chapter8 financing methods of payment

8/6/2019 Chapter8 Financing Methods of Payment

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Financing

&

Methods of Payment

Chapter 8


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Agenda

8.0 Introduction

8.1 Export financing methods/terms of payment

8.2 Payment / financing procedures8.3 Countertrade


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8.0 Introduction

Export Financing

Definition:

Loans made for the shipping of productsoutside a country or region.

To enables businesses to bring their products allover the world.


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8.1 Export Financing Methods/

Termsof Payment 7 methods of receiving payment for products sold

abroad:

8.1.1 Consignment

8.1.2 Open Account

8.1.3 Documentary Collections

8.1.4 Letter of credit/ Documentary Credit

8.1.5 Cash on Delivery

8.1.6 Cash with Order

8.1.7 Long-term Financing


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8.1.1 Consignment

Demand for payment is usually made bymeans of a clean draft( no documentsattached).

Payment typically occurs after the productshave been resold by the buyer.


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8.1.2 OpenAccount

A term of payment in which no banks areinvolved, only an agreement between sellerand buyer that payment will be made within anagreed period of time.

Banks become involved through wire transfers,but no negotiations.

Some procedure and methods as in domestictrade.

Normally be willing to use this method only whenhe/ she has confidence in the creditworthinessof the buyer.


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8.1.3 Documentary Collections

A collection, which is accompanied bycommercial documents.

Means that the bank handles documents

according to the instructions received. This payment method is most often used in

international trade in the exchange ofmerchandise for money.

With this method, the goods are shipped to theforeign country, but the documents are sent tothe buyers bank.


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Cont..

DOCUMENTS AGAINST ACCEPTANCE

When shipping documents are delivered to thebuyer by the collecting bank after the buyer

has accepted the draft for payment at acertain maturity date.

DOCUMENTS AGAINST PAYMENT

When documents are delivered to the buyerupon payment of a draft.


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8.1.4 Letterofcredit/ Documentary Credit

International trade procedure in which thecredit worthiness of an importer is substituted bythe guaranty of a bank for a specific

transaction. Under documentary credit arrangement also

called letter of credit arrangement, a bank(usually in the importers country) undertakes topay for a shipment, provided the exporter

submits the required documents (such as aclean bill of lading, certificate of insurance,certificate of origin) within a specified period.


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8.1.5 Cashon Delivery

A transaction in which goods are paid for infull cash or by certified check immediatelywhen they are received by the buyer.


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8.1.6 Cash with Order

Cash or part cash with order

Cash in Advance/Prepayment occurs when abuyer sends payment in the agreed currency

and through agreed method to a seller beforethe product is manufactured and or shipped.


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8.1.7 Long-term Financing

Is a major project, large capital equipmentsales and special exports such as agriculturalcommodities moving under government

programs may require long-tern financing. Allow the procedures to receive funds in the

near future while allowing the purchaser tospread payments over several years.


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8.2 Payment/ Financing Procedures

There are 2 general categories :

8.2.1Letter of credit

8.2.2 Drafts or bills of exchange


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8.2.1Letterof Credit

Use of letters for financing export shipmentspopular with exports.

Arranging payment affords a high degree of

protection against the risk inevitably arising inexport business.

A letter of credit is only as good as the bank that issues it and it confirmed the bank thatconfirms it.

Except in their general form and phraseology,letter o f credit very greatly.


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Typeof Lettersof Credit

(a) Revocableand Irrevocable

Ability of the establishing to revoke beforeexpired day.

Revocable - changed or cancelled at anytime without notice to the beneficiaryExample : issuing banks client.

Irrevocable cannot be unilaterally cancelledor amended by the importer.

Privilege of revoking temptation wayunscrupulous buyer.


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b) Confirmedand Unconfirmed

The bank in the exporters country announcesits confirmation.

Words to the following effect are to be found

in the letter of credit.

If the credit does not require that drafts bedrawn, the wording

Will be adjusted but still must state that thebank has added its

Confirmation to the credit.


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(c) Cleanand Documentary

Beneficiary clean draft or receipt for funds.

Notifying bank against documentary

drafts delivery of full set.


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(e)Assignmentof Proceeds

The proceeds due to him or her to another

party.

The legal procedure similar to the assignment

of rights under any contract.


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(f) Revolvinglettersofcredit

Devised to meet the needs businesstransactions are more or less regular andcontinuous.

(i) Credit indicating the maximum amount tonegotiate fresh bills.

(ii) Credit providing for a specified maximumpayment.

Noncumulative revolving credit, cumulative,credit unused shipment.


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(g) Deferredpaymentcredit

Exporter will paid at specified dates aftershipment.

Single shipment will paid by number of payment.

