TRADE FINANCE WORLD

LIBOR - London InterBank Offered Rate

2014-03-26T21:58:00.000+05:30

LIBOR, stands for the London InterBank Offered Rate, provides a measure of how much large banks would have to pay to borrow money from other large banks on an unsecured basis. Banks rely on this money to lend to customers and businesses and so it is a vital indicator of confidence in the banking system.

It is the most common reference base for pricing interest rate sensitive instruments (e.g. it is the key rate in the interest rate swap market, whilst corporate loans and even some adjustable rate residential mortgages are pegged to LIBOR).

LIBOR has hit the headlines recently following the £290m fine imposed on Barclays by the Financial Services Authority along with US regulators, after an investigation found they had been attempting to manipulate the level of LIBOR.

Here, we take a look at how LIBOR is calculated, how it could have been manipulated and the potential impact on investors as a result.

What rates are submitted and by whom?

• LIBOR is calculated every day (at around 11am) in 10 different currencies, with 15 loan maturities quoted for each currency (ranging from overnight to one year). Therefore, 150 rates are calculated in total every day.

• For each currency, there are a panel of banks chosen as a reflection of the largest and most active banks in that currency.

• Each day, every one of those banks is asked to provide a submission of the rate at which they could borrow funds in that currency over the relevant maturity.

• Just as customers with bad credit records have to pay higher interest rates, large banks which are deemed in poorer financial health are charged more to borrow.

How is the LIBOR rate then calculated?

• For each maturity, the submissions from the panel of banks are ranked from the highest to lowest.

• The highest 25% and the lowest 25% of submissions are dropped and the remaining rates are averaged.

• This average is reported as the LIBOR rate for that maturity on that day.

• Whilst extreme quotes are cut out during the calculation of LIBOR, all rates are subsequently made public as part of the monitoring of the system.

How can LIBOR be manipulated?

• The fact that the panel of banks who help set the rate are also invested in financial instruments which are tied to LIBOR, means that they potentially have an incentive to misquote.

• Such behavior can be limited to a certain extent by the removal of the extreme quotes as part of the calculation methodology noted above.

• However, even the average rate could theoretically be manipulated if enough banks collude or if a sufficient number change their behavior.

Supplier's Credit - Overview

2014-03-26T21:21:00.002+05:30

Supplier's Credit:

I would like to restrict this topic considering Importer in India. Overall concept remains same. However local regulation shall be applied as per importer’s country.

First of all, we need to check how Reserve Bank of India (RBI – India’s central bank) has defined a trade credit. “Trade Credits (TC) refer to credits extended for imports directly by the overseas supplier, bank and financial institution for maturity of less than three years. Depending on the source of finance, such trade credits include suppliers’ credit or buyers’ credit. Suppliers’ credit relates to credit for imports into India extended by the overseas supplier, while buyers’ credit refers to loans for payment of imports into India arranged by the importer from a bank or financial institution outside India for maturity of less than three years. It may be noted that buyers’ credit and suppliers’ credit for three years and above come under the category of External Commercial Borrowings (ECB) which are governed by ECB guidelines”

Overall concept remains same. Suppliers Credit is a financing arrangement under which supplier (seller) extends credit to a foreign importer (Buyer).

Through Supplier’s credit importers can avail cheaper loan pegged to LIBOR rates and agreed margin. This margin should be within range as prescribed by central bank of importer. In India as on date (26/03/2014) ceiling is 6M Libor + 350 bppa. Present market rate being offered may be much lower than the ceiling rate mentioned.

Investopedia defines LIBOR as “An interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market. The LIBOR is fixed on a daily basis by the British Bankers' Association. The LIBOR is derived from a filtered average of the world's most creditworthy banks' interbank deposit rates for larger loans with maturities between overnight and one full year.”

Amount and Maturity:

Authorised Dealers/ banks are permitted to approve trade credits for imports into India up to USD 20 million per import transaction for imports permissible under the current Foreign Trade Policy of the DGFT with a maturity period up to one year (from the date of shipment). For import of capital goods as classified by DGFT, AD banks may approve trade credits up to USD 20 million per import transaction with a maturity period of more than one year and less than three years (from the date of shipment). No roll-over/extension will be permitted beyond the permissible period.

