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10-1 Excel BooksExport and Import Management Aseem Kumar
Copyright © 2007, Aseem Kumar
Methods of Payment
Chapter
10Methods of Payment
10-2 Excel BooksExport and Import Management Aseem Kumar
Copyright © 2007, Aseem Kumar
Methods of Payment
The following methods of payment are available for export:
1. Advance Payment
It is the safest payment option where the importer sends the payment in advance
to the exporter either through TT (Telegraphic Transfer) or through a cheque or
demand draft. This is normally done after acceptance of the order by the exporter.
10-3 Excel BooksExport and Import Management Aseem Kumar
Copyright © 2007, Aseem Kumar
Methods of Payment
2. Open Account
This is an arrangement between the buyer and the exporter where goods are
shipped without the guarantee of payments. Both the parties agree on sales
terms but no documentary evidence is created. The odds are heavily loaded in
the favour of the importer as the payment will be released at a later date. The
accounts between the exporter and buyer are settled periodically. Chances of
default or delay in payment are very high under this system. The exporter must
deal with only trustworthy buyers under this scheme.
10-4 Excel BooksExport and Import Management Aseem Kumar
Copyright © 2007, Aseem Kumar
Methods of Payment
3. Consignment Sales
Under this method, goods are shipped by the exporter but he transfers the
ownership to the importer only when the goods are actually sold. This means that
the entire risk here is borne by the exporter. If the importer is unable to find an
actual buyer, the exporter is stuck with the unsold goods and he can not claim
payment for the same from the importer.
10-5 Excel BooksExport and Import Management Aseem Kumar
Copyright © 2007, Aseem Kumar
Methods of Payment
4. Documents against Acceptance (D/A)
This system is based on documents and thus falls under the category of
documentary credit. The exporter does not want to part with the ownership of
goods unless he is certain about the receipt of payment of the same. The
importer, on the other land, does not want to pay, unless he is sure about the
receipt of goods. Banks function as intermediaries, providing assurance to both
the parties on the other's behalf and use documents as a tool for this assurance.
Under the D/A method, the exporter sends the shipment documents along with
the draft (bill of exchange) through his bank to the importer's bank that gets the
draft accepted by the importer before handing him over the title documents.
10-6 Excel BooksExport and Import Management Aseem Kumar
Copyright © 2007, Aseem Kumar
Methods of Payment
5. Documents against Payment (D/P)
Like in D/A arrangement, here too the documents are sent to the buyer's bank
with a draft (bill of exchange). However, this draft is a sight draft and not a
usance draft. This draft has to be paid immediately on sight and only after the
receipt of payment the shipment title documents are released. It means that the
importer gets possession of the ownership documents of the shipment only after
making payment for the same. The exporter, on the other hand, releases
possession of shipment title papers only against the receipt of payment. No
credit is involved here.
10-7 Excel BooksExport and Import Management Aseem Kumar
Copyright © 2007, Aseem Kumar
Methods of Payment
6. Letter of Credit (LC)
A letter of credit is a very popular form of documentary credit. In fact, majority of
international business transactions use LCs. The letter of credit is a letter
established by the importer through his bank to the benefit of the exporter
promising payment of drafts drawn against this letter if the exporter complies with
the specific conditions prescribed in the LC. The conditions are usually the same
as stipulated in the purchase order or export contract. LC acts as a substitution
of the importer's promise to that of his bank's to the exporter to honour its
commitment to pay for the export bills provided all conditions are satisfied. In this
way, a letter of credit works as an independent contract between the exporter
(designated beneficiary) and the issuing bank.
10-8 Excel BooksExport and Import Management Aseem Kumar
Copyright © 2007, Aseem Kumar
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7. Benefits of LCs
To Exporters
LC minimizes the credit risk provided the issuing bank is reputed and carries
a sound track record.
LC eliminates risk of payment delays due to uncertain factors like political
instability.
LC affords financing for the exporter.
The exporter is bound to ship by a certain date as per the LC, failing which
the order will stand cancelled.
LC minimizes uncertainty and provides a clear picture to the exporter
regarding all the requirements for payments.
Cont….
10-9 Excel BooksExport and Import Management Aseem Kumar
Copyright © 2007, Aseem Kumar
Methods of Payment
To Importers
He is in a position to ask for better prices and faster deliveries.
Use of LCs will attract a large number of good suppliers offering the importer
a lot of choice.
The importer is assured of timely shipment of the specified quality and
quantity of ordered merchandise.
The importer can refuse payment if he finds any and even a very minor
mistake/oversight in any of the required documents.
Importer's risk of losing money in case the supplier is unable or unwilling to
effect a proper shipment is totally eliminated.
10-10 Excel BooksExport and Import Management Aseem Kumar
Copyright © 2007, Aseem Kumar
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8. Types of LCs
9. Documentary and Clean LCs
10. Revocable and Irrevocable LCs
11. Confirmed and Unconfirmed LCs
10-11 Excel BooksExport and Import Management Aseem Kumar
Copyright © 2007, Aseem Kumar
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9. Special LCs
10. Revolving LCs
11. Transferable LCs
12. Back-to-Back LCs
10-12 Excel BooksExport and Import Management Aseem Kumar
Copyright © 2007, Aseem Kumar
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Useful Tips to Exporters regarding LCs
Always go for an irrevocable, confirmed LC issued by a prime bank.
Ensure that the LC is transferable and allows transshipments.
Before the LC is actually opened, please ask the importer to fax you a draft.
The exporter must also show this draft to his banker and the C&F agent to
make sure that no unusual conditions are present and that everything is in
order.
This exercise is important because any change in an LC (known as
Amendment) once it is established, is very difficult to make and carries high
bank charges at the buyer's end.