The document discusses various methods of payment used in international trade. It describes cash in advance, where payment is received before shipment of goods; letters of credit, where a bank guarantees payment to the exporter if documents are presented; and documentary collections, where banks facilitate payment from the importer to exporter after shipment. It outlines the parties involved in letters of credit and the typical process. The advantages and disadvantages as well as suitability of each payment method is explained. Examples are provided of industries that commonly use certain methods. Factors related to wire transfers, credit cards, and checks are also summarized.

1. Methods of Payment
Presented by:
Shruti Mittal 13DM180
Sonakshi Govil 13DM186
Sreevatsan Natarajan 13DM190
Tarun Mangal 13DM204
Udit Jain 13DM206
Vanshika Gupta 13DM212
Presented To:
Prof. Abha Rishi

2. Exporter receives payment for trade deals before:
• The shipment of good from his country
•The actual transfer of ownership
Cash in advance

3. Advantages • For Exporter:
• Safe and secure
• No credit risk
• Most desirable and
acceptable option
• Funds can be used
for business
purposes
immediately
Disadvantages
• For Exporters:
• May lead to loss of
customers
• For Importers:
• Not safe and secure
• Risk of non delivery
• Least attractive

4. Suitability
•Exporter has sole
monopoly in the
market
•Importer has dire
need of goods
•Importers credit
worthiness can’t be
ascertained/not
good.
•Political and
commercial risk is
very high importer’s
country.

5. Examples
Teleshopping
Internet-based
firms

6. Ways
Wire Transfer
Credit Cards
Payment by
Check

7. Factors Wire
Transfer
Credit Card Payment by
Check
Cost Costly for
importer
Cost effective Little costly
Time Least time : 16
seconds
Least time Takes time: 4 to 6
weeks
Safety Most safe Fraudulent use is
possible
Safe but bank
could be fake
Ease in use Very easy to use Easy to use Require some
effort
How it works Through SWIFT
system
Through Online,
Fax and via
telephone
Lengthy process

8. Letter of Credit

9. • A letter of credit is a document issued by a financial institution or a similarly
accredited professional party. The letter assures payment to a seller of goods
or services provided certain documents have been presented to the bank.
• "Letters of Credit" are documents that prove the seller has performed the
duties specified by an underlying contract (e.g., the sale of goods contract)
and the goods/services have been supplied as agreed.
• In return for these documents, the beneficiary receives payment from the
financial institution that issued the letter.

10. • Letters of credit are used primarily in international trade for transactions
between a supplier in one country and a purchaser in another.
• Most letters of credit are governed by rules promulgated by the International
Chamber of Commerce known as Uniform Customs and Practice for
Documentary Credits (latest version: UCP 600).
• A letter of credit may either be irrevocable and thus, unable to be changed
unless both parties agree; or revocable where either party may unilaterally
make changes.
• A revocable letter of credit is inadvisable as it carries many risks for the exporter.

11. Involved Parties
• Applicant = Buyer/ Importer
• Beneficiary = Seller/Exporter
• Opening Bank = Importer’s Bank >> Issues L/C
• Advising Bank= Exporter’s Bank >> Advises L/C
• Confirming Bank = Advising Bank or 3rd Party Bank >> Confirms L/C
• Paying Bank = Any Bank as Specified in L/C >> Pays the Draft

12. A sight LC causes payment to be made immediately to the
beneficiary/seller/exporter upon presentation of the correct documents.
A time or date LC specifies when payment is to be made at a future date and upon
presentation of the required documents
Advising Bank — advises the beneficiary at the request of the issuing bank.
Applicant — the party on whose request the issuing bank issues a credit .
Beneficiary — the party who is to receive the benefit (payment) of the LC. The
consignee of an LC and the beneficiary may not be the same. The credit is issued in
the beneficiary's favour.

13. Confirming bank — adds confirmation to an LC. It does so at the request of
the issuing bank and taking authorization from the issuing bank.
Issuing bank — issues the LC.

14. A Typical Letter of Credit Transaction
Here are the typical steps of an irrevocable letter of credit
• After the exporter and buyer agree on the terms of a sale, the buyer arranges
for its bank to open a letter of credit that specifies the documents needed for
payment. The buyer determines which documents will be required.
• The buyer's bank issues, or opens, its irrevocable letter of credit includes all
instructions to the seller relating to the shipment.
• The buyer's bank sends its irrevocable letter of credit to the bank and requests
confirmation. The exporter may request that a particular bank be the
confirming bank, or the foreign bank may selected as a correspondent bank.