Substantial difference between a usance creditby negotiation and one

By acceptance or deferred credit.

Recent court cases have indicated onlyobligation of the book to honor

Pay at maturity and not before.


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(h) Standbyletterofcredit

Used to finance the movement of goods. Specifically, a standby letter of credit is an

obligation to the beneficiary the issuing bankof the following.

(i) To repay money borrowed by or advancedto the account party

(ii) To make payment on the account of anyevidence of indebtedness undertaken bythe account party.

(iii) To make payment on account of anydefault by the account party in theperformance of a contractual obligation.


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8.2.2 Drafts

An unconditional order in writing prepared byone (drawer) and addressed to another(drawee)

The draft is drawn by the beneficiary under theterm of authorization in the letter of credit andin strait conformance with the condition stated.

The draft have to include as the name of theissuing bank.

Draft (in some countries) is said to be drawn tothe account of the bank or buyer.


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(I)Acceptance

Acceptance frequently used connectionwith a draft, or bill of exchange.

The exporter can grant credit to the importer

with out losing the protection of a letter ofcredit.

More easily negotiated or discounted ifcountersigned by the bank.


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(II) Delivering Document

The most important element beside the amountto be collected is the statement of documentare to be delivered against the acceptance ofthe draft (D/A) or against payment at the draft(D/P).

When a draft is drawn d/p, the drawee maysecure the document of title only when theamount shown on the face of the draft.


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Typesof Draft

(a)Cleanor Documentary Draft

Accompanied by the relevant documentneeded to complete the export transaction.

Clean draft is one no document attachedand is usually handed to a bank forcollection in a foreign country.

Open account, the sale of stoke and bonds

payment for services.


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(b) Sightor Usance

Drawn to be payable either at sight or atsome specified future time.

Name implies, sight draft supposed to paid

first seen by the drawee.

Some countries is customary drawee to delaypayment of sight draft until the merchandise.


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(c) Timeor Date Draft(Usance Draft)

Time or date draft are used where theseller/exporter is wiling to extend credit to thebuyer/importer.

Great advantage to the drawee of a datedraft is date on which the draft should bepaid is known.


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(d) Withor Without Recourse

With recourse means parches by a bankerother financial institution of draft.

The purchases draft or bills of exchange

assumes full responsibility for payment,discharges his obligation as guarantor andconsignees.

With recourse means exact opposite.

Consignee fails for any original drawer of thedraft.


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8.3 Countertrade

Definition

Countertrade is exchange goods or servicesthat are paid for, in whole or part, with other

goods or services. Each party is both buyer and seller at the

same time.

Appeals to buyers in countries that short of

foreign hard currencies.


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Typesof CountertradeTypesof Countertrade

8.3.1 Pure Barter

8.3.2 Clearing arrangements

8.3.4 Counter purchase8.3.5 Switch trading

8.3.6 Buy-back

8.3.7 Offsets


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8.3.1 Pure Barter

Simple direct exchange without money

For example:

Product A

Product B

Online barter is now operating in the U.S. and

can be expected to develop internationally.

Company A Company B


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8.3.2 ClearingArrangements

2 countries agree to exchange a number ofproducts, some not easily sold on openmarket, for a specified period.

Both parties agree on the quantities andvalues to be exchanged and final settlementdate for surpluses must be cleared up.

Transactions between governmentsclearing accounts

Transactions between organizationsevidence accounts


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8.3.3 Counter Purchase

Sale of goods and services to a country bya company that promises to make a futurepurchase of a specific product from the

country. For example:

Sell of goods and services

Country A Country B

The products purchased are not related to

the original exporters product line.

Volkswagen

promises topurchase

specific product

from country B in

the future

East Germany


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8.3.4 Switch Trading

One party agree in a barter or counterpurchase arrangement has goods that theother does not want.

This kind of goods will sold for the exporter tosome third party by a specialist called a switchtrader.

Engine

Coffee

Company

ACompany

B

Switch

Specialist Sells to others


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8.3.5 Buy Back

Also called compensation agreement.

A company agrees to supply technicalknowledge to build a plant, or builds the

plant or licenses the use of trademark, inexchange for the production output. Forexample:

technology, equipment, training,

or other services.

agrees to give a certain percentage of the plant's

output as partial payment for the contract.

Country APlant

output


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8.3.6 Offsets

Seller assist in or arrange for the marketing of productsproduced by the buyer.

Similar to counter purchase, but different becauseoffset involved the industry and parties.

Seller will provides benefit to buyer because sellerspurchase of components from the buyer to be used inproducing the sellers products which want sold tobuyer. For example:

sell products and assist Company B marketing the products

sell components to be used in producing sellers products

Company

A

Company

B

chapter8 financing methods of payment

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