Mrs. Charu Rastogi, Asst. Prof.

METHODS OF PAYMENT IN
INTERNATIONAL TRADE/EXPORT
AND IMPORT FINANCE
International Business Management
WORLD BANK
 The World Bank is an international financial
institution that provides loans to developing countries
for capital programs

Mrs. Charu Rastogi, Asst. Prof.

 The World Bank's official goal is the reduction of
poverty.
 According to the World Bank's Articles of Agreement
(as amended effective 16 February 1989), all of its
decisions must be guided by a commitment to promote
foreign investment, international trade, and facilitate
capital investment
 The World Bank comprises two institutions:
 The International Bank for Reconstruction and
Development (IBRD) lends to governments of middle-
income and creditworthy low-income countries.
 The International Development Association (IDA) provides
interest-free loans—called credits— and grants to
governments of the poorest countries.
EXPORT AND IMPORT FINANCE METHODS
 Accounts Receivable Financing
 An exporter that needs funds immediately may obtain a bank loan that is
secured by an assignment of the account receivable
 Factoring (Cross-Border Factoring)

Mrs. Charu Rastogi, Asst. Prof.

 The accounts receivable are sold to a third party (the factor), that then
assumes all the responsibilities and exposure associated with collecting
from the buyer.
 Letters of Credit (L/C)
 These are issued by a bank on behalf of the importer promising to pay the
exporter upon presentation of the shipping documents.
 The importer pays the issuing bank the amount of the L/C plus associated
fees.
 Commercial or import/export L/Cs are usually irrevocable.
 The required documents typically include a draft (sight or time), a
commercial invoice, and a bill of lading (receipt for shipment).
 Sometimes, the exporter may request that a local bank confirm (guarantee)
the L/C.
 Variations include
 standby L/Cs : funded only if the buyer does not pay the seller as agreed upon
 transferable L/Cs : the first beneficiary can transfer all or part of the original L/C
to a third party
 assignments of proceeds under an L/C : the original beneficiary assigns the
proceeds to the end supplier
EXPORT AND IMPORT FINANCE METHODS
 Banker’s Acceptance (BA)
 This is a time draft that is drawn on and accepted by a bank
(the importer’s bank). The accepting bank is obliged to pay the

Mrs. Charu Rastogi, Asst. Prof.

holder of the draft at maturity.
 If the exporter does not want to wait for payment, it can
request that the BA be sold in the money market. Trade
financing is provided by the holder of the BA.
 The bank accepting the drafts charges an all-in-rate (interest
rate) that consists of the discount rate plus the acceptance
commission.
 In general, all-in-rates are lower than bank loan rates. They
usually fall between the rates of short-term Treasury bills and
commercial papers.
 Working Capital Financing
 Banks may provide short-term loans that finance the working
capital cycle, from the purchase of inventory until the eventual
conversion to cash.
EXPORT AND IMPORT FINANCE METHODS
 Medium-Term Capital Goods Financing (Forfaiting)
 The importer issues a promissory note to the exporter to
pay for its imported capital goods over a period that

Mrs. Charu Rastogi, Asst. Prof.

generally ranges from three to seven years.
 The exporter then sells the note, without recourse, to a
bank (the forfaiting bank).
 Countertrade
 These are foreign trade transactions in which the sale of
goods to one country is linked to the purchase or exchange
of goods from that same country.
 Common countertrade types include barter, compensation
(product buy-back), and counterpurchase.
 The primary participants are governments and
multinationals.
METHODS OF PAYMENT IN INTERNATIONAL
TRADE
 To succeed in today’s global marketplace and win
sales against International trade presents a spectrum
of risk, which causes uncertainty over the timing of
payments between the exporter (seller) and importer

Mrs. Charu Rastogi, Asst. Prof.

