Payment modes
- 1. International Business II PAYMENT METHODS
- 2. International Trade Payment Methods They are banking instruments that allow the successfull closure of an international trade operation therefore guaranteeing the payment derived from the purchase or sale of goods.
- 3. International Trade Payment Methods Letter of Credit Documentary Collection Foreign Remittances Payment Orders Current Accounts in Foreign Currency Foreign Warranty Foreign Permission
- 4. Payment Form • It is determined by the exporter according to: – Company’s policies – Corporate objectives (long, medium, short term) – Market conditions – Government regulations
- 5. Currency of Negociation • In Colombia all international business transactions are expressed in USD – However in the practice, business can be made in €, £, ¥ too • The currency exchange risk is up to the seller when the transaction is made in the buyer’s currency of choice. – It goes to the buyer when the currency used is from the seller’s country.
- 6. International Trade Payment Methods • Advance payment (most secure for seller) – Where the buyer parts with money first and waits for the seller to forward the goods • Documentary Credit (more secure for seller as well as buyer) – Letter of Credit • Revocable • Irrevocable
- 7. International Trade Payment Methods • Documentary collection (more secure for buyer and to a certain extent to seller) – Also called "Cash Against Documents • Direct payment (most secure for buyer) – Where the supplier ships the goods and waits for the buyer to remit the bill proceeds, on open account terms.
- 8. Documentary Credit • The importer’s word is not a warrant. • The buyer has to ask his bank the opening of a documentary credit. • A documentary credit is the written promise from a bank on behalf of a customer authorizing a third party to claim some money. – Reasons: • To assure the seller the seriousness of the business. • Because of the changing currency exchange rates. • To involve a serious firm in the negotiation.
- 9. Letter of Credit • It is not the same as the DC; the letter establishes the conditions of use of the credit; it is a kind of a voucher issued by the bank to the seller, stating the instructions to make the DC effective. • Importer Applicant • M Bank Remitter • X Bank Collector • Exporter Payee
- 10. Applicant – Account Party • Obligations: – Receive the merchandise – Pay the price – Comply with all the requirements established by the bank
- 11. Remitter • Obligations: – Inform the payee of the transaction. • Using SWIFT (Society for Worldwide Interbank Financial Communication) • Fax, e-mail (secured connection) – Consider the request by the applicant. – Pay
- 12. Collector • Obligations: – Verify the nature of the transaction. – Confirm the credit by Remitter’s request (the bank has the right no to do so) • If confirmed, the collector is directly involved in the transaction.
- 13. Payee • Obligations: – Present all the required documents. – Present them in the established deadline. – Comply with all the general conditions of the contract. – The seller doesn’t have to accept the Letter of Credit, the notice is not an offer.
- 14. Letter of Credit - Process A B Applicant (Buyer) Payee (Seller) C Remitter (Applicant’s Bank) D Collector (Payee’s Bank) Contract Letter of Credit Notice
- 15. Letter of Credit - Usage A Applicant (Buyer) B Payee (Seller) C Remitter (Applicant’s Bank) D Collector (Payee’s Bank) Shipment Export Documents Export Documents Documents for the nationalization process
- 16. Opening Request Process • The buyer must provide: – Full name and address of the payee. – The amount of the credit. – Merchandise description. – Docs required by the importer. – Sight payment or acceptance. – Incoterm – Confirmed or not confirmed / transferrable or not. – Deadlines for: shipment, docs and payment. – Transport modes and partial shipment. (if required and allowed) – Mailing details about shipment docs. – Any other required info.
- 17. Deadline for the Letter of Credit • Docs must be delivered in the 21st days after the shipment was made. – Abandon • Payment: Usually 90 days after the notice.
- 18. Classes of Letter of Credit Confirmed • The remitter requests the collector’s confirmation. Non Confirmed • The collector has no obligation with the payee and just notifies him about the credit’s existence. Revocable The credit can be modified or cancelled by any of the parts. Irrevocable • Ensures that the seller would receive the payment.
- 19. Classes of Letter of Credit Rotative • It enables the payee to use the credit several times up to the total ammount of the credit itself. Transferable • The payee can transfer partially or totally the amount of the credit. Intransferable It cannot be transferred Pay the bearer at sight • It is used when the payee gets paid as soon as he delivers the documents to the Collector.
- 20. Most Used Methods • Open account • Direct transfer • Cheque • Bank instruments • (subject to documents) • Letter of credit • Collection • Bill of exchange
- 21. International Payment Methods • The decision of which method of payment must be used also depends on: • The risk assumed by the parties. • The cost of the transaction.
- 22. Security 0 25 50 75 100 125 LETTER OF CREDIT COLLECTION BILL OF EXCHANGE PAYMENT ENGAGEMENT CHEQUE TRANSFER Security of payment Risk of unpayment
Editor's Notes
- #3: Normally all letters of credit are irrevocable unless the seller has not complied with the obligation so in that case the seller has to fulfill the contract without a payment in the next 90 days.
- #4: Normally all letters of credit are irrevocable unless the seller has not complied with the obligation so in that case the seller has to fulfill the contract without a payment in the next 90 days.
- #7: Normally all letters of credit are irrevocable unless the seller has not complied with the obligation so in that case the seller has to fulfill the contract without a payment in the next 90 days.