1. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Terms of Payment

2. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Characteristics of International Payment Issues Risks in International Trade Alternative Terms of Payment Cash in Advance Open Account Letter of Credit Documentary Collection Procurement Cards TradeCard Terms of Payment as a Marketing Tool Terms of Payment

3. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Characteristics of International Payment Issues Risks in International Trade Alternative Terms of Payment Cash in Advance Open Account Letter of Credit Documentary Collection Procurement Cards TradeCard Terms of Payment as a Marketing Tool Terms of Payment

4. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Characteristics of International Payment Issues Reduced Credit Information Lack of Personal Contact Difficult and Expensive Collections No Easy Legal Recourse Higher Litigation Costs Mistrust

5. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Characteristics of International Payment Issues Risks in International Trade Alternative Terms of Payment Cash in Advance Open Account Letter of Credit Documentary Collection Procurement Cards TradeCard Terms of Payment as a Marketing Tool Terms of Payment

6. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Risks in International Trade Country Risk Country risk is also known as political risk. The probability of not getting paid by a creditor, because the creditor’s country has:  Insufficient foreign exchange reserves.  Not allowed the creditor to pay the debt (political embargo). Political risk can also mean the probability of nationalization of a firm’s subsidiary by the host country.

7. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Risks in International Trade Commercial Risk The probability of not getting paid by a creditor, because this creditor does not have the funds to pay the debt or because the creditor refuses to pay the debt. Exposure The relative consequences of a bad-debt risk for an exporter; the risk of a $50,000 loss would represent a greater exposure for a small exporter than for a large exporter.

8. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Characteristics of International Payment Issues Risks in International Trade Alternative Terms of Payment Cash in Advance Open Account Letter of Credit Documentary Collection Procurement Cards TradeCard Terms of Payment as a Marketing Tool Terms of Payment

9. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Alternative Terms of Payment Cash in Advance Open Account Letter of Credit Documentary Collection Procurement Cards TradeCard

10. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Alternative Terms of Payment Table 7-1: Advantages and Disadvantages of Several Terms of Payment Term of paymentProbability of Losing the Business because of the Choice of Method of Payment Probability of loss due to Non-Payment Cash in AdvanceHighNil Letter of CreditFairly HighAlmost Nil Documentary CollectionLow Open AccountNilRelatively High TradeCardLowAlmost Nil

11. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Characteristics of International Payment Issues Risks in International Trade Alternative Terms of Payment Cash in Advance Open Account Letter of Credit Documentary Collection Procurement Cards TradeCard Terms of Payment as a Marketing Tool Terms of Payment

12. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Cash in Advance Definition In a Cash in Advance transaction, the exporter requests that the customer provide payment in advance, before shipment of the goods can take place. It is the ultimate “risk-free” alternative for the exporter. In a Cash in Advance transaction, the risk is completely transferred to the importer.

13. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Cash in Advance Applicability This method is only justified in rare cases. It could be used when the importer is perceived as being very high risk (commercial or country risk). It should be avoided.

14. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Characteristics of International Payment Issues Risks in International Trade Alternative Terms of Payment Cash in Advance Open Account Letter of Credit Documentary Collection Procurement Cards TradeCard Terms of Payment as a Marketing Tool Terms of Payment

15. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Open Account Definition In an Open Account transaction, the exporter conducts international business in a manner similar to the way it conducts business domestically. The exporter ships the goods, accompanied by an invoice, and expects the importer to pay within a defined time period (30-60 days).

16. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Open Account Applicability The exporter is confident that the importer will pay (e.g. long- standing business relationship). The exporter is competing with companies that offer Open Account terms. The exporter wants to create goodwill. In cases where the exporter is unsure of the importer’s credit, the exporter can use credit insurance.

17. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Open Account Credit Insurance An insurance policy under which commercial risk is covered. The insurance company bears the risk of non-payment by the importer, deducting a slight percentage of the receivable. Credit insurance does not cover political risk, unless the exporter has explicitly asked for additional political coverage that is obtained through the Ex-Im Bank.

18. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Open Account International Factoring A means of financing international receivable accounts. The firm can ask a factoring company to advance funds on a receivable account:  With recourse where the owner of the account receivable is still responsible for collecting it.  Without recourse where the collection responsibility entirely shifts to the factoring house.

19. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Characteristics of International Payment Issues Risks in International Trade Alternative Terms of Payment Cash in Advance Open Account Letter of Credit Documentary Collection Procurement Cards TradeCard Terms of Payment as a Marketing Tool Terms of Payment

20. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Letter of Credit Definition A Letter of Credit is a document with which the importer’s bank promises to pay the exporter if the importer does not pay. A Letter of Credit is documentary; the exporter is only paid if it can produce the documents required by the importer’s bank. The exporter is not paid until it produces all of the required documents to the importer’s bank. Also called Documentary Credit.

21. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Letter of Credit Issuing Bank The bank providing the Letter of Credit to the importer. The bank that will pay the exporter when it provides all the necessary documents, should the importer be unable to pay. Advising Bank The bank that determines whether the terms of the Letter of Credit offered by the Issuing Bank are appropriate. The Advising Bank is generally the exporter’s regular bank. In some cases, the exporter’s bank will delegate this role to another bank which is more experienced in international trade.

22. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Letter of Credit Applicant The firm asking the Issuing Bank for a Letter a Credit. Usually, the applicant is the importer. Beneficiary The firm named in a Letter of Credit as the firm to which the issuing bank is promising payment if the importer does not pay. Usually, the beneficiary of a Letter of Credit is the exporter.

23. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Letter of Credit (Process) Issuance First Step -- Negotiation between exporter and importer. Second Step -- Applicant (Importer) requests the bank to open a Letter of Credit (L/C) on importer’s behalf and naming exporter as beneficiary. Third Step -- Issuing Bank sends this L/C to Advising Bank (Exporter’s Bank). Fourth Step -- The Advising Bank notifies the beneficiary that the L/C is acceptable.

24. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Letter of Credit Issuance of a Letter of Credit

25. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Letter of Credit (Process) Shipment Fifth Step  The exporter ships the merchandise to the importer.  After all documents are collected, the exporter sends them to the Advising Bank, which checks them against the terms of the L/C, and sends them to Issuing Bank. Sixth step -- After receiving and checking the documents, the Issuing Bank notifies the importer, who uses them to clear Customs.

26. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Letter of Credit (Process) Shipment Under a Letter of Credit

27. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Letter of Credit (Process) Payment Seventh Step -- Importer pays Issuing Bank. Eighth Step -- Issuing Bank pays Advising Bank. Ninth Step -- Advising Bank pays Exporter.

28. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Letter of Credit (Process) Payment Under a Letter of Credit

29. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Letter of Credit (Process) Entire (Simplified) Process of a Letter of Credit

30. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Letter of Credit A Letter of Credit is: Irrevocable  It cannot be altered without the express consent of all parties involved.  Virtually all Letters of Credit are irrevocable. Documentary  The beneficiary must present a certain set of documents (bill of lading, invoice and miscellaneous certificates) to the bank.  It is paid on documents, not the safe arrival of the goods.

31. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Letter of Credit Confirmed Letter of Credit The exporter asks a bank to provide an additional level of payment security to a Letter of Credit. If the importer does not pay, and the Issuing Bank does not pay, the Confirming Bank pays. Correspondent Bank A foreign bank with which a domestic bank has a preferred business relationship.

32. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Letter of Credit Discrepancies A difference between the documents required by the Letter of Credit and the documents provided by the exporter. A discrepancy can be as simple as a misspelling and as significant as a change in the invoice amount. Since Letters of Credit are documentary, any discrepancy is, in theory, a violation of the terms of the Letter of Credit and therefore invalidates it. In practice, letters of credit are amended with the approval of both the issuer and the beneficiary.

33. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Letter of Credit Leading Causes of Discrepancies in Letters of Credit [as a percentage of all discrepancies]

34. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Letter of Credit Amendments A change to a Letter of Credit to which all parties to a Letter of Credit agree: the exporter, the importer, the Issuing Bank, and the Advising Bank. In general, amendments are only made if there are discrepancies, as every amendment costs the exporter and importer money.

35. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Letter of Credit Drafts Letters of Credit can also be accompanied by Drafts, if the Exporter wants to extend credit to the Importer. Drafts are explained under Documentary Collection.

36. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Letter of Credit UCP 500 Universal Customs and Practice for Documentary Credit, 1993 Revision, International Chamber of Commerce. URR 525 Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits. Outlines the responsibilities of the banks involved in international transactions under the UCP 500.

37. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Letter of Credit Applicability Letters Of Credit used to be the instrument of all international transactions. Letters of Credit are an outstanding means of making sure that the exporter will be paid. Letters of Credit are costly. Letters of Credit are cumbersome.

38. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Letter of Credit Stand-By Letters of Credit Have a much longer validity period. (Sometimes longer than one year). Usually apply to more than one shipment from the exporter to the importer. Stand-By Letters of Credit were created by United States banks as a substitute for bank guarantees.

39. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Characteristics of International Payment Issues Risks in International Trade Alternative Terms of Payment Cash in Advance Open Account Letter of Credit Documentary Collection Procurement Cards TradeCard Terms of Payment as a Marketing Tool Terms of Payment

40. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Documentary Collection Definition It is a process by which an exporter asks a bank to “safeguard” its interests in the foreign country by not releasing the documents. It is accompanied by a Bill of Exchange (also called a Draft). It involves a Letter of Instructions to the Presenting Bank.

41. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Documentary Collection Remitting Bank The bank that interacts with the exporter and with the Presenting Bank in the importing country. Receives the documents from the exporter and then sends them to the Presenting Bank. It has no obligation to render judgment or advice on the quality of the packet of documents; it just transmits them to the Presenting Bank. Presenting Bank The bank that interacts with the importer on behalf of the exporter. Receives the documents from the exporter or from the Remitting Bank and holds them until the importer either signs a draft or pays the exporter. Follows the Letter of Instructions from the Exporter.

42. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Documentary Collection Sight Draft The Remitting Bank is instructed to release the documents only when the Importer pays. The importer has to pay “on sight.” Time Draft The Remitting Bank is instructed to release the documents only after the Importer has signed the Draft. A Promissory Note that the importer has to pay in 30, 60, 90 or 180 days after the date at which it signs the Draft. The exporter extends credit to the importer.

43. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Documentary Collection Date Draft The Remitting Bank is instructed to release the documents only after the Importer has signed the Draft. A Promissory Note that the importer has to pay in 30, 60, 90 or 180 days after the date at which the goods were shipped (BOL date). The exporter extends credit to the importer.

44. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Documentary Collection Banker’s Acceptance The Remitting Bank is instructed to sign the Draft on behalf of the Importer. The Remitting Bank only does so if it is convinced that the Importer will eventually pay. The Remitting Bank “avals” the Draft. The opposite of “Trader’s Acceptance.”

45. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Documentary Collection Applicability Almost as secure as a Letter of Credit if used with a Banker’s Acceptance, but about as expensive in that case.

46. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Documentary Collection Process of A Documentary Collection

47. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Characteristics of International Payment Issues Risks in International Trade Alternative Terms of Payment Cash in Advance Open Account Letter of Credit Documentary Collection Procurement Cards TradeCard Terms of Payment as a Marketing Tool Terms of Payment

48. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Procurement Cards Definition A “Credit Card” for a company. Each department of the company has a Credit Card with a specific number and can make purchases limited to certain vendors and certain amounts (per transaction and per month). The company gets a itemized bill at the end of the month.

49. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Procurement Cards Process A purchase is made. The Exporter gets paid “right away,” but at a discount (2-3 percent). The Importer does not have to pay until the billing date. The Importer’s Bank (issuing the Procurement Card) is the one extending credit to the Importer.

50. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Procurement Cards Advantages Excellent exchange rates. Payment terms are advantageous to Exporter. The Importer does not have to pay until the billing date. Minimal Risk for Exporter.

51. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Procurement Cards Disadvantages Exchange Rate fees (2-3 percent). No documentation requirements.

52. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Characteristics of International Payment Issues Risks in International Trade Alternative Terms of Payment Cash in Advance Open Account Letter of Credit Documentary Collection Procurement Cards TradeCard Terms of Payment as a Marketing Tool Terms of Payment

53. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. TradeCard Definition Similar to a Procurement Card. The Exporter does not get paid until it provides TradeCard with all the documentation necessary for the Importer to clear Customs. TradeCard transmits all the documents to the Importer. TradeCard extends credit to the Importer.

54. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. TradeCard Advantages As good as a Letter of Credit in terms of risk for the Exporter. As good as a Letter of Credit in terms of risk or the Importer. Much lower cost than a Letter of Credit. Disadvantages Requires that both Exporter and Importer have TradeCard accounts. Not widely known / used. Banks are not keen on TradeCard.

55. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Characteristics of International Payment Issues Risks in International Trade Alternative Terms of Payment Cash in Advance Open Account Letter of Credit Documentary Collection Procurement Cards TradeCard Terms of Payment as a Marketing Tool Terms of Payment

56. © 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved. Terms of Payment as a Marketing Tool The exporter should offer the Term of Payment that is the least constraining for the importer and which is generally the best alternative. The exporter should protect its interests through means that are invisible to the importer (Credit Insurance). European competitors will tend to offer “Open Account” terms.