Ibus 430- Chapter 11 (Financing & Methods Of Payment)

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Export Financing: Methods/Terms of Payment

Payment is made against clean draft, usually after goods are sold by importer.

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Consignment

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Export Financing: Methods/Terms of Payment

Payment is made against clean drafts or against statements of balance

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Open Account

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Export Financing: Methods/Terms of Payment

Title documents to the merchandise are attached to a draft sent through a bank.

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Documentary Collection

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Export Financing: Methods/Terms of Payment

The bank will not release the documents until the importer has "accepted" them.

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Documents against payment (D/P)

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Export Financing: Methods/Terms of Payment

The bank will not release the documents until the importer has paid.

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Documents against payment (D/P)

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Export Financing: Methods/Terms of Payment

At the request of the importer, his/her bank establishes a commercial credit which guarantees payment to the exporter when certain conditions are met. The bank actually pays, or agree to pay, when the exporter's draft (demand for payment) is presented, usually with documents attached.

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Letter of Credit

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Export Financing: Methods/Terms of Payment

Not frequent except for air and truck shipment to Canada.

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COD (Cash on Delivery)

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Export Financing: Methods/Terms of Payment

Advance payment is sometimes demanded by sellers.

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Cash with Order (Cash in Advance)

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Export Financing: Methods/Terms of Payment

For major projects, large capital equipment sales, and special exports. Both financing and insurance against credit and political risk are often available from government and private sources.

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Long Term Financing

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Export Financing: Methods/Terms of Payment

A written promise, usually by a bank, that it will pay a specified sum of money to a specified beneficiary when the conditions are met. Adds the bank's name and credit to that of the exporter.

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Letter of Credit

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Type of Letters of Credit:
Distinction between them rests upon the ability of the establishing bank to revoke the letter of credit before expire date.

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Revocable/Irrevocable

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Type of Letters of Credit:

Confirmed letter of credit includes agreement by exporter's bank to pay when conditions are met.

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Confirmed/Unconfirmed

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Type of Letters of Credit:

Clean will pay against draft (demand for payment) with no title documents attached. Documentary has title documents.

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Clean/Documentary

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Type of Letters of Credit:

Transferable allows part of proceed to be assigned by the beneficiary to a third party.

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Transferable/Non-transferable

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Type of Letters of Credit:

Used where transaction are more or less continuous.

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Revolving

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Type of Letters of Credit:

Used where the payments are to be made in installments.

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Deferred Payment Credit

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Type of Letters of Credit:

An irrevocable letter of credit issued connection with something other than the movement of goods.

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Standby

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An unconditional order in writing prepared by one party (drawer) and addressed to another (drawee) directing the drawee to pay the beneficiary a specified sum of money at a fixed future time. They are used under an L/C or by themselves.

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Drafts or Bill of Exchange (demand for payment)

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Drafts or Bill of Exchange (Demand for Payment):
A draft which has been accepted (signed to agree that payment will be made at the time specified).

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Acceptance

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Drafts or Bill of Exchange (Demand for Payment):

A draft signed by buyer.

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Trade acceptance

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Drafts or Bill of Exchange (Demand for Payment):

A draft signed by a banker.

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Banker's acceptance

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Types of Draft:
______ _______ means that the bank that purchase drafts assumes full responsibility for payment, discharges the exporter of his/her obligation as guarantor even if the darwee does not pay.

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Without Recourse

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Types of Draft:

_______ _____ means the exact opposite; the drawer assumes full responsibility of payment of the draft when the draft is discounted or sold.

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With Recourse

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What is the major difference between using L/Cs and Drafts?

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L/C- Payment is guaranteed by the bank which issues it.

Draft- final payment rests upon the ability of the drawee (buyer) to pay.

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Letters of Credit are much more secure and attractive from the seller's point of view.

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True

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Available through governmental insurance or private insures. May cover commercial risks as well as political and risk of non-convertibility of currency.

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Export Credit Insurance

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Trade agreements in which the seller agrees to a reciprocal purchase obligation for all or part of the value of sale (payments other than money). Appeals to buyers in countries with short of hard currency.

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Countertrade

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Countertrade:
Goods or service for goods or service. Online barter.

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Pure barter

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Countertrade:

This system occurs where two countries agree to exchange a number of products during a specified time period.

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Clearing arrangements

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Countertrade:

Involves two separate exchanges
1) An exporter sells products to an importer for cash or credit

2) The exporter agrees to purchase and market products from the importer's country

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Counter-purchase

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Countertrade:

Involving a _____ ______ who arranges for goods not desired by exporter to be sold elsewhere.

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Switch trading

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Countertrade:

Seller takes part of goods produced by buyer in payment.

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Buy back or Compensation agreement

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Countertrade:

Seller assists in or arranges marketing or provides some other benefit to buyer.

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Offsets