Chapter 5

Methods of Payment
 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
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)
Four basic methods of payment
• Cash in advance

• Documentary credit (Letter of credit)

• Collection

• Open Account
Cash in advance
Importer pays Exporter prior to shipment

Goods

Exporter Importer

• Exporter has no risk of non-payment or non-acceptance

• Importer has risk that exporter will not ship the goods as ordered
• Used occasionally for small amounts, new customers, one-time
sales
Cash in advance
• Under this term, the importer will pay to the exporter before the exporter delivers them.

• In fact, this is a credit granted by the importer to the exporter. Being a credit, the
importer can ask the exporter the payment of an interest. This term is very useful for the
exporter.

• It is quite common for a sale contract to require partial payments in advance, for
example the contract could stipulate, say, 20% payable on the signing of the contract
with the remaining 80% payable after dispatch of the goods under one of the other
means of payment
Cash in advance
The risks of the importer:
- Sometimes the exporter does not send the goods;
- The documents can be wrong;
- The goods are sent with a delay or to a wrong destination.

This method of settlement is used between ole partners with a long business
relationship.

Another method of advance payment can be the following: “30% of the value in
advance and 70% of the value will be paid upon delivery”.
Cash in advance
Advantages to the importer:

- Few arrangements have to be made other than ensuring that funds are available
to meet payments when they are due;

- The importer has the control over the timing of settlement and the method by
which funds are remitted;

- Inspection of the goods is usually possible before payment is made.

Open account
- When a buyer and a seller agree to deal an open account term, it means that the
seller will dispatch his goods to the buyer and will also send an invoice requesting
payment.

- The seller loses control of the goods as soon as he dispatches them. He trusts that
the buyer will pay in accordance with the invoice.

- Open account is the simplest method of settlement but presents the greatest risk.
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.
Open Account
• 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?
Collection
Definition:

Collection means the handling by banks of documents, in accordance

with instructions received, in order to:

- Obtain payment and/or acceptance or

- Deliver documents against payment and/or against acceptance, or

- Deliver documents on other terms and conditions.

Collection
Classification:

- Clean collection: represent financial documents which are not

accompanied by commercial documents.

- Documentary collection means collection of:

1. Financial documents accompanied by commercial documents

2. Commercial documents not accompanied by financial documents

Collection
Parties to a documentary collection:
- The principal or the exporter: A person who entrusts the operation of collection to his
bank;
- The remitting bank or the exporter’s bank: the bank to which the exporter entrusts the
operation of collection;
- The collecting bank or the importer’s bank: the bank involved in processing the collection
order.
- The presenting bank: is the collecting bank which makes presentation to the drawee;
- The drawee or the importer: the one to whom presentation the payment is to be made
according to the collection order.
Collection
Duties of the presenting bank:
- To confirm receipt of the documents;
- To present documents to the drawee in compliance with the collection instructions (D/P or D/A)
- To notify the remitting bank that the draft has been accepted at its maturity date, or, if requested,
to return the bill to the remitting bank.
Duties of the remitting bank:
- To check the exporter’s collection instruction;
- To check that the presented documents are complete;
- To pass on the principal’s instructions to the collecting bank/presenting bank;
- To monitor the operation collection.
Documentary collection
Collection
Collection instruction:

- All documents sent for collection must be accompanied by a

collection instruction.

- Banks are only permitted to act upon the instructions given in such
collection instruction.

- Banks will not examine documents in order to obtain instructions

Collection
The information in a collection instruction:
1. Details of the bank from which the collection was received
2. Details of the principal, the drawee, the presenting bank (if any)
3. Amount(s) and currency (ies) to be collected
4. List of documents and the numerical count of each document
5. Terms and conditions upon which payment and/or acceptance is to be
obtained; Terms of delivery of documents against (D/A or D/P or D/OT)
6. Charges and interest (if any) to be collected, indicating whether it may be
waived or not.
7. Method of payment and form of payment advice
8. Instructions in case of non-payment, non-acceptance and/or non-
compliance with other instructions
Letters of Credit
Definition of a Letter of Credit
(1) Letter of Credit is a conditional guarantee of payment made by a bank to a named
beneficiary, guaranteeing that payment will be made, provided that the terms of the
credit are met. These terms will state that the beneficiary must submit specified
documents, usually to a stated bank and by a certain date.

