This document discusses various payment methods in international trade and their associated risks for buyers and sellers. It begins by explaining cash in advance, where payment is made before shipment. It then covers open account, where payment is due 30-90 days after shipment. This method carries risk of buyer default for the seller. The document also summarizes documentary collection and letters of credit, which shift more risk to the buyer. It provides details on the parties, documents, and processes involved in letters of credit. Overall, the summary discusses key trade payment methods and their impact on risk transfer between international buyers and sellers.

1. Presented by:

2. Buyer Risk Seller Risk
•Open Account High
Low
•Documentary
Collection
•Letter of Credit Low
•Cash in Advance
High

3. • Meaning:- An amount paid before it is earned or incurred, for
example, a prepayment by an importer to an exporter before
goods are shipped, or a cash advance for travel expenses.
• Desirable for the Exporter.
• In India advance payment is allowed only in
a) import of books
b) life saving payment apparatus
c) capital goods
d) machinery and a few other items.
e) Advance payment of USD 2500/- or equal to this amount can
be made for commercial purposes.
• In the case of export of vegetables and fruits, it is customary to
demand 100% advance payment.

4. • Time of Payment
 Before Shipment
• Goods Available to Buyer
 After Payment
• Risks to Seller
 None
• When Appropriate
 Seller has negotiating strength to demand cash in advance

5. A transaction where the payment is due 30 to 90 days after the
shipment has been done.
• Time of Payment
• After the shipment
• Goods Available to Buyer
• Before Payment
• Risks to Seller
• Buyer defaults on payment obligation
• Delays in availability of foreign exchange and transferring of funds from
buyer’s country
• When Appropriate
• Seller has absolute trust that buyer will accept shipment and pay at
agreed time
• Seller is confident that importing country will not impose regulations
deferring or blocking transfer of payment

6. Collection by a bank of funds due from a buyer against the
delivery of documents. The bank acts as an agent for the
seller.
• The bank presents documents to the buyer (the importer)
through that party's bank. In exchange, the seller's
bank receives payment of the amount owed, or a promise to
pay at a particular date.
•Allows exporters to retain ownership of the goods until they
receive payment or are reasonably certain they will receive it
•Bank assumes no risk but must act in good faith and exercise
reasonable care

7. Seller Buyer
$ Documents Documents $
Documents
$
Seller’s Bank Buyer’s Bank

8. • Sight Draft
• When the Exporter wants the Bank to hand over the
export documents to the Importer only against
payment immediately, the Bill of Exchange is called a
Sight Draft.
• Time Draft
• Bill of exchange payable at a fixed future date or
a determinable future time such as 30 days
after presentation (after sight). The purpose of a
time draft is to allow the buyer some time
to pay for goods bought.

9. When a drawee (buyer) acknowledges in writing on the face of
the draft that the buyer will pay the draft at maturity
• 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
• 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

10. • 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
• 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

12. • 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

13. • Letters of Credit (L/Cs) are legal instruments
issued by banks (on behalf of their customers)
with the conditional obligation to make payment
to the beneficiary of the L/C
• Documentary (Trade) Letters of Credit are used to
facilitate payments in import and export transactions
• Standby Letters of Credit are “Standing By” for an
event of default or non-performance before they can be
drawn on

14. • Applicant • Advising Bank
• Buyer/Importer • authenticates LC
• Beneficiary • Confirming Bank
• Seller/Exporter • guarantees payment if
Issuing Bank defaults
• Issuing Bank
• Guarantees payment • Negotiating Bank
• checks for
compliance with the
terms of the LC

15. • General provisions and definitions.
• Form and notification of credits.
• Liabilities and responsibilities of parties.
• Documents of commerce.
• Miscellaneous provisions.
• Transferability of letters of credit.

16. • Commercial Invoice
• Transport Document
• Ocean Bill of Lading
• Air Waybill
• Packing Lists/Weight Lists
• Insurance Policy or Certificate
• Draft or Bill of Exchange
• Other Documents
• Inspection Certificate
• Special Customs Invoices
• Certificate of Origin

17. Letter of Credit Issuance
Contract
Exporter Step 1 Importer
Step 4 L/C Forwarded Application Made Step 2
to Beneficiary with for Letter of Credit
or without
confirmation
Letter of Credit
Advising Bank Forwarded
by the Issuing Issuing Bank
in in Importer’s City
Exporter’s City Bank
Step 3

18. Letter of Credit Payment
Step 3
Issuing / Documents Advising/
Step 4 Opening Confirming Step 2
Bank Money
Bank
Documents Money Money Documents
Buyer Importer Seller/ Exporter
Step 5 Step 1
Account Party Beneficiary
Surrenders Receives Receives Surrenders
Bill of Goods Bill of Lading
Lading
Goods
Carrier

19. Time of Payment
• When LC calls for a sight draft - at time documents are
presented to negotiating bank
• When LC calls for a time (usance) draft - at maturity of
accepted time draft
Goods Available to Buyer
• When LC calls for a sight draft - after payment
• When LC calls for a time draft - after draft has been
accepted by bank

20.  Risks to Seller
• Discrepancies in the documents
• Buyer’s Bank (opening bank) defaults on its payment obligation
• Payment blocked due to political events in buyer’s country
 When Appropriate
• Seller is unsure of creditworthiness of buyer

21. • Revocable
• Irrevocable
• Back to Back
• Transferable
• Revolving
• Red Clause
• Installment credit

22. Question Letter of Credit Collection Open Account
What is customer relationship New Established Parent/Sub
Impact of total loss ($) Substantial Normal Small
Nature of order Custom Normal Excess Inventory
Production
Political situation – buyer’s Unstable Stable Strong
country
Economic situation – buyer’s Unstable Stable Strong
country
Competition to sell goods No Some Heavy
Changing price environment Yes No No
Experience in preparing Extensive Some None
documents
Company policy for protection Strong Medium Unwritten

23. • Countertrade
• i.e. barter, counterpurchase, compensation
• Factoring
• Outright sale of short term receivables
• Forfaiting
• Outright sale of medium term (large) obligation

24. THANK YOU