ib 1.pptx
- 1. Methods of payment in International Business International Business
- 2. Methods of payment in International Business There are five major types of payment used by businesses engaged in international trade : • Documentary Collections • Letters of Credit • Cash against Documents • Open Account Trade • Consignment
- 3. 1. Documentary Collections • This is a method of payment used in international trade where the buyer’s bank, after receiving the seller’s invoice, sends to its correspondent bank an irrevocable documentary collection order for collection against the buyer. • It is also called a Documentary Letter of Credit. This is a letter from a bank, known as the issuing or confirming bank, i.e., the bank that issues the document to an exporter in a foreign country at his request, or confirms it when issued by another bank for presentation abroad.
- 4. 2. Letters of Credit • A letter of credit (LC) or documentary credit is one of the most popular payment methods in international trade. It is an undertaking by a bank to pay the beneficiary (the seller), upon presentation of certain documents against acceptance by the bank of those documents. A Letter of Credit is used most often as the payment method for international trade. • Letter of Credits are irrevocable and must be confirmed. The exporter makes arrangements with their own bank who then contacts one or more banks in the country where they want to export. • The bank(s) abroad will appoint another correspondent, an advising bank to advise them on whether they should issue the Letter of Credit, and what its terms should be.
- 5. 3. Cash against Documents • This means that payment for goods sold is made after they are shipped according to shipping documents seen by both parties. • Such transactions are usually very large because it is more convenient for importers to pay for goods when they actually arrive at their destination rather than wait until they have been sold in their country of destination. • Import duties are usually paid in cash against documents transactions. An open account transaction is when goods are shipped without the use of documentary letters of credit or other irrevocable payment arrangements.
- 6. 4. Cash In Advance • One party pays another party only after the goods have been shipped and all documents have been released from custody by an independent inspector. Payment is issued by check before the shipment arrives at its destination, making this method more expensive for importers because it requires that they pay for shipping costs upfront as well as import duties paid to foreign governments.
- 7. 5. Open Account Trade • In open account trade, an exporter will send goods to a foreign customer, but the customer is not required to pay for them immediately when they arrive. Instead, the exporter will wait until the goods have been sold and the proceeds show up in his bank account before demanding payment from his or her foreign customer. The foreign customer can then make whatever arrangements he or she wants with its bank or financial institution to make payment for the goods. • Open Account transactions are usually used extensively by countries that depend heavily on exports like oil-rich nations. It is also common in certain other areas such as outfitting and service businesses (especially engineering and firms) that receive their payment directly in the form of a letter of credit or documentary collection.