15. • The bank prepares a letter of confirmation to forward to the exporter along with the
irrevocable letter of credit.
• The exporter reviews carefully all conditions in the letter of credit. The exporter's
freight forwarder is contacted to make sure that the shipping date can be met. If the
exporter cannot comply with one or more of the conditions, the customer is alerted
at once.
• The exporter arranges with the freight forwarder to deliver the goods to the
appropriate port or airport.
• When the goods are loaded, the freight forwarder completes the necessary
documentation.

16. • The exporter (or the freight forwarder) presents the documents,
evidencing full compliance with the letter of credit terms, to the confirming
bank.
• The bank reviews the documents. If they are in order, the documents are
sent to the buyer's bank for review and then transmitted to the buyer.
• The buyer (or the buyer's agent) uses the documents to claim the goods.
• A draft, which accompanies the letter of credit, is paid by the buyer's bank
at the time specified or, if a time draft, may be discounted to the exporter's
bank at an earlier date.

20. The original bill of lading (BOL) is normally the document accepted by banks as
proof that goods have been shipped
Documents that can be presented for payment
•Financial Documents — Bill of Exchange, co-accepted draft
•Commercial Documents — Invoice, packing list
•Shipping Documents — Transport document, insurance certificate, commercial, official or legal
documents
•Official Documents — License, embassy legalization, origin certificate, inspection certificate
•Transport Documents — Bill of lading (ocean or multi-modal or charter party), airway bill,
lorry/truck receipt, railway receipt, CMC other than mate receipt, forwarder cargo receipt
•Insurance documents — Insurance policy or certificate, but not a cover note

21. Types of Letter of Credit
Back to Back
Confirmed
Straight
Negotiation
Sight
Standby
Transferable

23. Documentary collections
Exporter sends the shipment to the importer,
submits the trade documents to his bank and
entrusts it collection of a payment from the
importer
Exporters bank-remitting bank
Importers bank-collecting bank
Remitting bank submits the trade documents to
the collecting bank for making the payment and
handing over the documents to the importers.

24. Rules for the collection of documents has been laid
down by Universal Rules for Collection of Documents
under URC-522
After receiving the documents. They handed over to the
importer in exchange of money which are remitted by
the collecting bank to the remitting bank and finally to
the exporter.
Handing over the documents after receiving the money is
known as Sight drafts or documents against payments
whereas credit extended by the exporter in a transaction is
known as Time or date of draft or Documents against
Acceptance.

25. Parties in the collection of Drafts
• Drawer: He is the exporter who issues the bill of exchange for a trade transaction
and to whom payment is made. The other party who discounts the draft is entitled to
make the payments and is known as payee.
• Drawee: It is the party who is entitled to make the payments. He is a importer, a
buyer, an acceptor and the payer of the draft in a documentary collection mode of
payments.
• Remitting Bank: It is the bank to which the exporters sends the bill of exchange
along with all transport, shipping documents, and instructions for documentary
collections. The role of the bank is of a facilitator without any risks and responsibility
for ensuring the payments from importer or his bank.

26. • Collecting/presenting Bank: It is the bank of the importer and facilitates in trade
transaction by getting the documents from collecting bank and handing them to the
importer after receiving the payment..The role of the bank is of a facilitator without
any risks and responsibility for the payments of trade transaction.

27. Types of documentary collection payments
• Documents against payments: This is considered to be the best option as it involves
minimal risks to both the parties. Under this , the exporter retains the title to the
shipment until the goods has reached the importers country and payment for the same
has been made. Importer also makes the payment on arrival of the goods in his
country . However , this payment option can be used effectively only when an
original , clean bill of lading is used, because it carries the title of goods and importer
needs to submit it to the shipping company to receive the goods . Airways bill does
not carry the title of goods.

28. Risk Involved
• Importer may change his mind
• Become insolvent
• May be unable or unwilling to make the payment as his creditworthiness has suffered
from the time of the shipment and presentation of documents for payment by the
exporter bank.
• Trade policies may change resulting in the ban on import or export of that item also
on flow of foreign exchange.

29. Documents against Acceptance
• Credit extended by exporter to win the buyer and to penetrate new markets.
• Payment is made on the mutually agreed future date , usually 30 to 90 days . Thus
known as Time Draft.
• Helps the importer to sell goods in the local market and thus make payments to the
exporter.

30. Risk Involved
• More risky for the exporter
• Importer may refuse to make payment.
• To be used only after thoroughly verifying and cross-checking the credit worthiness
of importer and his country’s economic and political situation.
• Exporter can transfer the draft to the bank and risk of non-payment is shifted to the
bank
• Exporter can also use date draft to cover his risk.

