This document provides an overview of international payment methods, including cash in advance, letters of credit, documentary collections, and open account. It discusses the advantages and disadvantages of each method from the perspective of both buyers and sellers. Letters of credit are described in more detail, outlining the key parties involved, steps to obtain an L/C, required documents, and potential issues that can arise. Export incentive programs from the US are also briefly outlined.

1. International Payment
Presentation Outline
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•
•
•
Cash Advance
Letters of Credit (L/C)
Documentary Collections
Open Account

2. Trade Statistics
• According to U.S. Department of Commerce (October,
1999), U.S. exports to Taiwan amounted to U.S.$ 10.466
billion from January to July of this year, while during the
same period only U.S.$ 7.466 billion worth of American
products were sold to mainland China.
• The United States exported 1.4 times more goods to
Taiwan than to the mainland. Mainland China is, however,
265 times the geographical size of Taiwan with a
population 58 times larger.

3. Cash in Advance
• Buyer pays before shipment
• Used in new relationship
• Transactions are small and buyer has no
choice
• Maximum security to sellers
• No guarantee that goods are shipped

4. Draft:
• A bill of exchange-- an unconditional
promise drawn by party (exporter),
instructing the importer (buyer) to pay the
face amount of the draft upon presentation

5. 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

6. International Methods of Payment: Advantages and
Disadvantages
Method
cash in advance
Risk
L
Sight draft
M/L
Letters of credit
Irrevocable
Revocable
M
M/H
Time draft
M/H
Consignment sales
M/H
Open account
H
Chief Advantage
Chief Disadvantage
No credit extension required Can limit sales potential, disturb
some potential customers.
Retains control and title;
If customer does not or cannot
ensures payment before
accept goods, goods remain
goods are delivered
at port of entry and no payment is due
Banks accept responsibility If revocable, terms can change
pay; payment upon
during contract work.
presentation of paper; costs
go to buyer
Lowers customer resistance Same as sight dragt, plus goods
by allowing extanded paymentdelivered before payment is due
after receipt of goods
or received
Facilitates delevery; lowers Capital tied up until sales; must
customer resistance
establish distributor's creditworthiness
need political rish insurance in some
countries; increased risk from
currency controls
Simplified procefure; no
High risk; seller must finance
customer resistance
production; increased risk from
currency controls

7. Methods of Payment
Risk Protection
Buyer
Min
Max
Confirmed
Unconfirmed
Sight
Draft
Max
Cash in
Advance
Letter of
Credit
Seller
Time
Draft
Documentary
Collection
Min
Open
Account

8. 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

9. • L/C (continued)
• Shipping documents
• Bill of Lading:
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–
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title documentcontract between carrier and shipper
shipper’s receipt of the goods
document assigns control of goods
• Commerce Invoice:
– description of the product, price and others

10. • Packing list:
– outlines things to be filled
• Certificate of Insurance
• Certificate of Origin

11. Documentary Credit Procedure
(1) Contract of Sale
Buyer
(Importer)
(2)
Request
to Provide
Credit
(5) Delivery of Goods
(8)
Documents
& Claim for
Payment
Importer’s Bank
(Issuing Bank)
Seller
(Exporter)
(6)
Documents
Presented
(7) Documents Presented to
issuing Bank
(9) Payment
(3) Credit Sent to Correspondent
(4)
Letter of
Credit
Delivered
Correspondent
Bank

12. Irrevocable
Documentary (Commercial)
Letter of Credit (L/C)
Advised or Confirmed

13. Documentary Letter of Credit
• Conditional, legal obligation of bank to pay
beneficiary
• Bank places its internationally accepted
credit rating before customer’s
• Eliminates commercial risk

14. Principal Parties to Letter of
Credit
• Applicant
(importer/buyer/account party)
• Beneficiary
(exporter/seller)
• Issuing Bank
(guarantor)
• Correspondent Bank

15. Use a Letter of Credit to Seller
when:
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•
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Credit standing of buyers is uncertain
Your ability to absorb risk is low
Merchandise is custom-made or high value
Economic, political conditions unstable
Use does not harm you competitive stand

16. To the seller,
having a Letter of Credit means:
• Issuing bank eliminates commercial risk of
buyer
• Confirmation eliminates economic,
political, foreign bank risk
• Streamlines pre-export financing