The companies in the infrastructure sector, where “infrastructure” is as defined under the extant guidelines on External Commercial Borrowings (ECB) by RBI have been allowed to avail of trade credit up to a maximum period of five years for import of capital goods as classified by DGFT subject to conditions that the trade credit must be abinitio contracted for a period not less than fifteen months and should not be in the nature of short-term roll overs. However, the condition of 'abinitio' buyers'credit would be for 6 (six) months only for trade credits availed of on or before December 14, 2012.

AD banks shall not approve trade credit exceeding USD 20 million per import transaction.

The period of trade credit should be linked to the operating cycle and trade transaction

Why Suppliers Credit:

Cheaper Loan

Extended Credit Period

Various cost associated with Suppliers Credit:

There ain't no such thing as a free lunch. Let’s see various costs associated.

A. Financing Cost

LIBOR : Libor rate of the agreed date.

Spread over LIBOR : Interest charged over and above the LIBOR. Care: Ensure this spread is within limit approved by central bank.

B. Operational Costs

LC Opening Charges: As agreed with importer’s bank

Hedging Charges: When the importer wants to restrict the liability of the Supplier Credit in local currency, he can do so by booking a forward contract / option on the same and the forward premium / option cost to be added to the total cost of availing Suppliers Credit

Funding Bank LC Confirmation Cost

Acceptance Charges

LC Advising and/or amendment cost

Negotiation Cost

Postage and Swift Charges

Reimbursement Charges

Reference: RBI Master Circular on External Commercial Borrowings and Trade Credits

WHY SBLC IS BETTER THAN GUARANTEES

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IN LOCAL SCENARIOS:

Sr No	Parameter	Guarantee	Stand-by Letter of Credit
1	Governing Law	Local law	UCP 600 or ISP 98 - Same Rules acepted by all members of ICC
2	Format	Long draft by legal experts and contains legalese	Simple and easy to understand, text can be a one pager.
3	Nature of Document	Subject to clarification by legal department	Bankers can easily interprete the UCP rules
4	Claim Process	Validity of the claim to be confirmed by lawyers	Validity of the claim can be ascertained by bankers.
5	Purpose	Very rigid and a linear product.	Flexible and can be customised easily
6	RBI recognition of aplicable ICC Rules	URDG 758 of ICC not yet approved by RBI	UCP and ISP approved by RBI
7	Risk Undertaking	Demand format not specified.	Demand is defined and the contents of the claim can be pre-determined.
8	Payment by	Issuer	Paying bank or the issuing bank
9	Stamp Duty	Stamp duty varies statewise	As per the local practice
10	Dispute	Dispute settled by court.	Dispute referred to courts only if the banks fail to resolve
11	Issuance of instrument	Physical	By SFMS ( RBI electronic platform ) or physical
12	Authentication of instrument	Manual process of verifying signature of issuers	Not required if issued electronically
13	Fields for instruction	Running text often subject to dispute.	Defined fields for each instruction even manually as appearing in electronic transmission SFMS
14	Transferability	Non Transferable	Transferable
15	Expiry	At issuer's counter	Alllows the paying bank to be of customer's choice
16	Presentation	Original Guarantee generally required by issuer	SBLC not to be presented to issuing bank while making claim
17	Advising of Instrument	Issuer sends directly to beneficiary	Advised by beneficiary's bank
18	Issuing Entity	Any entity can issue	As of date only Banks can issue in India

IN INTERNATIONAL SCENARIO:

Sr No	Parameter	Guarantee	Stand-by Letter of Credit
1	Governing Law	URDG or specified jurisdiction or Local Laws of issuing bank country	UCP 600 or ISP 98 - Same Rules acepted by all members of ICC
2	Format	Long draft by legal experts and contains legalese	Simple and easy to understand, text can be a one pager.
3	Nature of Document	Subject to clarification by legal department	Bankers can easily interprete the UCP rules
4	Claim Process	Validity of the claim to be confirmed by lawyers	Validity of the claim can be ascertained by bankers.
5	Purpose	Very rigid and a linear product. Mainly confined to non performance / financial	Wide Range; Flexible and can be customised easily
6	RBI recognition of aplicable ICC Rules	URDG 758 of ICC not yet approved by RBI	UCP and ISP approved by RBI
7	Risk Undertaking	Demand format not specified.	Demand is defined and the contents of the claim can be pre-determined.
8	Payment by	Issuer	Paying bank or the issuing bank
9	Stamp Duty	Stamp duty varies statewise	As per the local practice
10	Dispute	Dispute settled by court.	Dispute referred to courts only if the banks fail to resolve
11	Issuance of instrument	Physical or swift	SWIFT
12	Authentication of instrument	Manual process of verifying signature of issuers	Not required since issued electronically
13	Fields for instruction	Running text often subject to dispute.	Defined fields for each instruction even manually as appearing in electronic transmission SFMS
14	Transferability	Non Transferable ; URDG Permits assignment	Transferable; ISP permits transfer to more than one beneficiary
15	Expiry	At issuer's counter; Where not issued under URDG, some countries do not recognise expiry date.	Clear cut; Alllows the paying bank to be of customer's choice
16	Presentation	Original Guarantee generally required by issuer	SBLC not to be presented to issuing bank while making claim
17	Advising of Instrument	Issuer sends directly to beneficiary	Advised by beneficiary's bank
18	Issuing Entity	Any entity can issue	As of date only Banks can issue
19	Irrevocable	Yes	Yes
20	Amendment	With Beneficiary Consent	UCP - With beneficiary consent; ISP - Automatic amendment permitted

