’s country
 Payment blocked due to political events in buyer’s
country
DOCUMENTARY COLLECTIONS - D/A

 When Appropriate
 Seller has confidence that buyer will accept shipment
and pay on agreed date
 Seller is confident that importing country will not
impose regulations deferring or blocking the transfer of
payment
TYPES OF ‘BILLS FOR COLLECTION’
 Clean Bills:
 Payments of the Bill is NOT based on presenting of
the export documents.
 Documentary Bill – D/P
 The buyer’s Bank delivers the documents only when
the buyer makes payments of the Bill (D/P) or accepts
the Bill (A/D)
TYPES OF ‘BILLS FOR COLLECTION’
 Nominal Bill
 The Bill that clearly identifies name of the
Beneficiary. This Bill can Not be assigned to another
party by endorsement.
 Bearer Bill (pay to the Bearer)
 Those who holds the Bill will become the Beneficiary
and receive payments
 Order Bill (pay to order of -------- (beneficiary
name)
 Endorsement must be made in the back of the Bill.
DOCUMENTARY COLLECTIONS RISK
 Unscrupulous buyer
 Insolvent buyer

 Buyer changes mind

 Buyer’s country is in turmoil

 Foreign exchange may not be available

 Seller may have to pay return freight

 Buyer may not honor promise to pay

RELATING PARTIES OF B/E
 Drawer: the seller, the exporter or supplier
 Drawee: the one who obliges to pay the B/E. The
importer, the buyer or a third party assigned by
the drawee (confirming bank or issuing bank)
 Beneficiary: the drawer for the first time, the one
assigned by the drawer.
CLASS DISCUSSION
 Make a Bill of Exchange, based on the following
information:
 1. Case 1
 Exporter: ABC Company, District 10, HCMC, Vietnam
 Importer: THN Trading Co.LTD, Pusan, Korea
 Advising Bank: Bank of Foreign Trade of Vietnam HCMC
Branch
 Opening Bank: Sinhan Bank Seoul, Korea
 Drawn on: Tokyo Bank Japan
 Means of payment L/C
 Amount of Payment: USD 48,380 USD
 Shipment Date: November 25, 2009
 Irrevocable Confirmed L/C No: M426300/NS02617 date
November 01, 2009
 Invoice Number: 18/ABC//2009 date: November 25, 2009.
CLASS DISCUSSION
 Case 2:
 Exporter: Seaprodex Vietnam, HCMC, Vietnam
 Importer: Foo Soon Trading Co LTD, Australia
 Collecting Bank: Viettinbank, HCMC Branch
 Bank in Australia: Sydney Bank Australia
 Means of Payment: D/P
 Amount of Payment: USD 45,364 USD
 Shipment date: November 24, 2009
CLASS DISCUSSION
 Case 3:
 Importer: SONY Electronics, 13600 Perai Province
Wellesley, Penang Malaysia
 Exporter: SONY Vietnam Ltd. 248A No Trang Long
St. Binh Thanh District, HCM city
 Means of Payment: D/A 240 days after delivery
 Amount of payment: USD 51,900
 Importer’s Bank: Indosuez Bank
 Exporter’s Bank: Vietcombank Ho Chi Minh city
Branch.
BILL OF EXCHANGE USED IN
DOCUMENTARY COLLECTION
 Bill of Exchange
 No………
 For……..

 At-------- sight of this FIRST Bills of Exchange

(Second of the same tenor and date being unpaid)
pay to the order of
.…………………………………………………………
………….
 The sum of:
…………………………………………………..
 To……………………………..
BILL OF EXCHANGE USED IN
DOCUMENTARY CREDIT
 Bill of Exchange
 No………
 For……..
 At-------- sight of this FIRST Bills of Exchange
(Second of the same tenor and date being unpaid) pay
to the order of
.………………………………………………………………
…….
 The sum of:
…………………………………………………..
 Value received as per our invoice (s) No (s): …….
 Dated: ……………………..
 Drawn under: …………………………….
 Irrevocable L/C No: ……………………..
Dated…………………..
CLASS DISCUSSION
 Why does the documentary collection method of
payment is in favor of the importer?
 5. DOCUMENTARY LETTERS OF CREDIT
 Most commonly used mechanism in
international trade.
 Affords greatest degree of protection to
the seller after advance payment. Acts
like an insurance contract for buyer/seller,
eliminating credit risk
 Issued by importer’s bank in favour of the
exporter giving him authority to draw
bills up to a particular amount covering a
specified shipments of goods
(contd.)

