International Business II

PAYMENT METHODS

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

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.

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.

PAYMENT FORM

• It is determined by the exporter according to:– Company’s policies– Corporate objectives (long, medium, short term)–Market conditions– Government regulations

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.

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

APPLICANT – ACCOUNT PARTY

• Obligations:– Receive the merchandise– Pay the price– Comply with all the requirements established by the bank

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

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.

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.

LETTER OF CREDIT - PROCESS

A

B

Applicant(Buyer)

Payee(Seller)

CRemitter

(Applicant’s Bank)

D

Collector (Payee’s

Bank)

ContractLetter of

Credit

Notice

LETTER OF CREDIT - USAGE

AApplicant

(Buyer)

B

Payee(Seller)

CRemitter

(Applicant’s Bank)

D

Collector (Payee’s

Bank)

ShipmentExport

Documents

Export Documents

Documents for the nationalization process

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.

DEADLINE FOR THE LETTER OF CREDIT

• Docs must be delivered in the 21st days after the shipment was made.– Stale

• Payment: Usually 90 days after the notice.

INTERNATIONAL PAYMENT METHODS

• The decision of which method of payment must be used depends on:

• The risk assumed by the parties.

• The cost of the transaction.

MOST USED METHODS

• Open account

• Direct transfer

• Cheque

• Bank instruments

• (subject to documents)

• Letter of credit

• Collection

• Bill of exchange

CONDITIONS OF THE LETTER OF CREDIT

• Confirmed

• Notified

• Pay the bearer at sight

SECURITYLETTER OF CREDIT

COLLECTION

BILL OF EXCHANGE

PAYMENT ENGAGEMENT

CHEQUE

TRANSFER

0 25 50 75 100 125

Security of payment

Risk of unpayment