Basic concepts of EXIM

Presented by:

Risk vs. Method of Payment

High

High

Low

Buyer Risk Seller Risk

• Open Account

• Documentary Collection

• Letter of Credit

• Cash in Advance

Low

Cash In Advance• Meaning:- An amount paid before it is earned or

incurred, for example, a prepayment by an importer to an exporter before goods are shipped, or a cash advance for travel expenses.

• Desirable for the Exporter.• In India advance payment is allowed only in a) import of booksb) life saving payment apparatusc) capital goodsd) machinery and a few other items. e) Advance payment of USD 2500/- or equal to this

amount can be made for commercial purposes.• In the case of export of vegetables and fruits, it is

customary to demand 100% advance payment.

Cash In Advance• Time of Payment

Before Shipment

• Goods Available to Buyer After Payment

• Risks to Seller None

• When Appropriate Seller has negotiating strength to demand cash in

advance

Open AccountA transaction where the payment is due 30 to 90 days after the shipment has been done.• Time of Payment• After the shipment

• Goods Available to Buyer• Before Payment

• Risks to Seller• Buyer defaults on payment obligation • Delays in availability of foreign exchange and transferring of funds from

buyer’s country• When Appropriate • Seller has absolute trust that buyer will accept shipment and pay at

agreed time• Seller is confident that importing country will not impose regulations

deferring or blocking transfer of payment

Documentary CollectionCollection by a bank of funds due from a buyer against the delivery of documents. The bank acts as an agent for the seller. • The bank presents documents to the buyer (the importer) through that party's bank. In exchange, the seller's bank receives payment of the amount owed, or a promise to pay at a particular date.•Allows exporters to retain ownership of the goods until they receive payment or are reasonably certain they will receive it

•Bank assumes no risk but must act in good faith and exercise reasonable care

Seller Buyer

Seller’s Bank Buyer’s Bank

Documents

$

Documents Documents$ $

Documentary Collection

• Sight Draft• When the Exporter wants the Bank to hand over the

export documents to the Importer only against payment immediately, the Bill of Exchange is called a Sight Draft.• Time Draft • Bill of exchange payable at a fixed future

date or a determinable future time such as 30 days after presentation (after sight). The purpose of a time draft is to allow the buyer some time to pay for goods bought.

Documentary Collections - D/AWhen a drawee (buyer) acknowledges in writing on the face of the draft that the buyer will pay the draft at maturity• Time of Payment

• At maturity of accepted draft• Goods Available to Buyer

• Before payment• Risks to Seller

• Buyer’s default on payment obligation• Delays in availability of foreign exchange and transferring of

funds from buyer’s country• Payment blocked due to political events in buyer’s country

• When Appropriate• Seller has confidence that buyer will accept shipment and pay on

agreed date• Seller is confident that importing country will not impose

regulations deferring or blocking the transfer of payment

Documentary Collection - D/P• Time of Payment

• On presentation of sight draft by a bank to buyer• Goods Available to Buyer• After payment

• Risks to Seller• Buyer’s nonacceptance of shipment• Payment delays due to unavailability of foreign exchange

in buyer’s country• Payment blocked due to political actions in buyer’s

country

• When Appropriate• Seller is confident that buyer will accept shipment• Seller is confident that importing country will not impose

regulations deferring or blocking transfer of payment

Documentary Collections Risk

• Unscrupulous buyer• Insolvent buyer• Buyer changes mind• Buyer’s country is in turmoil• Foreign exchange may not be available• Seller may have to pay return freight• Buyer may not honor promise to pay

Letter of Credit

• Letters of Credit (L/Cs) are legal instruments issued by banks (on behalf of their customers) with the conditional obligation to make payment to the beneficiary of the L/C

• Documentary (Trade) Letters of Credit are used to facilitate payments in import and export transactions

• Standby Letters of Credit are “Standing By” for an event of default or non-performance before they can be drawn on

Letter of Credit – Key Parties

• Applicant•Buyer/Importer

• Beneficiary• Seller/Exporter

• Issuing Bank•Guarantees payment

• Advising Bank• authenticates LC

• Confirming Bank• guarantees payment if Issuing Bank defaults

•Negotiating Bank•  checks for compliance with the terms of the LC

Uniform Customs and Practices for Documentary Credits • General provisions and definitions.• Form and notification of credits.• Liabilities and responsibilities of parties.• Documents of commerce.• Miscellaneous provisions.• Transferability of letters of credit.

Commonly Used Documents• Commercial Invoice• Transport Document• Ocean Bill of Lading• Air Waybill

• Packing Lists/Weight Lists• Insurance Policy or Certificate• Draft or Bill of Exchange• Other Documents• Inspection Certificate• Special Customs Invoices• Certificate of Origin

Letter of Credit Issuance

Importer

Advising Bankin

Exporter’s City

Issuing Bankin Importer’s City

Step 1

Step 2Step 4

Step 3

L/C Forwardedto Beneficiary with

or without confirmation

Application Madefor Letter of Credit

Letter of CreditForwarded

by the Issuing Bank

Contract

Exporter

Letter of Credit Payment

Issuing /Opening

Bank

Advising/Confirming

Bank

Seller/ ExporterBeneficiary

Buyer ImporterAccount Party

Carrier

Step 3

Step 2

Step 1Step 5

Step 4

Documents

Money

Documents Money Money Documents

SurrendersBill ofLading

ReceivesGoods

SurrendersGoods

ReceivesBill of Lading

Letter of CreditTime of Payment•When LC calls for a sight draft - at time documents are presented to negotiating bank•When LC calls for a time (usance) draft - at maturity of accepted time draft

Goods Available to Buyer•When LC calls for a sight draft - after payment•When LC calls for a time draft - after draft has been accepted by bank

Letter of Credit Risks to Seller• Discrepancies in the documents• Buyer’s Bank (opening bank) defaults on its payment

obligation• Payment blocked due to political events in buyer’s country

When Appropriate• Seller is unsure of creditworthiness of buyer

Letter of Credit Variations• Revocable• Irrevocable• Back to Back• Transferable• Revolving• Red Clause• Installment credit

Factors to Consider in Determining Payment Terms Under a Contract

Question Letter of Credit Collection Open AccountWhat is customer relationship New Established Parent/Sub

Impact of total loss ($) Substantial Normal Small

Nature of order Custom NormalProduction

Excess Inventory

Political situation – buyer’scountry

Unstable Stable Strong

Economic situation – buyer’scountry

Unstable Stable Strong

Competition to sell goods No Some Heavy

Changing price environment Yes No No

Experience in preparingdocuments

Extensive Some None

Company policy for protection Strong Medium Unwritten

Other Financing Options• Countertrade• i.e. barter, counterpurchase, compensation

• Factoring• Outright sale of short term receivables

• Forfaiting• Outright sale of medium term (large) obligation

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