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DOCUMENTARY LETTERS OF CREDIT (CONTD.)
 Bills are accompanied by the shipping documents
covering the goods contracted to be purchased by
the importer
 Assurespayment against delivery of
documents. At the same time reduces
payment delays
 Governed by Uniform Customs & Practice for
Documentary Credits – latest edition UCP
600.

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PARTIES TO A LETTER OF CREDIT –
RIGHTS AND RESPONSIBILITIES
 Applicant/Importer: the one who requires his bank
to open an L/C.
 Applicant’s/Importer’s Bank (Issuing Bank or
opening bank): the bank who opens an L/C following
the requirement of the applicant.
 Confirming Bank: the bank that gives additional
signature to the L/C to confirm that it will ensure
payment to the exporter if the issuing bank is not
able to fulfill its financial responsibility.
 Intermediary Bank (Advising Bank): the bank that
informs about the L/C opening. It is often the branch
of the Issuing Bank and located in the exporter’s
country.
 Beneficiary/ Exporter: the seller who receives
payment. 32
THE PROCESS
 The importer (opener) asks his bank to open a LC in
favour of the exporter
 The LC is opened by the opening bank
 The advising bank (an intermediary bank in exporter’s
country) receives credit from the opening bank. If all
okay, it is forwarded to beneficiary (exporter)
 Exporter satisfies itself about the provisions in the LC
as in conformity with the contract and seeks any
amendment, if needed
 The shipment is effected by the exporter. He prepares
the documents and draws his bill under the LC and
sends these to advising/negotiating bank contd

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THE PROCESS (CONTD)

 The negotiating bank checks the documents and

if in conformity with the credit terms, negotiates
the bill and releases payment to the exporter.
 The documents are sent to the opening bank
which reimburses the negotiating bank. The
opening bank forwards the bills to the importer
 The importer receives the bill. Checks the
documents. If found in order the payment is
made to the opening bank
 On acceptance/payment, the shipping documents
are given to the importer for receiving the goods

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 Documentary Credit Procedure

Buyer (1) Contract of Sale Seller

(Importer) (Exporter)
(5) Delivery of Goods

(2) (8) (6) (4)

Request Documents Documents Letter of
to open & Claim for Presented Credit
L/C Payment Delivered

(7) Documents Presented to

issuing Bank
Importer’s Bank Advising
(Issuing Bank) (9) Payment Bank

(3) L/C Sent to advising

DOCUMENTS PRESENTED TO THE BANKS
 L/C
 Shipping documents
 Bill of Lading:
 title document-
 contract between carrier and shipper
 shipper’s receipt of the goods
 document assigns control of goods
 Commerce Invoice:
 description of the product, price and others
 Packing list:
 outlines things to be filled
 Certificate of Insurance
 Certificate of Origin
 Others as stated in the L/C
LETTER OF CREDIT (L/C)
CHAPTER 6
Letters of Credit
• What is L/C?
– A document issued by a bank stating its
commitment to pay someone (seller or
exporter) a stated amount provided the
seller or exporter meets specific terms
and conditions
• also called the documentary letters of credit
• Most common payment method in
international trade
CONTENT OF A LETTER OF CREDIT
(L/C)

 Number of L/C; Address and Date of issuing the L/C

 Form of L/C
 Currency Code and Amount
 Date and Place of Expiry
 Applicable Rules: UCP 600
 Applicant, Beneficiary,
 Drafts at sight or Time Draft
 Date of Shipment
 Description of goods and/or services
 Description of shipment, packaging, delivering of
goods
 Documents required
 Commitments of payment by the Issuing Bank
 Signature of the Issuing Bank
 Other special items
Steps in Obtaining L/C
• Buyer and seller agree on the terms of a
sale, seller requests buyer to arrange for his
bank to open a L/C
• The buyer’s bank (issuing bank) prepares a
L/C
• The buyer’s bank then sends the L/C to its
corresponding bank (buyer’s bank), which is
called the advising bank
• The advising bank forwards the L/C to the
buyer for approval-- terms can be amended
• After final terms (agreed), goods shipped
TYPES OF LETTERS OF CREDIT
 Revocable & Irrevocable LC
 Confirmed Irrevocable LC
 Irrevocable Without Recourse LC
 Transferable LC
 Back to back LC
 ‘Red Clause’ and ‘Green Clause’ LC
 Revolving LC
 Deferred payment LC
 Standby LC