Standby Letter of Credit

2011-07-22T12:34:00.000+05:30

What is a standby letter of credit?

A Standby Letter of Credit (called“SBLC) are written obligations of an issuing bank to pay a sum of money to a beneficiary on behalf of their customer in the event of NON PERFORMANCE OF APPLICANT. It is important to note that standby letters of credit apply only whenever the issuing bank's commitment to pay is not contingent on the existence, validity and enforceability of it’s customer’s obligation; The bank’s obligation is to pay regardless of any disputes between its customer and the beneficiary. The issuance of letters of credit is a private transaction and does not result in the issuance of any public trading securities.

Requirement of standby letters of credit?

The standby letter of credit comes from the banking legislation of the United States, which forbids US credit institutions from assuming guarantee obligations of third parties. (Most other countries outside of the USA continue to allow bank guaruntees.) To circumvent this US banking rule, the US banks created the standby letter of credit, which is based on the uniform customs and practice for documentary credits. In 1998 the International Chamber of Commerce (ICC) added ISP98 (International Standby Practices 98) as the rules to guide standby letters of credit. These rules are slowly being adopted; however, many of the standby letters of credit continue to rely on the ICC’s older guide, Uniform Customs and Practices for Documentary Credits, ICC Publication 600.

Now most of the banks across globe has preferred SBLC over conventional guarantees due to its operational benefits to all parties.

Parties to the standby letter of credit-

This is same as parties to commercial Letter of Credit.

There are only two parties to any credit. the one - who issues it and the other who is the beneficiary. Rest all are just facilitators.

(1) The Issuing Bank. This is the applicant’s bank that issues the standby letter of credit.
(2) The Beneficiary. This is the party in whose favor the instrument is issued.

Facilitator to Standby Letter of Credit:

(1) The Applicant. This is the customer of the bank who applies to the bank for the standby letter of credit. He must provide collateral to the bank or have sufficient credit to induce the bank to issue the instrument. He also must pay the bank a fee for issuing the instrument.
(2) Confirming Bank. This is a bank (usually located near the beneficiary) that agrees (confirms) to pay the beneficiary rather than have the issuing bank pay the beneficiary. The beneficiary pays the Confirming Bank a fee for this convenience. The Confirming Bank then collects from the Issuing Bank the amount paid to the beneficiary.
(3) Advising Bank. This is the bank that represents the beneficiary. It may accept the letter of credit on behalf of the beneficiary and collect on it on behalf of the beneficiary. In order for the transaction to be a bank-to-bank transaction, the advising bank works for the beneficiary to keep the instrument in the banking system. Sometimes the Advising Bank also is the Confirming Bank, but not always.

Purpose of the standby letter of credit

The standby basically fulfills the purpose as a bank security, FAR BETTER THAN A BANK GUARANTEE: it is payable upon first demand and without objections or defenses on the basis of the underlying transaction between the applicant and the beneficiary. It is up to the beneficiary to decide whether he may accept a standby.