(foreign buyer).
 For exporters, any sale is a gift until payment is
received.
 Therefore, exporters want to receive payment as soon
as possible, preferably as soon as an order is placed or
before the goods are sent to the importer.
 For importers, any payment is a donation until the
goods are received.
 Therefore, importers want to receive the goods as
soon as possible but to delay payment as long as
possible, preferably until after the goods are resold to
generate enough income to pay the exporter.
METHODS OF PAYMENT IN INTERNATIONAL TRADE :

CASH IN ADVANCE / PREPAYMENTS

 With cash-in-advance payment terms, the exporter
can avoid credit risk because payment is received
before the ownership of the goods is transferred.

Mrs. Charu Rastogi, Asst. Prof.

 Wire transfers and credit cards are the most
commonly used cash-in-advance options available to
exporters.
 However, requiring payment in advance is the least
attractive option for the buyer, because it creates
cash-flow problems. Foreign buyers are also
concerned that the goods may not be sent if payment
is made in advance.
 Thus, exporters who insist on this payment method as
their sole manner of doing business may lose to
competitors who offer more attractive payment terms.
METHODS OF PAYMENT IN INTERNATIONAL TRADE:
LETTERS OF CREDIT
 Letters of credit (LCs) are one of the most secure
instruments available to international traders.
 An LC is a commitment by a bank on behalf of the

Mrs. Charu Rastogi, Asst. Prof.

buyer that payment will be made to the exporter,
provided that the terms and conditions stated in the
LC have been met, as verified through the
presentation of all required documents.
 The buyer pays his or her bank to render this service.
 An LC is useful when reliable credit information
about a foreign buyer is difficult to obtain, but the
exporter is satisfied with the creditworthiness of the
buyer’s foreign bank.
 An LC also protects the buyer because no payment
obligation arises until the goods have been shipped or
delivered as promised.
METHODS OF PAYMENT IN INTERNATIONAL TRADE:
DOCUMENTARY COLLECTIONS/DRAFTS/BILLS
OF EXCHANGE)
 A documentary collection (D/C) is a transaction whereby
the exporter entrusts the collection of a payment to the
remitting bank (exporter’s bank), which sends documents
to a collecting bank (importer’s bank), along with

Mrs. Charu Rastogi, Asst. Prof.

instructions for payment.
 Funds are received from the importer and remitted to the
exporter through the banks involved in the collection in
exchange for those documents.
 D/Cs involve using a draft that requires the importer to pay
the face amount either at sight (document against
payment) or on a specified date (document against
acceptance).
 The draft gives instructions that specify the documents
required for the transfer of title to the goods. Although
banks do act as facilitators for their clients, D/Cs offer no
verification process and limited recourse in the event of
non-payment.
 Drafts are generally less expensive than LCs.
METHODS OF PAYMENT IN INTERNATIONAL TRADE:
OPEN ACCOUNT
 An open account transaction is a sale where the goods are
shipped and delivered before payment is due, which is
usually in 30 to 90 days.

Mrs. Charu Rastogi, Asst. Prof.

 Obviously, this option is the most advantageous option to
the importer in terms of cash flow and cost, but it is
consequently the highest risk option for an exporter.
 Because of intense competition in export markets, foreign
buyers often press exporters for open account terms since
the extension of credit by the seller to the buyer is more
common abroad. Therefore, exporters who are reluctant to
extend credit may lose a sale to their competitors.
 However, the exporter can offer competitive open account
terms while substantially mitigating the risk of non-
payment by using of one or more of the appropriate trade
finance techniques, such as export credit insurance.
 Mrs. Charu Rastogi, Asst. Prof.
COMPARISON
 COMPARISON
Cash in Open
Letter of Credit DC/BoE
Advance Account

Time of Before When shipment is On presentation As agreed

Mrs. Charu Rastogi, Asst. Prof.

