Chapter 5 International Payment

CHAPTER 6
INTERNATIONAL PAYMENT
9/5/2023 706021 - Chapter 6: International payment 1

LEARNING OUTCOMES
Identify the key issues in handling int’l payment
Understand the use of paying instruments
Define the three basic terms of payment
Compare and contrast the characteristics of terms of payment
Identify the major parties involved in different payment methods
State the stages involved in using a L/C
Establish a basic understanding of export financing

LOGO
PAYING INSTRUMENT
International payment depends on the use of special
financial documents called paying documents
• Represent a unilateral promise to pay a fixed amount of
money to the legitimate holder of instrument
• Be transferable or negotiable
Promissory
Note
Bill of
Exchange
Check/
cheque
8/19/2019 706021- Chapter 5: International payment 3

LOGO
BILL OF EXCHANGE OR DRAFT
A bill of exchange is a written instrument which:
• Contains an unconditional order whereby the drawer
directs the drawee to pay a definite sum of money to the
payee or to his order
• Is payable on demand or at a definite time;

• Is dated
• Is signed the drawer.
==> credit instrument, carying the risk of being dishonored,
but can be reduced by the paying condition for title transfer

LOGO
BILL OF EXCHANGE OR RAFT
LOGO
www.themegallery.com Company Name

LOGO

LOGO
BILL OF EXCHANGE OR DRAFT
-Type of Draft-
Clean Bill vs Documentary Bill
Commercial Draft vs Banker’s Draft
Sight Draft vs Time Draft/ Usance Draft

LOGO
PROMISSORY NOTE
a writtent instrument which contain unconditional

promise whereby the maker undertake to pay a stated
sum to the payee or to his order.
• Share common features with the B/E

• Difference: a two-party instrument
-The promisor/maker
- The promisee/payee

LOGO

LOGO
CHECK/CHEQUE
a direction writing to a bank to pay a stated sum of
money on demand to a named party, or to his order, or to
the bearer.
• A type of B/E drawn on a bank
• The drawer must keep an account in the bank with
enough amount
• Any time before the payment, the check can be
cancelled
• The check have to be sent back to local bank for
payment (through banking channels)

LOGO

NEGOTIATING TERMS OF PAYMENT
The amount of payment and the need
for protection.
Considerations Terms offered by competitors.
Practices in the industry.
Capacity for financing

international transactions.
Relative strength of the
parties involved.

THE RISK TRIANGLE
BUYER’S PERSPECTIVE SELLER’S PERSPECTIVE
Source: Adapted from Chase Manhattan Bank, Dynamics of Trade Finance (New York: Chase Manhattan Bank, 1984),5

INTERNATIONAL PAYMENT
INSTRUMENTS
Payment terms refers to the way • Remittance
with which the seller will be paid • Open Account
by buyer and reflects the extent • Documentary
to which the seller requires a Collections
guarantee of payment before
• Letters of Credit
he loses control of the goods.
• CAD
• Barter
Banks play an important role

REMITTANCE
Remittance refers to a bank (the remitting bank), the request of
its customer (the remitter), transfers a certain sum of money to
its overseas branch or correspondent bank (the paying bank)
instructing it to pay a named person domiciled in that country.
T/T (Telegraphic Transfer

Remittance):remittance
M/T (Mail Transfer
by cable/telex/swift
Remittance): remittance Payment Order
(Society Worldwide
by airmail
Interbank Financial Tele-
comunication)

TRANSACTION WORK
• PAYMENT IN ADVANCE
3
Intermediary Remitting
Bank Bank
4 6 2
1
Applicant/
Beneficiary
Remitter
5
CONSIDER
Risks:
• The seller may ship the goods late
• Seller may supply inferior goods
• The seller may decide not to ship at all
Applicable where:
• The buyer can not supply evidence of
creditworthiness
• It is a new business
• The buyer country is not considered creditworthy
18
9/5/2023 706021 - Chapter 6: International payment
TRANSACTION WORK
• PAYMENT RIGHT AFTER/ AFTER SHIPMENT
4
Intermediary Remitting
Bank Bank
5 3 6
1
Applicant/
Beneficiary
Remitter

CONSIDER
Risks:
• Buyer may delay payments
• Buyer may run into financial difficulties and will be unable to
pay
• Country risk (may have limited access to FX due to local
conditions)
• Advantages to the buyer: the buyer pays for the goods or
services only when they are received and/or inspected.
Applicable where:
• Buyer can show creditworthiness, or
• There is existing successful credit relationship, and
• Buyer’s country is creditworthy