Various types of standby letters of credit

(1) Performance Standby. This instrument supports an obligation to perform other than to pay money including the purpose of covering losses arising from a default of the applicant in completion of the underlying transaction.
(2) Advance Payment Standby. This instrument supports an obligation to account for an advance payment made by the beneficiary to the applicant.
(3) Bid Bond/Tender Standby. This standby supports an obligation of the applicant to execute a contract if the applicant is awarded a bid.
(4) Counter Standby. This instrument supports the issuance of a separate standby or other undertaking by the beneficiary of the counter standby.
(5) Direct Pay Standby. This instrument serves to support payment when due of an underlying payment obligation typically in connection with a financial standby without regard to default. This standby is also used to directly pay an obligation where the only conditions of payment are the passage of the term and presentment of payment.
(6) Insurance Standby. This instrument is an insurance or reinsurance obligation of the applicant.

(7) Commercial Standby. This is the most used standby and it supports the obligations of an applicant to pay for goods or services in the event of non-payment by a business debtor.

Transferable standby letter of credits

Transfer of any SBLC shall be as per applicable rules. if its under UCP600, article 38 of UCP shall be applicable.

Standby letter of credits can be transferred to a third party ONLY with the written consent of the beneficiary. If issuing bank wants, they may add that thier consent should be taken prior to any transfer. Issuing bank may also request for pre-intimation of transfer.

LC Availability & Nomination

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1: The LC must state how it is available

UCP 600 sub-article 6(b) reads:
A credit must state whether it is available by sight payment, deferred payment, acceptance or negotiation.
This means that there are four ways by which an LC can be made available:

1. Sight payment,

2. Deferred payment,

3. Acceptance

4. Negotiation.

In addition to the above an LC can be made available with one or more banks in 3 different ways.

1. With the issuing bank In which case presentation of documents must be made to the issuing bank.

2. With a named bank (nominated bank). An LC available with a nominated bank is also available with the issuing bank, in which case presentation of documents must be made to either the nominated bank or the issuing bank.

3. With any bank (nominated bank) An LC available with a nominated bank is also available with the issuing bank, in which case presentation of documents must be made to either the nominated bank (which in this case may be any bank that acts upon the nomination given by the issuing bank) or the issuing bank.

2: Availability defined

UCP 600 defines “Honour” and “Negotiation” as follows:

Honour means:
a. to pay at sight if the credit is available by sight payment.
b. to incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment.
c. to accept a bill of exchange (“draft”) drawn by the beneficiary and pay at maturity if the credit is available by acceptance.

Negotiation means the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank.
The UCP 600 distinguishes between Honour and Negotiation. A main principle is that issuing banks do not “Negotiate” – only a bank nominated by the issuing bank to negotiate can negotiate. The issuing bank honours.

3: Nomination

The concept of nomination is important in the context of availability. UCP 600 article 2 defines a “Nominated bank” as follows:

Nominated bank means the bank with which the credit is available or any bank in the case of a credit available with any bank.

In general terms a “nominated bank” acting upon its nomination is “protected” by the UCP 600. This means e.g. that a negotiating bank that has advanced funds to the beneficiary – and is subsequently not reimbursed by the issuing bank e.g. due to an injunction or stop payment order – would at the outset be able to successfully file a claim against the issuing bank. This is however outside the UCP 600 – hence subject to local law.

The obligation of the nominated bank depends on the agreement made between the nominated bank and the beneficiary. UCP 600 sub-article 12(a) reads:

Unless a nominated bank is the confirming bank, an authorization to honour or negotiate does not impose any obligation on that nominated bank to honour or negotiate, except when expressly agreed to by that nominated bank and so communicated to the beneficiary.

This provision may in fact be rather wide – and it is up to the nominated bank to decide what it is willing to do. This provision does not address the issue of “with or without recourse” – and such will also be subject to the agreement made with the beneficiary.

4: Availability described

Sight payment

An LC available by “sight payment” with a nominated bank is one where the nominated bank pays the beneficiary when a complying presentation is made.

The “classical” LC available by sight payment will grant the nominated bank access to the funds, either via an instruction to the nominated bank to debit the account of the issuing bank – or via a reimbursement instruction.
The principle is that the nominated bank does not assume any payment risk, as payment to the beneficiary is done simultaneously with the payment from the issuing bank to the nominated bank.

However, the nominated still bear the risk of document examination (provided it pays of course) – i.e. must return the funds to the issuing bank if the issuing bank refuses to honour based on valid discrepancies.

Deferred payment

An LC available by “deferred payment” with a nominated bank is one where the beneficiary will receive funds after a fixed period of time (e.g. 60 days from shipment) or on a fixed date. According to UCP600 sub-article 7(c), an issuing bank undertakes to reimburse a nominated bank that has honoured a complying presentation and forwarded the documents to the issuing bank. The reimbursement is due at maturity, whether or not the nominated bank has prepaid before maturity.

