Getting Paid

1
Getting Paid
2
Payment Methods(Ranked from Most Secure for
Exporter to Least Secure)

1. Cash
2. Letter of Credit
3. Collections (Payment against documents, cash
   against documents)
4. Open Account

3
Method Goods Available to Buyers Usual Time of Payment Exporter Risk Importer Risk
Cash After Payment Before Shipment Least Most
Letter of Credit After Payment When Documents are available after shipment None None if Inspection Report Req.
Collection Against Documents After fulfilling payment terms At sight when documents delivered or at predetermined number of days from date of shipment High if foreign bank or forwarder is unreliable Minimal particularly if allowed to inspect goods
Open Account Before payment As Agreed Most Least
4
Letter of Credit

• The letter of credit (L/C) is essentially the
  purchase of bank credit in favor of the seller by
  the buyer. The bank issuing the L/C assumes the
  credit risk of the buyer. The exporter can draw a
  draft against the bank issuing the credit and
  receive payment with presentation of the proper
  shipping documentation. The importer initiates
  the letter of credit.

5
Letter of Credit

• Diminishing in popularity due to cost and
  complexity 90 wo LC
• (L/C) is issued by a bank for the importer to
  assure a the exporter that if the exporter
  conforms to all details specified in the letter
  of credit, he will be paid by that bank even if
  the importer defaults.
• Under a documentary L/C, before payment is made
  the bank responsible for making payment verifies
  that all documents are exactly as required by the
  L/C. If a discrepancy exists, it must be
  rectified before payment can be made.

6

• Irrevocable letter of credit - If the buyer has
  no right of inspection and no right of rejection.
• Revocable letter of credit - Either party may
  unilaterally make changes. Rarely used due to the
  high risk inherent to the exporter. If a
  revocable letter of credit is used, the buyer
  can, at will, cancel the order at the exporter's
  expense.

7
Steps of at sight L/C ( 1 of 2)

• After you (the exporter) and buyer agree on
  terms of sale, buyer arranges for its bank to
  open a l/c that specifies documents needed for
  payment. Buyer determines which documents will
  be required.
• Buyers bank issues l/c, which includes all
  instructions to seller relating to the shipment.
• Buyers bank sends l/c to U.S. bank and requests
  confirmation.
• U.S. bank prepares letter of confirmation to
  forward to you along with l/c.
• You review carefully all conditions in the l/c
  contact the freight forwarder to make sure
  shipping date can be met.
• You arrange with the freight forwarder to deliver
  the goods to the appropriate port or airport.

8
Steps of L/C ( 2 of 2)

• Following shipment, the documents proving that
  shipment was made, and made in conformance with
  l/c are sent you.
• You present the documents, showing full
  compliance with the lc to the U.S. bank. Your
  are paid.
• U.S. bank reviews the documents. If they are in
  order, the documents are sent to the buyers bank
  for review and then transmitted to the buyer.
• The buyer (or the buyers agent) uses the
  documents to claim the goods.

9

• Compliance with all L/C terms is crucial. You
  should carefully review the L/C and make sure the
  price and terms are the same agreed to in price
  quotes and other documents.
• If the L/C terms are not precisely met, the bank
  might not pay. Also, the bank will only pay the
  amount in the L/C, even if higher charges for
  shipping, insurance, or other factors are
  documented.
• If the L/C terms can't be met, or it has errors
  or even misspellings, you should contact the
  buyer immediately and ask for an amendment to the
  L/C to correct the problem.
• You must also present the documents by the date
  specified. The bankers can advise whether theres
  enough time to meet a presentation deadline. You
  should always request that the L/C specify that
  partial shipments and transshipment will be
  allowed. This will avoid unforeseen problems at
  the last minute.

10
Drafts

• Draft an unconditional order in writing
  prepared by one party (drawer) and addressed to
  another (drawee) directing the drawee to pay a
  specified sum of money to the order of a third
  person (the payee), or to the bearer, on demand
  or at a fixed and determinable future time.

11
Steps in Foreign Collection

1. Exporter ships goods and gathers documentation
2. Exporter sends completed collection letter form
   and documents to his bank
3. Exporters bank forwards collection letter and
   documents to importers bank
4. Importers bank notifies importer that documents
   are available and presents exporters draft
5. Importer either pays or accepts draft
6. Upon payment or acceptance, bank releases
   shipping documents to importer
7. Bank remits draft amount to exporters bank
8. Exporters bank credits exporters account

12
Drafts

• Sight Draft Supposed to be paid when it upon
  determination of proper presentation to the
  drawee
• Time Draft - Buyer is given a specified time to
  pay after receiving the goods, such as 30 or 60
  days after acceptance of the draft.