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

2. Trade Statistics
According to U.S. Department of Commerce (October, ), U.S. exports to Taiwan amounted to U.S.$ billion from January to July of this year, while during the same period only U.S.$ 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, 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

7. Methods of Payment Seller Risk Protection Buyer Max Min Con- firmed
Uncon-
firmed
Sight
Draft
Time
Draft
Max
Min
Seller
Cash in
Advance
Letter of
Credit
Documentary
Collection
Open
Account

8. Steps in Obtaining L/C After final terms (agreed), goods shipped
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: Commerce Invoice:
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

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

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

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

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

20. Where We Go Wrong Commercial Invoices
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
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
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)
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
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)