No drafts (bills of exchange) are to be used in deferred payment LCs. Only the bank nominated in the LC can prepay the funds to the beneficiary. Technically this can be “any bank” but normally it will be a bank named in the LC.

Acceptance

An LC available by “acceptance” with a nominated bank is one where the beneficiary will receive funds after a fixed period of time (e.g. 60 days from shipment) or on a fixed date. According to UCP600 sub-article 7(c), an issuing bank undertakes to reimburse a nominated bank that has honoured a complying presentation and forwarded the documents to the issuing bank. The reimbursement is due at maturity, whether or not the nominated bank has purchased before maturity.

The LC will call for a time draft presented together with the documents. Such draft will normally be drawn by the beneficiary on the nominated bank that is to accept it (a non-confirming nominated bank is not obligated to do so).

Consequently only the bank nominated in the LC can prepay the funds to the beneficiary. Technically this can be “any bank” but normally it will be a bank named in the LC.
The fact that the nominated bank does not accept the draft – does not change the issuing banks obligation to honour at maturity (see UCP 600 sub-article 7(a)(iv)).

Negotiation

An LC available by “negotiation” is one where an issuing bank nominates another bank to negotiate. Such nominated (also termed “negotiating”) bank is not obliged to negotiate unless it has confirmed the LC. When a bank negotiates then it purchases the complying documents and/or drafti presented by the beneficiary from their own funds, i.e. they do not collect the funds from the account of the issuing bank before paying the beneficiary.

The “classical” negotiation LC would therefore not include any reference to claiming reimbursement from a reimbursing bank or a reference to the debiting of the issuing banks account. The LC would merely specify that the nominated bank must forward the documents to the issuing bank and upon the issuing bank ascertaining that the presentation is complying it will reimburse in accordance with the instructions received.
The UCP 600 does not distinguish between negotiation with or without recourse – except where it is a confirming bank – in which case the negotiation must be without recourse (UCP 600 sub-article 8(a)(ii). The obligation of a non-confirming negotiating bank is based on UCP 600 sub-article 12(a) saying that:
“.. an authorization to … negotiate does not impose any obligation on that nominated bank to … negotiate, except when expressly agreed to by that nominated bank and so communicated to the beneficiary”
The above analysis attempts to follow the take on this by the ICC Banking Commission.

In practical terms many variations of the “negotiation LC” are identified. E.g. what is referred to as “negotiation” – which normally is an LC available by negotiation, providing a reimbursing bank – i.e. allowing the negotiating bank to collect the funds from a third bank – as soon as the documents have been approved by the negotiating bank. This would mean that the negotiating bank has the option to pay the beneficiary at the same time they are collecting the funds from the issuing bank.
Although this may not be fully categorized as “advancing funds” – this is still within framework of negotiation, i.e. meaning that the issuing bank is obligated to honour a complying presentation.

The International Chamber of Commerce - ICC PARIS

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ICC is the world business organization, a representative body that speaks with authority on behalf of enterprises from all sectors in every part of the world.

The fundamental mission of ICC is to promote an open international trade and investment across frontiers and help business corporations meet the challenges and opportunities of globalization. Its conviction that trade is a powerful force for peace and prosperity dates from the organization’s origins early in the 20th century.
The small group of far-sighted business leaders who founded ICC called themselves “the merchants of peace”.

ICC has three main activities: rule setting, arbitration, and policy. Because its member companies and associations are themselves engaged in international business, ICC has unrivalled authority in making rules that govern the conduct of business across borders. Although these rules are voluntary, they are observed in countless thousands of transactions every day and have become part of the fabric of international trade.

ICC also provides essential services, foremost among them the ICC International Court of Arbitration, the world’s leading arbitral institution. Another service is the World Chambers Federation, ICC’s worldwide network of chambers of commerce, fostering interaction and exchange of chamber best practice. Business leaders and experts drawn from the ICC membership establish the business stance on broad issues of trade and investment policy as well as on vital technical and sectoral subjects. These include financial services, information technologies, telecommunications, marketing ethics, the environment, transportation, competition
law and intellectual property, among others.

ICC enjoys a close working relationship with the United Nations and other intergovernmental organizations, including the World Trade Organization, the G20 and the G8.

