PAYMENT METHODS IN

INTERNATIONAL TRADE

BY
ASHUTOSH FOTEDAR
Roll No 0031143908
M.B.A- 3rd Semester
Bhai Parmanand Institute of Business
Studies, Shakarpur, Delhi 1
 Global Business
Professional
 Involved in sale/purchase of goods/services
internationally.
 Essentials :
- Understand and able to use payment
methods.
- Documentation.
- Calculate the risks involved.

2
Payment Methods: Factors
 Cash Flow needs.
 Relationship with customer.
 Economic conditions in the country.
 Interest rates and currency adjusting
factors.
 Type of product.
 Customer’s creditworthiness.
 Competitors offering.
 Supplier’s demands.
 Urgency of the transaction. 3
 Currency Used:
 USA – Dollar  China – Yuan
 Kuwait – Dinar  Spain - S Peseta
 Saudi Arabia – Riyal  France - Franc (Euro)
 Australia - A Dollar  Mexico – Peso
 Pakistan - P Rupee  UAE – Dirham
 Iran – Rial  UK – Pound
 Japan – Yen  Italy - Lira (Euro)

4
 Risk in International trade:
 Buyer insolvency
 Non-acceptance
 Credit risk
 Regulatory risk
 Intervention
 Political risk
 War and Acts of God.

5
 Cash in
advance/prepayment:
 Payment sent before the product is manufactured
or shipped.
 Use this method when:
- No established relation between the seller and
buyer.
- Product is a special order.
- Importing country will impose regulations.
- Seller does not have sufficient liquidity.
 Buyer must have cash or financing available.

6
 Example of cash in
advance
 Wire Transfer
 Credit Card
 Payment by Check

7
 Documentary Collection:
 Negotiable instrument created, usually a draft
or bill of exchange.
 Processed through a buyer’s bank or through
seller and buyer’s bank.
 The seller’s rights to payment are protected.
 Less costly and do not require buyer to tie up
credit lines.

8
Documentary Collection: 4
Processes
 D/P – Documents against Payment:
- Documents provided only when payment is
made.
 D/A – Documents against Acceptance:
- Buyer is able to collect the documents against
an undertaking to bay on an agreed date.
- After acceptance, seller is financially exposed.
 Clean Collection:
- Only bill of exchange created without export
document.

9
Documentary Collection: 4
Processes
 Cash against Documents:
- Exports documents are sent through a remitting
bank to a collection bank without a bill of
exchange.

10
 Documentary Collection:
 Use this method when:
- Seller and buyer have done some business.
- Some trust on the buyer.
- Importing country will not impose regulations.
- Sufficient Liquidity or outside financing.
 Trade acceptances can be used for financing.
 Seller finances buyer.
 Financing comes from domestic/global business.

11
 Letter of Credit:
 Balances the risk between the seller and buyer.
 Reduces the commercial and political risks.
 Provide extended terms to the buyer.
 Involved Parties:
- Applicant
- Beneficiary
- Opening bank
- Advising Bank
- Conforming Bank
- Paying Bank

12
 Types of Letter of Credit:
 Revocable – Amended or cancelled by the
applicant w/o notice, discussion
or agreement with the beneficiary.
 Irrevocable – Can not be amended or cancelled
w/o the agreement of all the
parties.
 Unconfirmed – Commitment by the issuing bank to
pay, accept, or negotiate a L/C.
Advising bank forwards to beneficiary.

13
 Types of Letter of Credit:
 Confirmed - Credit risk taken by bank and
agreement to pay (fee charged).
 Transferable - part or all of the proceeds from the
L/C may be transferred to another
party, used by sales brokers or
agents to disguise buyers and sellers
 Assignment of proceeds:
Proceeds of the L/C can be assigned where beneficiary is
not the actual seller of all or in part.

14
 Types of Letter of Credit:
 Revolving – Allow companies conducting regular
business to issue a L/C that would
“rollover”.
 Standby - Issued as a back-up or form of
insurance for the seller should the
buyer default on the agreed-upon
payment terms.

15
 Letter of Credit:
 When appropriate to use it:
- corporate credit policy and ability to absorb risk
credit standing of the buyer.
- political environment.
- type of merchandise.
- availability of foreign exchange.
- Govt. require banks to control flow of currency.
- Products and services comply with quality steps.

16
Example of Letter Of
Credit:

17
 Open account
 Both goods and documents are shipped
together.
 Buyer agrees to pay on a future date.
 When to use:
- Absolute trust.
- No regulations by importing country.
- Sufficient liquidity required by seller.
- High banking fees avoided.

18
Example of open account:
 SWIFT Inter-Bank transfer
 Buyer's Cheque
 Banker's Draft
 International Money Orders

19
 Combining Method:
 Payment methods are not absolute.
 Combined to reduce risks of all parties.
 Example: For custom made products, an
exporter could offer 50% prepayment to
cover the cost of manufacturing and 25%
payment at invoice date and 25% payment 90
days after invoice.

20
Payment Ladder Diagram:

21
Balance of Payment:
 The payments that flow between any individual
country and all other countries.
 Summarize all international economic
transactions.
 The international transactions of the domestic
country are classified
1. Trade Transactions
2. Capital Transactions
3. Current account

22
Example of Balance of
Payment:
The Economic Crises of 1990-92 of
India
 Foreign Exchanges declined from $3.1
Billion to 896 Million.
 Current Account Deficit reached to $9.7
Billion i.e. 3.2% of GDP.
 Inflation had risen to 17 percent.

23
 Summary
A significant responsibility of a credit manager is to
understand the use of the various payment terms in a
competitive business environment.

A pro-active international manager involves other

business units and individuals, such as those in sale
management, not only in the process of “why” certain
credit terms are determined for a buyer, but also
“how” they are determined.

24
 References:

 www.wikipedia.com
 www.wikieducator.com
 Sitpro: Financial Guide
 www.trade.gov

25
 THANK YOU

Email:
ashutoshfotedar@gmail.com

26