Payment Shipment made of draft upon

Goods After
After payment Before
available to payment After payment
payment
buyers

Relies on
Risk to Disposal of
None Very little - None buyer to pay
exporter unpaid goods
as agreed upon

Assured shipment Relies on

Relies on
but relies on exporter to ship
Risk to exporter to
exporter to ship goods as None
importer ship goods as
goods as described in described in the
ordered
the documents documents
LETTER OF CREDIT: PROCEDURE
1. Sale Contract
Buyer Seller
(Importer) (Exporter)
5. Deliver Goods

Mrs. Charu Rastogi, Asst. Prof.

2. Request 8. Documents 6. Present 4. Deliver Letter
for Credit and claim for Documents of Credit
payments

7. Present Documents
Importer’s bank Exporter’s bank
(Issuing Bank) (Advising Bank)
3. Send Credit
TYPES OF LETTER OF CREDIT
 Irrevocable and revocable letters of credit
 A revocable letter of credit can be changed or cancelled by the bank that
issued it at any time and for any reason.

Mrs. Charu Rastogi, Asst. Prof.

 An irrevocable letter of credit cannot be changed or cancelled unless
everyone involved agrees. Irrevocable letters of credit provide more
security than revocable ones.
 Confirmed and unconfirmed/Advised letters of credit
 When a buyer arranges a letter of credit they usually do so with their own
bank, known as the issuing bank. The seller will usually want a bank in
their country to check that the letter of credit is valid.
 For extra security, the seller may require the letter of credit to be
'confirmed' by the bank that checks it. By confirming the letter of credit,
the second bank agrees to guarantee payment even if the issuing bank fails
to make it. So a confirmed letter of credit provides more security than an
unconfirmed one.
 In case of unconfirmed LC, the advising bank forwards an unconfirmed
letter of credit directly to the exporter without adding its own undertaking
to make payment or accept responsibility for payment at a future date, but
confirming its authenticity.
TYPES OF LETTER OF CREDIT
 Transferable letters of credit
 A transferable letter of credit can be passed from one
'beneficiary' (person receiving payment) to others.

Mrs. Charu Rastogi, Asst. Prof.

They're commonly used when intermediaries are
involved in a transaction.
 Stand-by LC
 A standby letter of credit is like a guarantee that is used
as support where an alternative, less secure, method of
payment has been agreed.
 It is an assurance from a bank that a buyer is able to
pay a seller. The seller doesn't expect to have to draw on
the letter of credit to get paid.
TYPES OF LETTER OF CREDIT
 Revolving LC
 The revolving credit is used for regular shipments of the same commodity
to the same importer. It can revolve in relation to time or value. If the
credit is time revolving once utilised it is re-instated for further regular

Mrs. Charu Rastogi, Asst. Prof.

shipments until the credit is fully drawn. If the credit revolves in relation
to value once utilised and paid the value can be reinstated for further
drawings.
 Revolving letters of credit are useful to avoid the need for repetitious
arrangements for opening or amending letters of credit.
 Back to Back LC
 A back-to-back letter of credit can be used as an alternative to the
transferable letter of credit. Rather than transferring the original letter of
credit to the supplier, once the letter of credit is received by the exporter
from the opening bank, that letter of credit is used as security to establish
a second letter of credit drawn on the exporter in favour of his importer.
 Many banks are reluctant to issue back-to-back letters of credit due to the
level of risk to which they are exposed, whereas a transferable credit will
not expose them to higher risk than under the original credit.
POSSIBLE QUESTIONS
 Explain all the modes of payment used in international business.
Discuss various types of L/Cs.
 Write short notes on:

Mrs. Charu Rastogi, Asst. Prof.

 Balance of payment vs. balance of trade
 Asian Development Bank
 Balance of payment
 Types of Letter of Credit
 Explain the role played by ‘International Monetary Fund’, ‘Asian
Development Bank’ and World Bank in promotion of
International Trade
 Explain the functions of International Monetary Fund.
 What are various methods of payment in International Trade?
 Discuss the role of World Bank in International Financial
Management.
Mrs. Charu Rastogi, Asst. Prof.