ICC was founded in 1919. Today it groups hundreds of thousands of member companies and associations from over 120 countries. National committees work with their members to address the concerns of the business in their countries and convey to their governments the business views formulated by ICC.

The ICC national committee network

ICC’s influence around the world is due in large part to its global network of national committees and groups.
Located in more than 90 countries, it is the job of regional representatives to voice the interests of business
to their national governments, and also to provide input to ICC’s policy work.

In countries where a national committee has yet to be formed, companies can join ICC individually by becoming a direct member. ICC membership is currently bolstered by direct members in some 37 additional countries.

ICC Algeria
ICC Argentina
ICC Australia
ICC Austria
ICC Bahrain
ICC Bangladesh
ICC Belgium
ICC Bolivia
ICC Brazil
ICC Bulgaria
ICC Burkina Faso
ICC Cameroon
ICC Canada
ICC Caribbean
ICC Chile
ICC China
Chinese Taipei Business Council of ICC
ICC Colombia
ICC Costa Rica
ICC Croatia
ICC Cuba
ICC Cyprus
ICC Czech Republic
ICC Denmark
ICC Dominican Republic
ICC Ecuador
ICC Egypt
ICC El Salvador
ICC Finland
ICC France
ICC Georgia
ICC Germany
ICC Ghana
ICC Greece
ICC Guatemala
ICC Hong Kong, China
ICC Hungary
ICC Iceland
ICC India
ICC Indonesia
ICC Iran (Islamic Republic)
ICC Ireland
ICC Israel
ICC Italy
ICC Japan
ICC Jordan

ICC Korea

ICC Kuwait

ICC Lebanon

ICC Lithuania

ICC Luxembourg

ICC Madagascar

ICC Malaysia

ICC Mexico

ICC Monaco

ICC Morocco

ICC Nepal

ICC Netherlands

ICC New Zealand

ICC Nigeria

ICC Norway

ICC Pakistan

ICC Panama

ICC Philippines

ICC Poland

ICC Portugal

ICC Qatar

ICC Romania

ICC Russia

ICC Saudi Arabia

ICC Senegal

ICC Serbia

ICC Singapore

ICC Slovakia

ICC Slovenia

ICC South Africa

ICC Spain

ICC Sri Lanka

ICC Sweden

ICC Switzerland

ICC Syria

ICC Tanzania

ICC Thailand

ICC Togo

ICC Tunisia

ICC Turkey

ICC Ukraine

ICC United Arab Emirates

ICC United Kingdom

ICC United States

ICC Uruguay

ICC Venezuela

Direct members:

Afghanistan

Albania

Andorra

Anguilla

Antigua & Barbuda

Armenia

Belarus

Belize

Bermuda

Bosnia & Herzegovina

Brunei Darussalam

Cape Verde

Côte d’Ivoire

Eritrea

Estonia

Gibraltar

Kazakhstan

Korea (Dem. People’s Rep. of)

Kyrgyzstan

Latvia

Liberia

Macau

Macedonia (FYROM)

Maldives

Malta

Mauritius

Moldova

Mongolia

Montenegro

Mozambique

Oman

Palestine

Peru

San Marino

Tajikistan

Uzbekistan

Vietnam

Contact details for all ICC offices are available at www.iccwbo.org/worldwide

Letter of Credit Discrepancies

2011-01-16T00:51:00.000+05:30

15 MOST COMMON DISCREPANCIES
1. Letter of credit has expired
2. Late presentation of documents
3. Late shipment of goods
4. Inconsistent spelling of parties’ names in documents
5. Terms of sale not complied with
6. Merchandise description not strictly as per L/C term
7. Partial shipment or transshipment effected despite L/C terms
8. Foreign language documents must be exactly as per L/C
9. Documents are not consistent with one another
10. Ocean Bill of Lading issued by forwarding agent unacceptable
11. Bills of Lading not clean
12. Insurance does not cover risks stipulated in L/C
13. Insurance issued after shipment date
14. Bills of Lading and Drafts not properly endorsed
15. Drafts not completed properly

CORRECTABLE DISCRPANCIES
1. Draft not in accordance with L/C terms
2. Amount of draft does not agree with invoice total
3. Invoice incorrectly addressed to the account party
4. Description of goods in invoice does not correspond with description in L/C
5. Invoice omits shipping terms
6. Commercial invoice not signed
7. Bill of Lading not endorsed
8. Inconsistencies found in documents presented

MAJOR DISCRPANCIES
1. Late shipment
2. Late presentation
3. L/C expired
4. Draft in excess of amount permitted in L/C
5. Bills of Lading incorrectly issued
6. Insurance policy bears a date later than the date of shipment shown on Bill of Lading

Brief Introduction of Incoterms 2010

2011-01-16T00:43:00.001+05:30

The International Chamber of Commerce (ICC) announced that Incoterms® 2010 launched in September 2010, come into effect on 1 January, 2011.

