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Getting Paid. Payment Methods (Ranked from Most Secure for Exporter to Least Secure). Cash Letter of Credit Collections (Payment against documents, cash against documents) Open Account. Letter of Credit.
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Payment Methods(Ranked from Most Secure for Exporter to Least Secure) • Cash • Letter of Credit • Collections (Payment against documents, cash against documents) • Open Account
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.
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.
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.
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. • Buyer’s bank issues l/c, which includes all instructions to seller relating to the shipment. • Buyer’s 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.
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 buyer’s bank for review and then transmitted to the buyer. • The buyer (or the buyer’s agent) uses the documents to claim the goods.
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 there’s 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.
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.
Steps in Foreign Collection • Exporter ships goods and gathers documentation • Exporter sends completed collection letter form and documents to his bank • Exporter’s bank forwards collection letter and documents to importer’s bank • Importer’s bank notifies importer that documents are available and presents exporter’s draft • Importer either pays or accepts draft • Upon payment or acceptance, bank releases shipping documents to importer • Bank remits draft amount to exporter’s bank • Exporter’s bank credits exporter’s account
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.
