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FINANCING

FOREIGN TRADE

I. PAYMENT TERMS
I. PAYMENT TERMS
A. Five Principal Means:
1.
Cash in advance
2.
Letter of Credit
3.
Drafts
4.
Consignment
5.
Open Account

On the plus side. Minimal risk to exporter Used where there is a. either through an ATM or directly from a bank or other financial agency.even higher than credit card itself . 2.and the interest begins to accrue immediately.B. cash advances are quick and easy to obtain in a pinch. Cash advances typically carry a high interest rate . 1. New unfamiliar customer . Cash in Advance A service provided by many credit card issuers allowing cardholders to withdraw a certain amount of cash. Goods made to order c. Political unrest b.

PAYMENT TERMS C.A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase. The bank also acts on behalf of the buyer (holder of letter of credit) by ensuring that the supplier will not be paid until the bank receives a confirmation that the goods have been shipped. b. the bank will be required to cover the full or remaining amount of the purchase. written and signed by buyer’s bank Seller must conform to terms . Letter of Credit (L/C). 1. A letter addressed to seller a.

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eliminates credit risk b. Advantages of an L/C to Exporter a.PAYMENT TERMS 2. payment certainty c. prepayment risk protection d. financing source .

shipment assured b. easy cash recovery if discrepancies . Advantages of L/C to Importer a. relatively low-cost financing e.PAYMENT TERMS 3. may allow better sales terms d. documents inspected c.

b. The Issuing Bank can only amend or cancel its undertaking if all parties to the LC consent to the change. providing that the Exporter presents documents which comply with the terms laid down in the Letter of Credit. documentary. c. Revocable.With an irrevocable Letter of Credit the Issuing Bank gives its irrevocable undertaking to pay if all the terms of the LC are met.A Documentary Letter of Credit (LC) is a written undertaking given by a bank on behalf of an Importer to pay the Exporter a given sum of money within a specified time.PAYMENT TERMS 4. . Irrevocable. Types of L/Cs a.This is an LC that can be cancelled or amended by the applicant or the Opening Bank without prior notice to the Exporter.

d. Confirmation is generally used when there is perceived to be some risk that the bank issuing the Letter of Credit may not be able to fulfill its obligation to pay. usually in the Exporter's country and at the Exporter's request.c. confirmed. It is normally used in situations where a supplier sells through an intermediary or 'middleman' to the ultimate Importer and is in a strong enough bargaining position to insist upon payment by Letter of Credit .Transferable Letter of Credit is one that can be transferred from the first Beneficiary to one or more additional Beneficiaries by the Transferring Bank. adds its own commitment (confirmation) that payment will be made.Confirmed LC is one to which a second bank. transferable. This could be due to bank failure or instability in the country of the Issuing Bank.

DRAFTS 1. Definition: .PAYMENT TERMS D.unconditional order in writing .exporter’s order for importer to pay .in future (time draft) .at once (sight draft) or .

Three Functions of Drafts a. provides negotiable and unconditional financial instrument (ie. clear evidence of financial obligation b. May be converted to a banker’s acceptance) . reduced financing costs c.PAYMENT TERMS 2.

Unlike a time draft. b.Sight drafts are used with both air shipments and ocean shipments for financing transactions of goods in international trade. clean (no documents needed). certificate of origin. sight.Time drafts are a type of short-term credit used for financing transactions of goods in international trade. c.3. time. They allow the buyer a delay in payment after accepting a shipment of exported goods. documentary. . Types of Drafts a. a sight draft is payable immediately.contains documents like bill of lading. which allows for a short-term delay in payment after the importer receives the goods.Draft to which no documents have been attached. d.

especially those offering specialty products. Consignment deals are made on a variety of products . Consignee attempts to sell goods to a third party. to clothing. remits rest to consignor. Importer = the consignee 3. consignment shops have become rather trendy. the consignor receives a percentage of the sale (sometimes a very large percentage).from artwork. CONSIGNMENT 1. An arrangement whereby goods are left in the possession of another party to sell. infant wear and high-end fashion items. keeps some profit. Typically. In recent years. to books. Exporter = the consignor 2.PAYMENT TERMS E. .

. as they receive delivery of the goods and services before paying for them Benefits of Open Accounts: a. OPEN ACCOUNT Open account payment terms can make your export contract attractive to an overseas buyer. lower transactions costs Major disadvantage: highly vulnerable to government currency controls. greater flexibility in making a trade b.PAYMENT TERMS F.

Consular Invoice .DOCUMENTS USED IN INT’L TRADE A. Commercial Invoice 3.II. Four most used documents 1. Insurance Certificate 4. Bill of Lading (most important) 2. DOCUMENTS II.

A legal document between the shipper of a particular good and the carrier detailing the type. This document must accompany the shipped goods. Type of Bills Straight Bill of Lading: This is typically used when shipping to a customer. To Order Bill of Lading: Used for shipments when payment is not made in advance.B. The bill of lading also serves as a receipt of shipment when the good is delivered to the predetermined destination. no matter the form of transportation. quantity and destination of the good being carried. and must be signed by an authorized representative from the carrier. Bill of Lading. The "Straight Bill of Lading" is for shipping items that have already been paid for. shipper and receiver. 3 . This can be shipping to one of your distributors or a customer on terms.

by road or rail. . Clean Bill of Lading: A Clean Bill of Lading is simply a BOL that the shipping carrier has to sign off on saying that when the packages were loaded they were in good condition. Direct Bill of Lading: Use a Direct Bill of Lading when you know the same vessel that picked up the cargo will deliver it to its final destination. they will need issue a "Soiled Bill of Landing" or a "Foul Bill of Landing.. stained paper. a Claused Bill of Landing is issued. but not over seas.). across domestic land.“ Inland Bill of Lading: This allows the shipping carrier to ship cargo. Claused Bill of Lading: If the cargo is damaged or there are missing quantities. If the packages are damaged or the cargo is spoiled in some way (rusted metal. etc.

Names of importer/exporter given 3. List charges for transport and insurance. . Identifies payment terms 4. COMMERCIAL INVOICE Purpose: 1.DOCUMENTS C. Lists full details of goods shipped 2.

Insurance Certificate issued to show proof of insurance 3. INSURANCE 1. Two Categories: a. .DOCUMENTS D. Air: transport by air 2. All shipments insured today. Marine: transport by sea b.

requires fee to be paid to consulate. . The consular invoice is required by some countries to facilitate customs and collection of taxes.E.CONSULAR INVOICE. consignee and value of the shipment.the commercial invoice in the language of the country. giving full details of the merchandise shipped A document certifying a shipment of goods and shows information such as the consignor. Local consulate in host country issues: a visa for the exporter’s invoice. A consular invoice can be obtained through a consular representative of the country you're shipping to.