To keep up with the rapid expansion of world trade and globalization, the Incoterms rules are revised about once a decade. Since the last revision in 2000, much has changed in global trade and the current revision will take into account issues such as developments in cargo security and the need to replace paper documents with electronic ones.

Get familiar with the New Incoterms® 2010. You may need to renegotiate any of your contracts that may be affected by the changes.

The 2010 edition includes 11 terms instead of the 13 in the previous edition.

DELETION
The following terms from Incoterms 2000 have been deleted from the list: DAF, DES, DEQ and DDU.

NEW ADDITION
Two new terms have been added to the list: DAT and DAP. DAT replaces Incoterms 2000 rule DEQ. DAP replaces Incoterms 2000 rules DAF, DES and DDU.

Whilst Incoterms 2000 had four categories, Incoterms® 2010 only has two categories. The Incoterms® 2010 are arranged in two categories as follows:

RULES FOR ANY MODE OF TRANSPORT
CIP – Carriage and Insurance Paid
CPT – Carriage Paid To
DAP – Delivered At Place
DAT – Delivered At Terminal
DDP – Delivered Duty Paid
EXW – Ex Works
FCA – Free Carrier

RULES FOR SEA AND INLAND WATERWAY TRANSPORT ONLY
CFR – Cost and Freight
CIF – Cost, Insurance and Freight
FAS – Free Alongside Ship
FOB – Free On Board

In addition to the 11 rules, Incoterms® 2010 includes:
• Extensive guidance notes and illustrative graphics to help users efficiently choose the right rule for each transaction;
• New classifications to help choosing the most suitable rule in relation to the mode of transport;
• Advice for the use of electronic procedures;
• Information on security-related clearances for shipments;
• Advice for the use of Incoterms® 2010 in domestic trade.

Used in international and domestic contracts for the sale of goods, Incoterms help parties avoid misunderstandings by clearly identifying the obligations of the buyer and seller.

WORLD'S BEST TRADE FINANCE BANKS

2011-01-16T00:10:00.000+05:30

WORLD'S BEST TRADE FINANCE BANKS

Trade Finance is the science that describes the management of money, banking, credit, investments, and assets for international trade transactions. Companies involved with trade finance include importers and exporters, financiers, insurers, and other service providers.

Global Finance selects the leaders in a specialized area of finance that is changing rapidly.
Global trade finance has become an extremely competitive business, mainly suitable for financial institutions with economies of scale or special expertise. Most international trade is now done on an open-account basis, as corporations have come to know their suppliers better and are less willing to pay the fees associated with letters of credit (LCs) and other forms of bank guarantees.

The list below describes the banks which are awarded the BEST TRADE FINANCE BANKS in different regions;

Americas	Citigroup
Europe	ABN Amro
Central and Eastern Europe	RZB
Middle East	National Bank of Kuwait
Asia	HSBC
Argentina	Citigroup
Australia	ANZ
Austria	RZB
Bahrain	Arab Banking Corporation
Belgium	Fortis Bank
Brazil	Banco do Brasil
Canada	Scotiabank
China	Bank of China
Colombia	Banco de Bogotá
Egypt	Commercial International Bank (CIB)
Finland	Nordea
France	BNP Paribas
Germany	Deutsche Bank
Greece	EFG Eurobank
Hong Kong	HSBC Holdings
India	ICICI Bank
Indonesia	Bank Danamon Indonesia
Italy	Banca Intesa
Japan	Mitsubishi UFJ Financial Group
Jordan	Jordan Kuwait Bank
Kazakhstan	Kazkommertsbank
Kuwait	National Bank of Kuwait
Mexico	Banamex
Netherlands	ABN Amro
Nigeria	First Bank of Nigeria
Norway	DnB NOR
Oman	BankMuscat
Pakistan	MCB
Poland	Bank BPH
Portugal	Millennium bcp
Qatar	Qatar National Bank
Russia	International Moscow Bank
Saudi Arabia	Arab National Bank
Singapore	DBS
South Africa	Standard Bank
South Korea	Korea Exchange Bank
Spain	Grupo Santander
Sweden	Svenska Handelsbanken
Switzerland	Credit Suisse Group
Taiwan	Chinatrust Commercial Bank
Turkey	Akbank
United Kingdom	HSBC
United States	Citigroup
Us (Honorable Mention)	Bank of America
Us (Honorable Mention)	JPMorgan Chase
Venezuela	Banco Mercantil