NOTE
All shipping documents, including

title documents, are handled
directly by the trading parties
The trading parties trust to

pay/ship
The role of banks is limited to

clearing funds

22
706021 - Chapter 6: International payment 9/5/2023

RISK ANALYSIS
Payment after Payment in
shipment
Advance
Advantages to Exporter: Advantages to Exporter:
•None - but could clinch the sale! •Assumes no risks
Disadvantages to Exporter: Disadvantages to Exporter:
•Assumes all risks •None
Advantages to Importer: Advantages to Importer:
•Assumes no risks •None - but could secure low cost!
•Delays use of company’s cash Disadvantages to Importer:

resources. •Assumes all risks
Disadvantages to Importer: •Opportunity cost of using company’s
•None cash resources until goods are
received.
23
DOCUMENTARY COLLECTIONS
A method of payment used in international trade
whereby the Exporter entrusts the handling of
commercial and often financial documents to banks
and gives the banks instructions concerning the
release of these documents to the Importer.
Banks involved do not provide any guarantee of

payment.
Collections are subject to the the Uniform Rules for

Collections published by the International Chamber
of Commerce. The last revision of these rules came
into effect on January 1, 1996 and is referred to as
the URC 522.
24
Documentary Collections may be
carried out in two different ways:
Documents Against
Documents Against
Acceptance (D/A):
Payment (D/P):
Documents are
Documents are
released to the buyer
released to the buyer
only against
only against payment
acceptance at sight of
at sight of the bill of
the bill of exchange.
exchange. Also known
Also known as a Term
as a Sight Collection
Collection.
9/5/2023 25
706021 - Chapter 6: International payment
The mechanics of a Documentary Collection are easily
understood when separated into the following three
steps:
Flow of Flow of Flow of

Goods Documents Payment

DOCUMENTARY COLLECTIONS:
FLOW OF GOODS
After the Importer and the
Exporter have established
a sales contract and agree Exporter/Drawer
on a Documentary
Collection as the method 1
of payment
The Exporter ships the GOODS
goods. In a Documentary
Collection, the Buyer is
known as the “drawee”
and the Seller as the
“drawer”
Importer/Drawee
DOCUMENTARY COLLECTIONS: 28
FLOW OF DOCUMENTS
Documents are delivered to the
Remitting Bank. 2
Document
s
Exporter/
Remitting
The Remitting Bank is to send these Drawer
Bank
documents accompanied by a
Collection Instruction to the Collecting/ 1
Presenting Bank
Document
3
The Collecting/ Presenting Bank acts in GOODS
s
accordance with the instructions given
releases the documents to the buyer
against payment or acceptance
Document
Note: The Exporter’s Bank and the s
Remitting Bank need not be the same. 4
Also, the Collecting Bank and Presenting Importer/ Collecting/
Bank need not be the same. Each role Drawee Presenting
could706021
be -performed by a different
Chapter 6: International payment bank. Bank
9/5/2023
DOCUMENTARY COLLECTIONS:
29
FLOW OF PAYMENT
7
Payment is forwarded Drawer Remitting

to the Remitting Bank Bank
for the Seller’s
account.
6
GOODS
The Buyer presents
5
the transport
document (B/L) to the
carrier in exchange
Documen
for the goods. Drawee ts Presenting/
4 Collecting Bank

COLLECTION
Clean collection of payment process
Remitting bank Presenting bank

3
4
2
Drawer Drawee
1

LOGO
COLLECTION
Document Collection Process
7
Remitting bank Presenting bank
3
8 4 6
2 5
Drawer Drawee
1

CONSIDER
Risks :
• Non-acceptance of merchandise;
• Buyer can delay/ refuse payment on the maturity
• Buyer can receive inferior goods
• Exchange restrictions.
Applicable where:
• There is existing successful credit relationship, and
• The trading experience between the trading
parties

RISK ANALYSIS
Documents Against Documents Against
Payment (D/P) Acceptance (D/A)
Advantages to the Seller: Advantages to the Seller:

•Documents are retained control until payment •Less costly than a Letter of Credit.
•Less costly than a Letter of Credit. •May provide formal/legal means to collect unpaid
obligation.
Disadvantages to the Seller:
Disadvantages to the Seller:
•Risk of refusal of payment.
•Risk of non-acceptance of documents.
•Commercial and country risks not hedged.
•Commercial and country risks not hedged.
Advantages to the Buyer:
•Although bill of exchange/draft is accepted by the
•Ability to examine documents before authorizing
Buyer, there is no guarantee of payment by the banks
payment.
involved.
•Fees are minimal.
•Legal enforcement of unpaid obligation costly and
Disadvantages to the Buyer: time-consuming.
•Receive goods after payment settlement Advantages to the Buyer:
•In the case that transport documents carry title, •Will receive goods before having to make payment.
cannot access goods until payment has been
Disadvantages to the Buyer:
made.
•Dishonoring an accepted draft is a legal liability and
9/5/2023 may
706021 - Chapter 6: International ruin business reputation.
payment 33
Letters of Credit
A Letter of Credit is a written undertaking by the Buyer’s bank
(the Issuing Bank), on behalf of its customer, the Buyer
(Applicant), promising to effect payment in favor of the Seller
(Beneficiary) up to a stated sum of money, within a prescribed
time limit and against stipulated documents.
A key principle underlying Letters of Credit is that banks deal only in

documents and not in goods.
Letters of Credit is dependent on Trade Contract
The International Chamber of Commerce (ICC)  “Uniform Customs

and Practice for Documentary Credits” (UCP) UCP 600/ 2007

LETTERS OF CREDIT
Basic Facts: Revocable/Irrevocable & Sight/Term
Letters of Credit may be

settled either by sight or
An Irrevocable Letter of Credit by acceptance:
cannot be canceled or
amended without the consent • If payment is to be made at
of all parties including the the time that documents are
Seller. Unless otherwise presented a sight L/C
stipulated, all Letters of Credit • If payment is to be made at a
are irrevocable. future fixed time from the
presentation of documents
a term/time/ usance L/C

LETTERS OF CREDIT
The mechanics of a Letter of Credit are easily

understood when separated into the following
three steps:
Flow of Documents
Issuance Flow of Goods
& Payment
36
LETTERS OF CREDIT:
ISSUANCE
4
1.The trading parties agree on Advice of the
a sale of goods where L/C
Beneficiary Advising Bank
payment is made by Letter of
Credit
2.the Buyer requests that its
bank (the Issuing Bank) issue
a L/C in favor of the Seller Contract 3
(Beneficiary) Negotiations Request to
advise the L/C
3.The Issuing Bank then sends 1
the L/C to the Advising Bank.
A request may be included Buyer applies for
for the Advising Bank to add L/C
its confirmation.
4.The Advising Bank verifies the Applicant 2
L/C for authenticity and Issuing Bank
sends it to the Seller.

LETTERS OF CREDIT:
FLOW OF GOODS
Upon receipt of the Letter of
Credit, the Seller reviews the
Letter of Credit to ensure that it
corresponds to the terms and Beneficiary
conditions in the purchase
and sales agreement; that the
documents stipulated in the
Letter of Credit can be 5
produced; and that the terms GOODS
and conditions of the Letter of
Credit can be fulfilled.
Assuming the Seller is in
agreement with the above, it
arranges for shipment of the
goods.
Applicant
38
LETTERS OF CREDIT:
FLOW OF DOCUMENTS & PAYMENT
7
6.The Seller presents the
documents specified in the
L/C to the Advising Bank. Documen
Beneficiary 6
7.The documents are ts
Advising/Negotiati
checked and found to ng Bank
comply with the Letter of 8
Credit (w/o discrepancies)
Documen
9
The Advising Bank pay
Beneficiary GOODS
ts
8.The Advising Bank 5
forwards these documents 11
to the Issuing Bank. Documen
ts
Note: For the purpose of the
Course, the Advising Bank is also
acting as the Negotiating Bank. Applicant
10 Issuing Bank
However, the roles of advising and
negotiating the L/C may be
706021 - Chapter 6: International payment 39
performed by two separate banks.
LETTERS OF CREDIT:
FLOW OF DOCUMENTS & PAYMENT
9.The Issuing Bank 7
reimburses The Advising
Bank Documen
Exporter/ Advising/
10.The Issuing Bank 6 ts
Beneficiary Confirming
examines the Bank
documents to ensure 8
they comply with the
Documen
9
L/C. If the documents GOODS
are in order, the Issuing
ts
5
Bank will obtain
payment from the Buyer Documen
11
11.Documents are ts
delivered to the
Applicant to allow it to Importer/
10 Issuing Bank
take possession of the Applicant
goods. 706021 - Chapter 6: International payment 40
9/5/2023
LOGO
PROCESS
7
Opening Bank 6 Advising Bank
Issuing Bank Notifying Bank
2
9 3 7
8 1 5
4
Applicant Beneficiary

