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    Methods of Payment

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    Harshit Ranga
    Here are the key points I would suggest to the exporter based on the information provided: 1. For the order from Tanzania, use a documentary collection method of payment. This protects the exporter by requiring payment before releasing shipping documents. Given Tanzania's balance of payment and political issues, this limits risk for a new customer order. 2. For the order from Italy, insist on an irrevocable letter of credit as the payment method. This provides the highest level of assurance for the exporter, securing payment upfront from a reputable bank. The 60 day credit term poses too much risk for a new customer. 3. For the existing UK customer, the 90 day credit term may be acceptable given the satisfactory past

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    Methods of Payment

    Uploaded by

    Harshit Ranga
    34 views13 pages
    Here are the key points I would suggest to the exporter based on the information provided: 1. For the order from Tanzania, use a documentary collection method of payment. This protects the exporter by requiring payment before releasing shipping documents. Given Tanzania's balance of payment and political issues, this limits risk for a new customer order. 2. For the order from Italy, insist on an irrevocable letter of credit as the payment method. This provides the highest level of assurance for the exporter, securing payment upfront from a reputable bank. The 60 day credit term poses too much risk for a new customer. 3. For the existing UK customer, the 90 day credit term may be acceptable given the satisfactory past

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    Here are the key points I would suggest to the exporter based on the information provided: 1. For the order from Tanzania, use a documentary collection method of payment. This protects the exporter by requiring payment before releasing shipping documents. Given Tanzania's balance of payment and political issues, this limits risk for a new customer order. 2. For the order from Italy, insist on an irrevocable letter of credit as the payment method. This provides the highest level of assurance for the exporter, securing payment upfront from a reputable bank. The 60 day credit term poses too much risk for a new customer. 3. For the existing UK customer, the 90 day credit term may be acceptable given the satisfactory past

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    34 views13 pages

    Methods of Payment

    Uploaded by

    Harshit Ranga
    Here are the key points I would suggest to the exporter based on the information provided: 1. For the order from Tanzania, use a documentary collection method of payment. This protects the exporter by requiring payment before releasing shipping documents. Given Tanzania's balance of payment and political issues, this limits risk for a new customer order. 2. For the order from Italy, insist on an irrevocable letter of credit as the payment method. This provides the highest level of assurance for the exporter, securing payment upfront from a reputable bank. The 60 day credit term poses too much risk for a new customer. 3. For the existing UK customer, the 90 day credit term may be acceptable given the satisfactory past

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 13

    METHODS OF PAYMENT

    consignment
    consignment
    1. Documentary collection
    • Goods are only handed over to the buyer when the amount
    shown on bill of exchange is paid or when customer accepts the
    bill as a contract to pay by a specified date
    • In D/C, bank acts on instruction of exporter, & the exchange of
    documents to title, takes place at customer place of business
    • Once the exporter dispatch goods to customer, exporter
    collects shipping documents, he draws ‘bill of exchange on the
    buyer’
    • This is made out to be payable either on sight (demand) or
    within a specified time (90 days)
    • The exporter sends the B/E & shipping documents to his bank,
    which forwards them an advising bank in the customer’s
    country
    • This bank takes the documents to the customer
    • If sight bill: customers pays the amount directly (D/P)
    • If time/usance bill: payment within a specified time(D/A)
    2. Documentary credit
     The documentary credit is merely a credit opened with the bank in the
    exporter’s favour (often called as letter of credit {L/C})
     The instructions come from customer and the exchange of documents
    & payment takes place at the exporters place of business
     The customer opens the credit a/c at his bank for a certain sum of
    money
     This is only paid under certain conditions:
     The goods & price will be as specified on the order
     The delivery or dispatch will be by a certain date
     Charges for freight, insurance, etc. will be as specified
     Two banks are involved in documentary credit process:
     The customers bank which opens the credit, is known as opening or
    issuing bank
     The money is actually paid to exporter by another bank, located in his
    own country known as advising or corresponding
    X LTD. CONFIRMS Y LTD. ARRANGES CREDIT
    ACCEPTANCE OF ORDER & IN FAVOUR OF X LTD.
    TERMS OF PAYMENT