(2) Letter of Credit is an arrangement between a customer and a bank to make payment
to, or to the order of the beneficiary (UCP 600).
Documents Common to an Export L/C
• Commercial Invoice
• Packing List
• Bills of Lading
• Certificate of Origin
• Other Certificates: Quality,
Inspection
• Beneficiary Statements
1. Importer and Exporter enter into a sales agreement

(1) sign the contract

Agreement
Exporter Importer
2. Importer applies for a letter of credit with the Issuing Bank

applicant Importer

(2) yêu cầu mở L/C

Application
Ngân hàng dựa vào các yêu cầu
này để mở ra thư tín dụng
ký quỹ đủ 100%
ko đủ gọi là tài trợ ngoại thương

international trade financing: tài trợ ngoại thương Issuing

Bank
3. Issuing Bank advises the letter of credit to Advising Bank, usually via SWIFT

L/C

SWIFT

Letter of
Credit
Advising Issuing
Bank (3) phát hành thư Bank
tín dụng
4. Advising Bank authenticates the L/C and advises L/C to Beneficiary

Beneficiary Nhận được thư tín dụng phải kiểm tra

lại xem sai ở đâu để sửa

(4) L/C được gửi từ exporter

sang importer

Advising.
Bank
document require
5. Exporter prepares the documents and ships the goods

Goods

Exporter Importer
(5) giao hàng

Goods
6. Exporter sends shipping documents to Advising Bank for examination

Exporter

Documents
(6) chuẩn bị bộ chứng từ
- commercial document
- ký hối phiếu đòi tiền

Advising
Bank
7. After examination all documents, Issuing Bank will pay money to the beneficiary
2 tình huống xảy ra
- chứng từ ổn, cán bộ non kinh nghiệm gây khó dễ, từ chối thanh toán với những lỗi nhỏ không đáng kể, gây khó khăn cho
exporter trong việc nhận tiền
- chứng từ rất nhiều lỗi, lỗi nghiêm trọng, cán bộ non kinh nghiệm, không phát hiện ra lỗi, chấp nhận thanh toán, exporter
cầm chứng từ sai, không nhận được hàng

=> Yêu cầu cán bộ ngân hàng

phải có kinh nghiệm để tránh Exporter
rủi ro

(7) gửi chứng từ cho issuing bank kiểm tra

Advising Documents Issuing

Bank Bank
8. Issuing Bank examines documents and delivers to importer against payment. Importer
takes possession of goods by presenting documents.
- Trả ngay nếu là hối phiếu trả ngay
- Chấp nhận nếu là hối phiếu trả chậm

Ngân hàng trả lại chứng từ cho importer,

không có nó không lấy được hàng. Cần
chứng từ để yêu cầu bồi thường, các thủ Importer

tục liên quan khác, ...

Documents (8) payment, acceptance

Goods

Issuing
Bank
9. The exporter has been paid, the importer has their goods, the banks have been
reimbursed, and the cycle is complete!

Goods

Exporter Agreement Importer

(9) payment, accepted B/E

Letter of
Documents Application Documents
Credit

Letter of
Credit
U.S. Issuing
Documents
Bank Bank
 Classification of
Letters of Credit

• Revocable L/C and Irrevocable L/C:

- Revocable L/C: may be cancelled or amended at any time without prior
notice being given to the beneficiary. This type of credit is rare.
- Irrevocable L/C can only be amended or cancelled with the agreement of
all parties.
• At sight L/C and Deferred Payment L/C
• Some particular L/C: Transferable L/C; Back to Back L/C; Red Clause L/C;
Revolving L/C; Standby L/C
 Classification of
Letters of Credit

• A revolving letter of credit is one where, under the terms and conditions thereof, the
amount is renewed or reinstated without specific amendment to the L/C being
needed.
• Revolving L/C is used when the same goods are to be imported or purchased on a
repeat basis over a period of time without any changes/amendments to the terms
and conditions of a L/C
 Classification of
Letters of Credit