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 Irrevocable Letter of Credit: an L/C that can
not be cancelled.
 Confirmed Irrevocable L/C: an Irrevocable
L/C which is ensured to be paid by the
Confirming Bank
 Irrevocable without recourse L/C: After the
exporter has received payments, can’t the Issuing
Bank claim the money back in any situations.
There must be statement: “Without Recourse to
Drawer” written on the Bill of Exchange and in
the L/C.
 Transferrable L/C: an Irrevocable L/C that can
be partially or fully transferred to other parties.
 Revolving L/C: An Irrevocable L/C that is
automatically recovered its value for several
times until the contract is fully implemented.
 Back-to-back L/C: After receiving the L/C from
the importer’s Issuing Bank (Original L/C), the
exporter can use it to open another L/C to
another beneficiary party. The second L/C is
called “Back-to-Back L/C”.
 Some requirements for Back-to-Back L/C:
 The number of required documents must be more than that
of Original L/C.
 Total value is lower than that of the Original L/C

 Delivery time must be shorter than that of the Original one.

 ‘Red Clause’ and ‘Green Clause’ LC: The
Issuing Bank agree to pay a certain amount of
the total in advance after receiving the following
documents:
 Bill of Exchange of the amount paid in advance
 Invoice
 Commitment of delivering goods on time.

 Deferred Payment: An Irrevocable L/C in

which payment is made by installment before the
time specified in the L/C.
 UCP 600
All international payments must be subject to UCP
600 – (Uniform Customs and Practice for
documentary credits), URC 522, URR 525, ISP
98, etc.
UCP 600 is issued by ICC as a new revision of UCP
500 in 2007.
UCP 600 consists of 39 items or clauses on uniform
customs and practice of documentary credits
URC 522 – the Uniform Rules for Collection – 26
items
URR 525 – the Uniform Rules for bank-to-Bank
Reimbursement under Documentary Credits
ISP 98 – International Standby Practice
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NEW FEATURES IN UCP600 VIS-À-VIS
UCP500 - EXAMPLES
 Article 1 of the UCP 600 states that the Rules will only
apply “when the text of the credit expressly indicates that
it is subject to these rules.”

 The default type L/C is now irrevocable L/C. The UCP 600
have moved firmly away from revocable credits. There is no
equivalent of the old Article 6 which expressly gave buyers
the choice of applying for a revocable credit.

 Article 2 now defines a credit as “any arrangement,

however named or described, that is irrevocable and
thereby constitutes a definite undertaking of the issuing
bank to honor a complying presentation.” (contd)

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NEW FEATURES IN UCP600 VIS-À-VIS
UCP500 - EXAMPLES
 Commercial Invoice must be made out in the
same currency as the L/C
 The data in a document when read in context
with the credit, the document itself and
international banking practice, need not be
identical to, but must not conflict with data in
that document, any other stipulated document or
the L/C.
 At least one original of each stipulated document
must be tendered unless excepted in the L/C.
Original document has been defined in UCP 600.

47
COMMON DEFECTS IN
DOCUMENTATION
About half of all drawings contain discrepancies, like:
 The L/C expires prior to presentation of documents
 B/L evidences delivery prior to or after the date range
stated in L/C
 Changes included in invoice not authorized in L/C
 Inconsistent description of goods
 Insurance document errors. A document required may
be missing
 Invoice amount not equal to draft amount
 Name of documents not exact as described in the credit.
Beneficiary information not exact
 Invoice/statement not signed as stipulated in L/C

48
RISK SITUATIONS IN A L/C
TRANSACTION
 General- If goods being offered for sale at a price that is
too good to be true, then it is a risky situation
 Fraud- Payment may be obtained for non-existent or
worthless goods against presentation of by the
beneficiary of forged or falsified documents or credit
itself may be forged
 Risks to applicant – non delivery of goods, short
shipment, inferior quality, early/late shipment, damages
in transit, Failure of bank viz. issuing bank/collecting
bank
 Risks to beneficiary- failure to comply with credit
conditions, failure of, or delays in payment from the
issuing bank contd

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RISK SITUATIONS IN A L/C
TRANSACTION (CONTD)
 Sovereign & Regulatory Risks- possibility that L/C
may be prevented by the government action out side the
control of parties
 Risks to issuing bank- Insolvency of the applicant,
fraud risk, sovereign, regulatory & legal risks
 Risks to advising bank- if it is a paying bank – failure
to check apparent authenticity of L/C – and advising it
to beneficiary
 Risks to confirming bank- Once having paid the
beneficiary, it may not be able to obtain reimbursement
from the issuing bank because of insolvency of issuing
bank

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HOME ASSIGNMENT
 Based on the Purchase contract No.16010440,
draft an L/C Inquiry Letter and an L/C to serve
this transaction.