    OPENING BANK SENDS


    ADVISING BANK ADVISES L/C TO ADVISING BANK
    X LTD.OF IN X’S COUNTRY
    DOCUMENTARY CREDIT

    X LTD. SHIPS GOODS &


    COLLECTS SHIPING DOCUMENTS
    FROM SHIPPING LINE

    ADVISING BANK RECEIVES SHIPPING OPENING BANK RECEIVES


    DOCUMENTS &PAYS X LTD. SHIPPING DOCUMENTSAND
    FORWARDS SHIPPING DOCUMENTS HANDS TO Y LTD.
    TO OPENING BANK Y LTD. COLLECTS THE GOODS
    3. Cash-in-Advance
    • With cash-in-advance payment terms, an exporter can
    avoid credit risk because payment is received before the
    ownership of the goods is transferred.
    • Requiring payment in advance is the least attractive option
    for the buyer, because it creates unfavorable cash flow.
    • Foreign buyers are also concerned that the goods may not
    be sent if payment is made in advance.
    • Exporters who insist on this payment method as their sole
    manner of doing business may lose to competitors who
    offer more attractive payment terms.
    4. Open Account
    • An open account transaction is a sale where the goods are
    shipped and delivered before payment is due, which in
    international sales is typically in 30, 60 or 90 days.
    • This is one of the most advantageous options to the importer, but
    it is consequently one of the highest risk options for an exporter.
    • Exporters who are reluctant to extend credit may lose a sale to
    their competitors.
    • When offering open account terms, the exporter can seek extra
    protection using export credit insurance.
    5. Consignment
    • Payment is sent to the exporter only after the goods
    have been sold by the foreign distributor to the end
    customer.
    • It is based on a contractual arrangement in which
    the foreign distributor receives, manages, and sells
    the goods for the exporter who retains title to the
    goods until they are sold.
    • It is very risky as the exporter is not guaranteed any
    payment and its goods are in a foreign country in
    the hands of an independent distributor or agent.
    Advantages -
    • UNDERSTANDING RISKS IN INTERNATIONAL PAYMENTS AND AVAILABLE RISK
    COVERAGE TOOLS- CASE STUDY
    Rama and Co is planning to promote business in African countries to expand their
    export business. Company has started participation in the business fair/exhibitions
    in the various countries of the Africa. It has also started market research, to find out
    the main distributor in various countries of Africa.
    Company has identify Tanzania, as the target country, to develop export of its fruit
    juice products. Main distributor promised to place good purchase orders and
    guarantee high volume business. But demands the credit period of 2 months. Goods
    have to be sent directly to the name of the Tanzanian distributor on CIF terms.
    To cater the demand in Tanzania and neighbouring countries, this buyer wants the
    shipment of USD100000 on monthly basis. Tanzania has special bilateral free trade
    agreement with some neighbouring countries, to trade among themselves with zero
    custom duty, whereas, such trade transactions from India to those countries attracts
    custom duty of 30%.
    The balance of payment position of Tanzania is not good and there is always fear of
    political unrest in this country. There is danger of disappearing the goods at
    Tanzanian seaport because of presence and control of local notorious gangs on port
    activities.
    • Discuss best approach by exporter to safeguard the international trade payments.
    SELECT RIGHT METHOD OF PAMENT FOR EXPORT TRANSACTION
    Exporter is a small sector manufacturing unit established about three years back. Initially
    the unit was manufacturing men garments for local market. To increase turnover, it
    started export business.
    Unit experienced cash flow shortages due to delays in receiving export realizations. It
    raised working capital financé from the bank. Unit realized that non payment or delays in
    getting the export sale realization are is the main reason for shortage of cash in the
    business.
    To overcome these problems, it has been decided that each and every export order must
    be analyzed properly for selecting payment method so to get full and final receipt of
    payment. Unit has following orders in hand from foreign buyers doing business in
    different countries:
    1. First order of USD 10,000 from new customer from Tanzania. Customer has ensured more
    business in future.
    2. An order of USD 1,00,000 from a new customer in Italy. Buyer wants the credit period of
    60 days from date of shipment.
    3. Existing customer in U.K. placed an order of STG 50000, with credit period of 90days. Past
    dealing with customer is very satisfactory. Party does not want to open letter of credit.
    4. There is a very reputed buyer in USA with huge local turnover. Buyer is ready to place
    repeated order of USD 100,000 each but demands credit period of 120 days from the
    receipt of goods in USA.
    • Suggest safe method of payment to the exporter.

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