• A red clause L/C is a credit with a special clause (in red ink or a red border to the
clause). The clause contains an authorisation by the issuing bank to the advising or
confirming bank to make funds available to the beneficiary before presentation of
documents.
• It is often used as a method of providing the seller with funds prior to shipment of
goods.
 Classification of
Letters of Credit

• A red clause L/C is a credit with a special clause (in red ink or a red border to the
clause). The clause contains an authorisation by the issuing bank to the advising or
confirming bank to make funds available to the beneficiary before presentation of
documents.
• It is often used as a method of providing the seller with funds prior to shipment of
goods.
 Benefits of Letters of Credit
To the Exporter:
• Payment protection
• Reliance on issuing bank’s
credit rather than buyer’s
• Rapid, local source of
repayment, if payable at a U.S.
bank
To the Importer:
• Documentary evidence that the ordered goods
have been shipped on time
• Assurance that necessary clearance documents
will be provided
• Payment deferred until goods are shipped and
documents presented (use of funds)
 Form of
Letters of Credit

40A: Form of credit • 43P: Partial Shipment

20: Number of L/C • 43T: Transhipment
40E: Applicable Rule
• 44A: Loading on Board
31C: Date of issue
31D: Date and place of Expiry • 44B: For transportation to
50: Applicant • 44C: Latest Shipment date
59: Beneficiary • 45A: Description of goods
51A: Issuing Bank • 46A: Documents required
32B: Currency Code, amount
39A: Percentage Credit Amount
• 47A: Additional Conditions
Tolerance • 71B: Charges
39B: Maximum Credit Amount
• 48: Period for presentation
39C: Additional Amounts Covered
41A: Available with…by • 53A: Reimbursing Bank
42C: Drafts at • 78: Instruction to the paying bank
42A: Drawee • 72: UCP
• Vietnam export and import company signs an international trade
contract with Henkang Inc, Korea under CIF Incoterms 2010 . In the
contract, Vietnam export and import company must open L/C at sight
and notify L/C to Henkang before proceeding with the delivery. On
December 15, 2020, Foreign Trade Bank Hanoi branch opened L/C for
a Vietnamese company. On December 17, 2020, the Bank announced
that the Korean side received the L/C with the content as below. Find
the incorrect points in the following L/C.

•
• 40A: Form of Documentary Credit • 41D: Available with Any Bank in
REVOCABLE L/C Vietnam by payment
• 31C:Date of Issue • 42C: Drafts at … : 180 days from BL
151220 (dd/mm/yy) date
• 40E:Applicable Rules • 42A:Drawee: Vietnam export and import
• UCP company
• 31D:Date and Place of Expiry • 44A:Port of Loading: HAIPHONG
251220 PORT
• 50:Applicant • 44B: Place of Final Destination:
Henkang Inc, Korea SAIGON PORT, VIETNAM
• 59:Beneficiary • 44C: Latest Date of shipment: 181220
Vietnam export and import
company
• 32B:Currency Code, Amount: 500.000
dollars
• 39A: Percentage Credit Tolerance: 10/10
 Case study
On August 10, 2020, the issuing bank received a set of documents as followings:
• Commercial Invoice issued on August 05th, 2020 with the amount of USD 550,000
• Bill of exchange issued on August 08th, 2020 requiring payment from the issuing bank with
the amount of USD 550,000
• Bill of lading issued on July 20th, 2020, clean on board notation indicating the date was July
21st, 2020, port of loading: Hai Phong port, port of discharge: Singapore port.
• Insurance policy issued on July 22nd, 2020, with the amount of USD 500,000
• Packing list issued on August 12nd, 2020
Terms and Conditions of L/C as followings:
• Currency Amount: $500,000, tolerance (+/-5%)
• Delivery Date between July 10th -20th,2020
• Terms of delivery: CIF Hai Phong, Incoterms 2010
• Applicable rule: UCP 600
• L/C issue date: June 10th, 2020
Question: Will the bank pay for this set of documents?