17. To the buyer,
having a Letter of Credit means:
• Payment made upon full compliance of L/C
term
• Possible import/export financing
(bankers’ acceptance)
• Buyer must tie up credit availability
(potential loan)

18. The life of a Typical Banker’s Acceptance
5. Shipment of Cars
Prior to B/A Creation
At and just after B/A Creation
At maturity date of B/A
3. L/C
7. Shipping documents & Time Draft
American Bank
Draft Accepted (B/A Created)
8. Payment - Discounted Value of B/A
9. Payment-Discounted Value of B/A
Mr. Susuki
(Exporter)
6. Shipping Documents & Time Draft
1. Purchase Order
4. L/C Notification
9. Payment - Face Value of B/A
10. Signed Promissory Note for
Face Value of B/A
6. Shipping Documents
2. L/C Application
Mr. Jones
(Importer)
Japan Bank
15. B/A Presented at Maturity
16. Payment - Face Value of B/A
Money Marker
13. Payment-Discounted Value of B/A
Investor
12. B/A

19. Where We Go Wrong:
• L/C expired
• Late shipment
• Documents discrepancy
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Amount differs with invoice
Amount in excess of L/C
Signatures missing
Drawn on wrong party

20. Where We Go Wrong Commercial
Invoices
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•
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•
Good description differs from L/C
Extension of cost wrong
Partial shipment not authorized
Term of shipment missing

21. Where We Go Wrong Insurance
Certificates
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•
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Required risks not covered
Amount of coverage not enough
Currency not consistent with L/C
Effective date later than bills of lading

22. Exporter Trouble Shooting
• Can you meet documentary requirements
• Can you meet shipping/expire/dates?
• Is description of goods accurate?
• Are names and addresses correct?

23. Exporter Trouble-Shooting
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•
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Is credit irrevocable?
Is credit confirmed?
Is credit amount correct?
Is credit tenor correct?
Is L/C negotiable?

24. A Letter of Credit Does Not:
• Replace a contract
• Substitute for buyer’s confidence in seller
and vice versa
• Constitute a guarantee of performance
• Assure payment if an condition not meet

25. Advantages to both parties:
• Flexible document
• Governed by internationally accepted set of
rules
The Uniform Customs and Practice for
Documentary Credits (The UCP)

26. Problems of L/C
• Shipping schedule is not met
• stipulations concerning freight cost are
unacceptable
• price is insufficient due to FX rate changes
• unexpected quantity of product
• description of product insufficient or too detailed
• documents are impossible to obtain specified in
L/C

27. Documentary Collections (DC)
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•
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Three Types of DC
Documents against Payment (D/P)
Documents against Acceptance (D/A)
Collection with Acceptance (Acceptance
D/P)

28. • Documents against Payment (D/P)
– Buyer may only receives the title and other
documents after paying for the goods
• Documents against Acceptance (D/A)
– the buyer may receive the title and other
documents after signing a time draft promising
to pay at a later date.
• Acceptance Documents against Payment
(Acceptance D/P)
– the buyer signs a time draft for payment at a
later date. Goods remain in escrow until
payment is made

29. Why DC?
• Easier to use and lower bank fee
• collection procedure entails risk
• Conditions to use DC
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No doubt on buyer’s integrity
buyer’s country is stable and safe
No foreign exchange control
goods are marketable (exporter resell goods)

30. DC Procedure
• Exporter ships the goods
• exporter forwards the documents to seller
bank (remitting bank),which in turns gives
the document to the buyer’s bank
(collecting bank)
• Collecting bank informs the importer the
conditions of the document or contract

31. Export Incentive Programs
• Export-Import Bank of the U.S. (Exim-Bank)
– set up in 1934
– to facilitate finance and export of American goods and
services and maintain American companies in oversea market
– offers programs like guarantees, bank insurance and export
credit insurance
• Foreign Export Credit Insurance
– provide insurance to exporters (nonpayment and preshippment
risk
• Small Business Administration (SBA)
– provide business loans and financing for small companies

32. Export Incentive Programs
• Commodity Credit Corporation (CCC)
– provide assistance in production/marketing of US agricultural
products overseas
• Overseas Private Investment Corporation(OPIC)
– formed in 1971
– insuring direct US investments in foreign countries
– provide medium and long-term financing
• Private Export Funding Corporation (PEFCO)
– consortium of commercial banks and industrial companies
– provides medium to long-term financing to foreign buyers
• United States Export Assistance Center (USEAC)