Payment Methods in International Trade

PAYMENT METHODS IN INTERNATIONAL TRADE

BY

Shantanu Dubey BBA 4533/07

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Global Business Professional

Involved in sale/purchase of goods/services internationally. Essentials : - Understand and able to use payment methods. - Documentation. - Calculate the risks involved.

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Payment Methods: Factors Cash Flow needs. Relationship with customer. Economic conditions in the country. Interest rates and currency adjusting factors. Type of product. Customer’s creditworthiness. Competitors offering. Supplier’s demands. Urgency of the transaction.

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Currency Used:

USA – Dollar Kuwait – Dinar Saudi Arabia – Riyal Australia - A Dollar Pakistan - P Rupee Iran – Rial Japan – Yen

China – Yuan Spain - S Peseta France - Franc (Euro) Mexico – Peso UAE – Dirham UK – Pound Italy - Lira (Euro)

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Risk in International trade: Buyer insolvency Non-acceptance Credit risk Regulatory risk Intervention Political risk War and Acts of God.

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Cash in advance/prepayment:

Payment sent before the product is manufactured or shipped. Use this method when: - No established relation between the seller and buyer. - Product is a special order. - Importing country will impose regulations. - Seller does not have sufficient liquidity. Buyer must have cash or financing available.

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Example of cash in advance Wire Transfer Credit Card Payment by Check

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Documentary Collection: Negotiable instrument created, usually a draft or bill of exchange. Processed through a buyer’s bank or through seller and buyer’s bank. The seller’s rights to payment are protected. Less costly and do not require buyer to tie up credit lines.

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Documentary Collection: 4 Processes D/P – Documents against Payment:

- Documents provided only when payment is made. D/A – Documents against Acceptance: - Buyer is able to collect the documents against an undertaking to bay on an agreed date. - After acceptance, seller is financially exposed. Clean Collection: - Only bill of exchange created without export document.

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Documentary Collection: 4 Processes

Cash against Documents: - Exports documents are sent through a remitting bank to a collection bank without a bill of exchange.

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Documentary Collection: Use this method when: - Seller and buyer have done some business. - Some trust on the buyer. - Importing country will not impose regulations. - Sufficient Liquidity or outside financing. Trade acceptances can be used for financing. Seller finances buyer. Financing comes from domestic/global business.

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Letter of Credit: Balances the risk between the seller and buyer. Reduces the commercial and political risks. Provide extended terms to the buyer. Involved Parties: - Applicant - Beneficiary - Opening bank - Advising Bank - Conforming Bank - Paying Bank

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Types of Letter of Credit: Revocable – Amended or cancelled by the

applicant w/o notice, discussion or agreement with the beneficiary. Irrevocable – Can not be amended or cancelled w/o the agreement of all the parties. Unconfirmed – Commitment by the issuing bank to pay, accept, or negotiate a L/C. Advising bank forwards to beneficiary.

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Types of Letter of Credit:

Confirmed - Credit risk taken by bank and agreement to pay (fee charged). Transferable - part or all of the proceeds from the L/C may be transferred to another party, used by sales brokers or agents to disguise buyers and sellers Assignment of proceeds:Proceeds of the L/C can be assigned where beneficiary is not the actual seller of all or in part.

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Types of Letter of Credit: Revolving – Allow companies conducting regular business to issue a L/C that would “rollover”. Standby - Issued as a back-up or form of insurance for the seller should the buyer default on the agreed-upon payment terms.

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Letter of Credit: When appropriate to use it: - corporate credit policy and ability to absorb risk credit standing of the buyer. - political environment. - type of merchandise. - availability of foreign exchange. - Govt. require banks to control flow of currency. - Products and services comply with quality steps.

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Example of Letter Of Credit:

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Open account Both goods and documents are shipped together. Buyer agrees to pay on a future date. When to use: - Absolute trust. - No regulations by importing country. - Sufficient liquidity required by seller. - High banking fees avoided.

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Example of open account:

SWIFT Inter-Bank transfer Buyer's Cheque Banker's Draft International Money Orders

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Combining Method: Payment methods are not absolute. Combined to reduce risks of all parties. Example: For custom made products, an exporter could offer 50% prepayment to cover the cost of manufacturing and 25% payment at invoice date and 25% payment 90 days after invoice.

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Payment Ladder Diagram:

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Balance of Payment: The payments that flow between any individual country and all other countries. Summarize all international economic transactions. The international transactions of the domestic country are classified 1. Trade Transactions 2. Capital Transactions 3. Current account

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Example of Balance of Payment:

The Economic Crises of 1990-92 of India Foreign Exchanges declined from $3.1 Billion to 896 Million. Current Account Deficit reached to $9.7 Billion i.e. 3.2% of GDP. Inflation had risen to 17 percent.

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Summary

A significant responsibility of a credit manager is to understand the use of the various payment terms in a competitive business environment.

A pro-active international manager involves other business units and individuals, such as those in sale management, not only in the process of “why” certain credit terms are determined for a buyer, but also “how” they are determined.

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References:

www.wikipedia.com www.wikieducator.com Sitpro: Financial Guide www.trade.gov

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THANK YOU

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