1. C hapter 10 Methods of Payment

2.

• The following methods of payment are available for export:

• 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.

3.

• 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.

4.

• 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.

5.

• 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.

6.

• 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.

7.

• 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.

8.

• 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.

9.

• • 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.

• Types of LCs

• Documentary and Clean LCs

• Revocable and Irrevocable LCs

• Confirmed and Unconfirmed LCs

11.

• Special LCs

• Revolving LCs

• Transferable LCs

• Back-to-Back LCs

12.

• 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.