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Foreign Trade Payments

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Payment Methods
Foreign Trade Payments

Payment Methods

Advance payment is a payment method that the importer transfers the amount specified in the contract in advance to the bank account of the exporter before receiving the purchased goods.

A portion or all of the cost is paid before the shipping or customs processing of the purchased good.

  • Since there is a possibility of the exporter not shipping the goods as per agreed or not shipping the goods at all, even though the importer paid the cost of the purchased good in advance, it is the payment method with the highest risk involved for the importer.
  • The exporter may make a discount on goods price since the importer will make a portion or all of the payment in advance.
  • It is an ideal payment method for the exporter as the cost of the goods will be paid in advance.

Cash against goods is a payment method that the exporter sends the documents to the importer directly. Therefore the importer clear the goods from the customs before making the payment through their bank.

  • Since the exporter performs the shipping of the goods before collection, this is a payment method with the highest risk involved for the exporter.
  • It is the safest payment method for the importer since they will be able to make the payment after receiving the goods.

Documentary collection is a payment method that the exporter sends the trade documents via own bank to the importer’s bank and importer can only receive the document to clear the goods from the customs, by making the payment or accepting to pay at maturity. Collection Documents transactions regulated under Brochure No: 522 (URC 522) of the International Chamber of Commerce. It contains two different payment methods. 

Delivery Against Documents

It is a payment method which the exporter ships the goods and submits the documents representing the shipment and goods to the importer’s bank via own bank where the delivery of the documents to the importer is subject to the payment of the document’s price. The documents can be received by the importer from the importer’s bank following the payment of the document amount. In the Cash Against Documents method, the major risk for the exporter is the failure of the importer to receive the documents.

Delivery Against Acceptance

It is a payment method which the exporter ships the goods and submits the documents representing the shipment and goods and a financial document (generally Bill of Exchange) including a specific amount and maturity to own bank to submit  the importer’s bank and where the delivery of the documents to the importer is subject to the acceptance of the financial document by the importer.

In this payment method; the documents are delivered against the acceptance of the bill of exchange by the importer; and the payment is made by the importer on the maturity date indicated in the bill of exchange.

In the Acceptance Credit method; the major risk for the exporter is the failure of the importer to receive the documents or to make payment on the maturity date in return for the documents received against the acceptance of the bill of exchange.

The exporter which does not wish to undertake the risk of non-payment by the importer may demand an aval (surety) from the importer’s bank. In such case, delivery of the documents will be made against the aval (surety) of the importer’s bank for the bill of exchange.

A letter of credit is an irrevocable payment undertaking issued by the importer’s banks within the framework of requests and conditions of the importer. The issuing bank declares to honour the payment at sight or accept to pay at maturity, against presentation of the complying documents within the letter of credit conditions. Letter of Credit transactions regulated under Brochure No: 600 (UCP 600) of the International Chamber of Commerce.

Features

  • A letter of credit is considered a guaranteed payment method that is commonly preferred because it protects both the importer and the exporter in international trade.
  • The exporter receives the payment against complying presentation of the documents to the issuing bank, without the risk of non acceptance of documents by the importer.
  • In accordance with the payment type, a Letter of Credit can be issued At Sight, by Deferred Payment, by Mixed Payment, by Acceptance, by Negotiation. In accordance with its features, it can be issued as Transferable, Revolving, Red Clause, Green Clause, and Back-to-Back

Parties

  • Applicant: The party on whose request the credit is issued. Usually considered as an importer.
  • Beneficiary: The party in whose favor a credit is issued. Usually considered as an exporter.
  • Issuing Bank: The bank that issues a letter of credit at the request of an applicant or on its behalf.
  • Advising Bank: The bank that advice the letter of credit to the beneficiary (exporter) at the request of the issuing bank.
  • Confirming Bank: The bank that adds its confirmation to a credit upon issuing bank’s authorization or request.
  • Reimbursing Bank: The bank instructed or authorized to provide reimbursement pursuant to a reimbursement authorization issued by the issuing bank.

Advantages of Letter of Credit for the Importer

  • Issuing banks examine the documents presented under the letter of credit. Therefore, the importer will be confident whether the exporter presents the complying document with the letter of credit conditions or not. In case of issuing bank determines that the presented documents do not comply, the importer is not obligated to pay.
  • The importer can determine the "shipment date or period",  "place of shipment", "transport conditions" etc. in the letter of credit.

Advantages of Letter of Credit for the Exporter

  • Since the letter of credit is an irrevocable payment undertaking from issuing bank, the exporter is confident to receive the payment in case of complying presentation.
  • In case the exporter bank adds their confirmation to the letter of credit, exporters protect themselves against the risk of the importer's bank and the importer's country.

A bank guarantee is an irrevocable payment obligation of a bank serving to secure certain contractually agreed performance and/or payment obligations of the parties to contracts.

A bank guarantee is payable upon the first written complying demand of the party in whose favor the guarantee was issued.

The bank guarantee is a contract between the bank and the beneficiary, concluded at the request of the bank’s customer (principal). In most cases, the principal is the beneficiary’s trade partner.

Letter of Guarantees can be issued subject to ICC (International Chamber of Commerce) publication, Uniform Rules for Demand Guarantees (URDG 758).

In general, a letter of guarantee is a solution to the problem of trust that arises between the parties that are subject to a commercial transaction or a business relationship. The main difference between a letter of guarantee and a letter of credit is the nature of the assurance instrument. In a letter of credit, the payment is made against beneficiary’s presentation showing performance of its obligations, while in a letter of guarantee the payment is made against beneficiary’s presentation showing applicant’s non-performance.
 

Letters of guarantee can be issued in two different ways: directly or under a counter-guarantee. Direct Guarantees are guarantees issued directly by the guarantor bank in favor of the beneficiary (if applicable just being advised through a correspondent bank), while under Counter Guarantees, guarantor bank issues its own letter of guarantee to the beneficiary under a counter guarantee issued by a counter guarantor in favor the guarantor.
 

Parties

  • Guarantor: The bank which undertakes to pay to the beneficiary any amount up to a maximum amount of the guarantee without raising any objection upon receipt of beneficiary’s first written complying demand in the event of applicant’s failure of fulfilling its obligation under the contract.
  • Applicant (Principal): The party indicated in the guarantee as having its obligation under the underlying relationship supported by the guarantee.
  • Beneficiary: The party in whose favor a guarantee is issued.
  • Counter-guarantor: The bank issuing a counter-guarantee, whether in favor of a guarantor or another counter-guarantor. 


Main Types of Letter of Guarantee:

  • Performance Bond
  • Advance Payment Guarantee
  • Payment Guarantee
  • Tender/Bid Bond
  • Retention Guarantee
  • Standby Letter of Credit
     
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