Import and Export Management

Muhammad Zahid Malik

zahid.malik@iqra.edu.pk
Payment methods in international trade
 Payment methods in international trade

• Similar to those in domestic trade

• Added risks involved in cross-border transactions
• Means of payment = terms of payment in international trade
• Four commonly used terms of payment – each of them defers
in level of risk and stability for buyer and seller.
• Absolute v. relative security of parties (compromise of the
parties interests)
 Key factors determining the payment method

• Relationship between the seller and the buyer

• The length of business relationship between the parties (most
important factor)
• Nature of merchandise
• Industry norms
• Distance between seller and buyer
• Currency fluctuations
• Political and economic stability
 Four basic terms of payment

• Cash in advance

• Documentary credit (Letters of credit)

• Documentary collection

• Open Account
 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
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
 Cash in Advance

• HOW: Bank draft or check, wire payment to the bank account

• WHEN: Unique, high-demand products, orders from unknown

buyers in unstable countries

• Small sample orders, large buyer-small seller-large order, new

relationship, small transaction, avoid costs of documentary
payments
• Questions for the buyer
• Are cash in advance terms the only option available?
• Will the seller comply with the terms and ship the goods as promised?
• What recourse is available if the goods are not shipped as ordered?
• Are there economic, political, or social instabilities in the seller´s country
that may increase the likelihood that the seller cannot ship as promised?

• Questions for the seller

• Is the product unique enough or in high enough demand to get way with
requiring cash in advance terms?
• Is the buyer willing to pay at least some proportion in advance?
 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
• Questions for the buyer
• Is my bank experienced in documentary credit transactions?
• Am I prepared to amend or renegotiate terms of the credit with the
seller?
• Am I certain of all the documents required for customs clearance?

• Questions for the seller

• Will I take care to confirm the good standing of the buyer and the
buyer´s bank?
• Will we carefully review the credit to make sure its conditions can be
met?
• Am I committed to properly prepare documentation for the credit?
• Can we comply with every detail of the credit?
• Am I prepared to amend or renegotiate terms of the credit with the
buyer?
 International Methods of Payment:
Advantages and Disadvantages
Method Risk Chief Advantage Chief Disadvantage
cash in advance L No credit extension required Can limit sales potential, disturb
some potential customers.
Sight draft M/L Retains control and title; If customer does not or cannot
ensures payment before accept goods, goods remain
goods are delivered at port of entry and no payment is due
Letters of credit Banks accept responsibility If revocable, terms can change
Irrevocable M pay; payment upon during contract work.
Revocable M/H presentation of paper; costs
go to buyer
Time draft M/H Lowers customer resistance Same as sight dragt, plus goods
by allowing extanded payment delivered before payment is due
after receipt of goods or received
Consignment sales M/H Facilitates delevery; lowers Capital tied up until sales; must
customer resistance establish distributor's creditworthiness
need political rish insurance in some
countries; increased risk from
currency controls
Open account H Simplified procefure; no High risk; seller must finance
customer resistance production; increased risk from
currency controls
 Methods of Payment
Risk Protection
Buyer Max
Min

Con-
firmed
Uncon
-
firmed Sight
Draft
Time
Draft
Max Min
Seller
Cash in Letter of Documentary Open
Advance Credit Collection Account
 Steps in Obtaining L/C

• 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 (seller’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
• L/C (continued)
• Shipping documents
• Bill of Lading:
– 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
• Packing list:
– outlines things to be filled
• Certificate of Insurance
• Certificate of Origin
 Documentary Credit Procedure

Buyer (1) Contract of Sale Seller

(Importer) (Exporter)
(5) Delivery of Goods

(2) (8) (6) (4)

Request Documents Documents Letter of
to Provide & Claim for Presented Credit
Credit Payment Delivered

(7) Documents Presented to

issuing Bank
Importer’s Bank Correspondent
(Issuing Bank) (9) Payment Bank

(3) Credit Sent to Correspondent

Irrevocable Documentary
(Commercial)
Letter of Credit (L/C)
Advised or Confirmed
 Documentary Letter of Credit

• Conditional, legal obligation of bank to pay

beneficiary
• Bank places its internationally accepted
credit rating
• Eliminates commercial risk
 Principal Parties to Letter of Credit

• Applicant
(importer/buyer/account party)
• Beneficiary
(exporter/seller)
• Issuing Bank
(guarantor)
• Correspondent Bank
 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
 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
 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)
The life of a Typical Banker’s Acceptance
 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
Where We Go Wrong Commercial Invoices

• Good description differs from L/C

• Extension of cost wrong
• Partial shipment not authorized
• Term of shipment missing
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
 Exporter Trouble Shooting

• Can you meet documentary requirements

• Can you meet shipping/expire/dates?

• Is description of goods accurate?

• Are names and addresses correct?

 Exporter Trouble-Shooting

• Is credit irrevocable?
• Is credit confirmed?
• Is credit amount correct?
• Is L/C negotiable?
 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

 Advantages to both parties:

• Flexible document

• Governed by internationally accepted set of

rules

The Uniform Customs and Practice for

Documentary Credits (The UCP)
 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
 Documentary Collections (DC)

• Three Types of DC
• Documents against Payment (D/P)
• Documents against Acceptance (D/A)
• Collection with Acceptance (Acceptance D/P)
• 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
• Questions for the buyer:
– Do I trust that the seller will ship the quality and quantity of goods
as promised?
• Questions for the seller:
– Do I know the buyer well enough to trust that he/she will pay for
the documents?
– If the buyer refuses to pay for the documents, are the goods we are
shipping easily marketable to another client?
– Is our company committed to prepare documents correctly?
 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)
 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
 Open Account

• Less risk for the buyer and the greatest risks for the seller that the buyer
will not comply with the terms of the contract and pay as promised.
• The seller should always consider whether any other alternatives are
available before agreeing to open account terms.
• The buyer has to pay for the goods within a designated time after the
shipment, usually 30, 60, 90 days, no longer that 180 days.
• Time to: receive the goods, check it, market them in his domestic
market, receive payment for it and make payment to the seller.
• Made by: bank draft, check, wire payment to the bank account specified
by the seller
• If the buyer does not pay – the last chance is to take an legal action on
the basis of sales contract.
 Open Account

• Used when:

– Not much common in international trade

– goods are shipped to the foreign branch or
subsidiary of a multinational company
– High degree of trust between the persons
– The seller has significant faith in the buyer’s ability
and willingness to pay.
• Questions for the buyer:
– Can I convince the seller of my ability and willingness to pay on an
open account terms?
– Is my marketing or distribution strength and reputation in my
domestic market attractive enough to the seller to justify open
account terms?
• Questions for the seller:
– Are open account terms the only option available?
– Does the buyer have the ability and willingness to make payment?
– Will economic, political, and social instability in the buyer’s country
hinder the buyer’s ability to pay?