LOGO
BY IRREVOCABLE L/C AT SIGHT FOR 100% CONTRACT VALUE

EQUAL TO USD
200,000 (say: two hundred thousands only), to be opened before
March 16, 2015 and valid within 30 days from the opening day.
- Beneficiary: ABC
- Advising bank: ANZ.
- Payment documents:
+ 3/3 set of clean on board BL marked “Freight prepaid” made out
to the order of opening bank and notify applicant.
+ Signed commercial invoice in triplicate.
+ Signed packing list in triplicate.
+ Certificate of quantity and quality in duplicate.
+ Certificate of origin attested by Chamber of Commerce in USA
in one original and two coppies.
+Insurance policy covering all risks for 110% of the invoice value.
+ DHL receipt providing that a full set of shipping document
(including Bill of lading) has sent to the Buyer within 03 working
ww w. th em ega l ler y.com Company Name
d a y s fro m t hedate of shipment.
LOGO

LOGO

LOGO

LOGO

LOGO

LOGO

Risk Analysis: L/C
Buyer Seller
Advantages: Advantages:
•Buyer is assured that all terms •An undertaking from the Issuing
and conditions of the Letter of Bank that the seller will receive
Credit must be met. payment
•Ability to negotiate more •Shifts credit risk from the Buyer to the
favorable trade terms with the Issuing bank.
Seller when payment by Letter of
•Not obligated to ship against a
Credit is offered.
Letter of Credit that is not issued as
Disadvantages: agreed.
•A Letter of Credit assures correct Disadvantages:
documents but not necessarily
•Documents must be prepared in
correct goods.
strict compliance with the
•Bear the cost of opening the requirements stipulated in the Letter
credit. of Credit
RISK SPECTRUM
HIGHEST •T/T after shipment LEAST RISK
RISK TO TO BUYER
SELLER •Documentary
Collections
Documents
Against Acceptance
Documents
Against Payment
•Letters of Credit
Unconfirmed
LEAST RISK HIGHEST
TO SELLER Confirmed RISK TO
BUYER
•T/T in Advance
706021 - Chapter 6: International payment 50
9/5/2023
COUNTERTRADE
Structures an international sale when means of
payment are difficult, costly, or non-existent
• No currency convertibility
• Weak reserves prohibit access to hard
currency
Barter-like agreements
• Trade goods and services for other goods

and services
• 8-10% or world trade by value is in the form
of countertrade (up from 2% in 1975)
COUNTERTRADE
Main attraction:
•Way to finance an export deal
•Meet requirement of local government to
support exports
Main drawback:
•Risk of disposal / sale of goods at less than
full value
•Disposal of imports may require resources
other than those that the firm possesses
TYPES OF COUNTERTRADE
Barter
Counter purchase
Offset
Switch Trading
Compensation or Buyback

BARTER
International Reciprocal Trade Association
(IRTA) – the industry trade organization -
almost a half a million small businesses use
commercial barter exchanges every year.
Almost $10 billion in sales is transacted each

year by the commercial barter industry.
Trades where no intermediary is used and the

global barter market may be 10 times that
amount.

BARTER
International Reciprocal Trade Association
estimates that in 1998 over 470,000 companies
actively participated in barter in the US for a total of
over $16 billion in annual sales.
Over 65% of the corporations listed in the New

York Stock Exchange are presently using barter
to reduce surplus inventory, bolster sales, and
ensure that production facilities run at capacity.
U.S. Department of Commerce estimates that

20 to 25% of world trade is now barter, and
corporate barter is now a $20 billion industry.

BARTER
Conserve cash -- preserve cash-flow
Strengthen cash reserves -- use barter for the goods

& services most needed
Increase buying power -- access to goods & services
for growth
Increase customer base – may add new clients
Move surplus inventory
Finance -- new businesses can build credit through

barter
Employee Incentives -- travel, entertainment, gifts,

perks & bonuses
COMPENSATION
Barter with a
combination of Less risk than in
goods and straight barter
convertible currency

COUNTER PURCHASE –
PARALLEL BARTER
Parties pay cash of goods
Seller agrees to buy products/services

unrelated to its business
Seller then sells products to third

parties
OFFSET PURCHASE
Usually large projects, often

involving expenditure of
buying government’s money
A % of the selling price is

required to be purchased or
sourced from the buying
country

BUYBACK
The seller agrees to buy

a negotiated quantity
of the output from the
buyer’s output.