31. Features of Documentary Collections
• Exporter ships the goods to the importer but retains the title of goods . It is less risky
and complicated.
• He shall resent the documents to the remitting bank and keep a close eye on the
financial position of the importer and his country’s political ,economic and regulatory
environment.
• Banks act as the facilitator. Exporters shall verify that the negotiating bank may not
grant any undue favor to the importer in case of default.
• Such a mode of payment can only be used in case of a established trade relationships
between an importer and exporter and in economically stable export markets.

32. OPEN ACCOUNT

33. • Also called open credit
• Involves delivery of your goods or services to the buyer with
an invoice requesting payment at a certain time after
delivery.
• The time given to the buyer to pay is called the credit term.
What is
it?
• Because of intense competition in export markets, foreign
buyers often press exporters for open account terms.
• Exporters who are reluctant to extend credit may lose a
sale to their competitors.
How it is
important
these
days?

34. Contract
Documents Sent
Goods Shipped
Payment Option 1
Payment Option 3

35. How does it work?
In negotiating an export contract, the
exporter agree with the buyer the
amount, currency, timing and method
of payment.
When he ships the goods or provide the
services, the buyer receives an invoice
setting out those payment details.
Control of the goods passes to the buyer
before you receive payment.
The credit term agreed with the buyer is
also stated on the invoice. For example,
if a buyer has 30 days’ credit, the invoice
will state when the 30 days begin—on
the date of invoice, the date of delivery
or another date.
When a payment is due, your buyer
will usually send it by
• Telegraphic (wire) transfer through a
bank or
• International bank cheque (bank draft)

36. What costs are involved?
• The cost is usually paid by the sender (buyer)
Telegraphic
transfers
• Depends on the bank of whether collection
charges apply.
International
cheques
• costs of reducing non-payment risk, such as
taking out export credit insurance, or of raising
working capital.
Other costs

37. What are the pros and cons?
Pros Cons
May increase market competitiveness, as this
payment method has no risk for overseas buyers
and it may also help their cash flow
The relatively high risk of non-payment makes open
account suited to long standing, trouble-free
trading relationships
International telegraphic transfers and bank
cheques are cheaper and more straightforward
payment methods for both seller and buyer than a
documentary collection or documentary credit
As seller don’t receive payment until after he has
shipped the goods, payment on open account
terms may strain his cash flow, especially if he
provides extended payment terms
If the export contract is in a foreign currency, seller
is exposed to exchange rate risk from the date of
the sale contract to the time of payment

38. How Exporters tackle the risk?
Using one or more of the appropriate trade finance
techniques
The exporter who lacks
sufficient liquidity needs
export working capital
financing that covers the
entire cash cycle from
purchase of raw materials
through the ultimate
collection of the sales
proceeds. Loan or revolving
line of credit
Export Working
Capital Financing
Able to obtain
needed facilities
from commercial
lenders when
financing is
otherwise not
available.
Government-
Guaranteed
Export
Working
Capital
Programs Provides protection
against commercial
losses-default,
insolvency,
bankruptcy, and
Political losses-war,
nationalization,
Currency
inconvertibility
Export Credit
Insurance
Discounting of
a short-term
receivable (up
to 180 days).
Usually works
with consumer
goods
Export
Factoring
Allows the
exporter to sell
its medium term
receivables (180
days to 7 years)
to the forfeiter
at a discount, in
exchange for
cash
Forfaiting

39. How risky is it?
A range of payment
methods is used in
international trade, with
payments taking place at
a different stage of the
export transaction in
each.
Each method has a
different level of non-
payment risk for the
exporter, and non-delivery
risk for the buyer.
EXPORTER
Safest
Riskiest
Riskiest
Safest
Cash in
advance
Letters of
Credit
Documentary
Collections
Open
Account
IMPORTER

40. Countertrade
Exchanging of Goods and Services

42. Countertrade
Barter System
Pepsico & Russian Vodka (Stolichnaya)

43. Countertrade
Compensation
Indo-Iraq Oil for Food Program

44. Countertrade
Buy-Back Arrangement
National Textile Corporation bought Looms from Soviet Union & buyback ratio was 75%
textile produce and remaining cash

45. Countertrade
Tolling Arrangement

46. Countertrade
Switch Trading

47. Offset

48. Countertrade
Pros
• When there is a shortage of foreign
exchange reserves, the
countertrade is the best option for
importing countries.
• Countertrade helps in the sales of
surplus stocks produced or stored.
• For example: Developed countries
can sell their stock, which have
become outdated or obsolete at
home due to the advancement in
technology to the developing or
poor countries of the world.
Cons
• A major drawback of countertrade
is that the value proposition may
be uncertain, especially in cases
where the goods being exchanged
have significant price volatility.
• It often includes complex
negotiations, potentially higher
costs and logistical issues

49. THANK YOU..!!