CLEARING AGREEMENT
A third party brokers transactions

between parties, maintaining
accounts for all participants
Typically are legal documents which specify

the details of the arrangements :
• Electrical power companies

• Stock brokers, on-line traders
SWITCH TRADING
Buyer pays hard currency for

unwanted goods/services from seller
Broker buys unwanted goods
Broker sells goods to third parties

PROCESS OF FACTORING
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706021 - Chapter 6: International payment
PROCESS OF FORFAITING

64
BASIS FOR COMPARISON FACTORING FORFAITING
Factoring is an arrangement
Forfaiting implies a
that converts your
transaction in which the
receivables into ready cash
Meaning forfaiter purchases claims
and you don't need to wait
from the exporter in return
for the payment of
for cash payment.
receivables at a future date.
Involves account Involves account
Maturity of receivables receivables of short receivables of medium to
maturities. long term maturities.
Trade receivables on Trade receivables on
Goods
ordinary goods. capital goods.
Finance up to 80-90% 100%
Type Recourse or Non-recourse Non-recourse
Cost of factoring borne by Cost of forfaiting borne by
Cost
the seller (client). the overseas buyer.
Does not deals in negotiable Involves dealing in
Negotiable Instrument
instrument. negotiable instrument.
Secondary
9/5/2023 market No
706021 - Chapter 6: International payment Yes 65

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CHAPTER 6

9/5/2023 706021 - Chapter 6: International payment 1

Understand the use of paying instruments

Define the three basic terms of payment

Compare and contrast the characteristics of terms of payment

Identify the major parties involved in different payment methods

State the stages involved in using a L/C

Establish a basic understanding of export financing

9/5/2023 706021 - Chapter 6: International payment 2

8/19/2019 706021- Chapter 5: International payment 3

• Is payable on demand or at a definite time;

8/19/2019 706021- Chapter 5: International payment 4

www.themegallery.com Company Name

www.themegallery.com Company Name

Commercial Draft vs Banker’s Draft

Sight Draft vs Time Draft/ Usance Draft

8/19/2019 706021- Chapter 5: International payment 8

a writtent instrument which contain unconditional

• Share common features with the B/E

8/19/2019 706021- Chapter 5: International payment 9

www.themegallery.com Company Name

8/19/2019 706021- Chapter 5: International payment 19

www.themegallery.com Company Name

Practices in the industry.

Capacity for financing

9/5/2023 706021 - Chapter 6: International payment 13

9/5/2023 706021 - Chapter 6: International payment 14

9/5/2023 706021 - Chapter 6: International payment 15

T/T (Telegraphic Transfer

9/5/2023 706021 - Chapter 6: International payment 16

9/5/2023 706021 - Chapter 6: International payment 19

9/5/2023 706021 - Chapter 6: International payment 20

All shipping documents, including

The trading parties trust to

The role of banks is limited to

9/5/2023 706021 - Chapter 6: International payment 21

706021 - Chapter 6: International payment 9/5/2023

Advantages to Exporter: Advantages to Exporter:

•None - but could clinch the sale! •Assumes no risks

Disadvantages to Exporter: Disadvantages to Exporter:

•Assumes all risks •None

Advantages to Importer: Advantages to Importer:

•Assumes no risks •None - but could secure low cost!

•Delays use of company’s cash Disadvantages to Importer:

Banks involved do not provide any guarantee of

Collections are subject to the the Uniform Rules for

Flow of Flow of Flow of

9/5/2023 706021 - Chapter 6: International payment 26

Payment is forwarded Drawer Remitting

9/5/2023 706021 - Chapter 6: International payment

Remitting bank Presenting bank

4/16/2020 706021- Chapter 5: International payment 30

Document Collection Process

4/16/2020 706021- Chapter 5: International payment 31

9/5/2023 706021 - Chapter 6: International payment 32

Advantages to the Seller: Advantages to the Seller:

A key principle underlying Letters of Credit is that banks deal only in

Letters of Credit is dependent on Trade Contract

The International Chamber of Commerce (ICC)  “Uniform Customs

9/5/2023 706021 - Chapter 6: International payment 34

Letters of Credit may be

9/5/2023 706021 - Chapter 6: International payment 35

The mechanics of a Letter of Credit are easily