Forfaiting

2011-01-16T00:06:00.000+05:30

Forfaiting

Forfaiting is a method of trade finance that allows exporters to obtain cash by selling their medium term foreign account receivables at a discount on a “without recourse” basis. A forfaiter is a specialized finance firm or a department in banks that performs non-recourse export financing through the purchase of medium-term trade receivables. Similar to factoring, forfaiting virtually eliminates the risk of nonpayment, once the goods have been delivered to the foreign buyer in accordance with the terms of sale. However, unlike factors, forfaiters typically work with the exporter who sells capital goods, commodities, or large projects and needs to offer periods of credit from 180 days to up to seven years. In forfaiting, receivables are normally guaranteed by the importer’s bank, allowing the exporter to take the transaction off the balance sheet to enhance its key financial ratios. The current going minimum transaction size for forfaiting is $100,000. Most users of forfaiting have been large established corporations, although small- and medium-size companies are slowly embracing forfaiting as they become more aggressive in seeking financing solutions for countries considered high risk.

Key Points

• Eliminates virtually all risk to the exporter with 100 percent financing of contract value.
• Allows offering open account in markets where the credit risk would otherwise be too high.
• Generally works with bills of exchange, promissory notes, or a letter of credit.
• Normally requires the exporter to obtain a bank guarantee for the foreign buyer.
• Financing can be arranged on a one-shot basis in any of the major currencies,
usually on a fixed interest rate, but a floating rate option is also available.

How Does Forfaiting Work?
The exporter approaches a forfaiter before finalizing a transaction’s structure. Once the forfaiter commits to the deal and sets the discount rate, the exporter can incorporate the discount into the selling price. The exporter then accepts a commitment issued by the forfaiter, signs the contract with the importer, and obtains, if required, a guarantee from the importer’s bank that provides the documents required to complete the forfaiting. The exporter delivers the goods to the importer and delivers the documents to the forfaiter who verifies them and pays for them as agreed in the commitment. Since this payment is without recourse, the exporter has no further interest in the transaction and it is the forfaiter who must collect the future payments due from the importer.

Cost of Forfaiting
The cost of forfaiting is determined by the rate of discount based on the aggregate of the LIBOR (London Inter Bank Offered Rate) rates for the tenor of the receivables and a margin reflecting the risk being sold. The degree of risk varies based on the importing country, the length of the loan, the currency of transaction, and the repayment structure – the higher the risk, the higher the margin and therefore the discount rate. However, forfaiting can be more cost-effective than traditional trade finance tools because of many attractive benefits it offers to the exporter.

Three Additional Major Advantages of Forfaiting

Volume: Can work on a one-shot deal, without requiring an ongoing volume of business.

Speed: Commitments can be issued within hours/days depending on details and country.

Simplicity: Documentation is usually simple, concise, and straightforward.

Characteristics of Forfaiting

Applicability
Ideal for exports of capital goods, commodities, and large projects on medium-term credit

Risk
Risk inherent in an export sale is virtually eliminated.

Pros
• Eliminate the risk of nonpayment by foreign buyers
• Strong capabilities in emerging and developing markets

Cons
• Cost can be higher than commercial bank financing

Export Factoring

2011-01-15T23:57:00.000+05:30

Export Factoring

Export factoring is a complete financial package that combines export working capital financing, credit protection, foreign accounts receivable bookkeeping and collection services. A factor is a bank or a specialized financial firm that performs financing through the purchase of invoices or accounts receivable. Export factoring is offered under an agreement between the factor and exporter, in which the factor purchases the exporter’s short-term foreign accounts receivable for cash at a discount from the face value, normally without recourse, and assumes the risk on the ability of the foreign buyer to pay, and handles collections on the receivables. Thus, by virtually eliminating the risk of nonpayment by foreign buyers, factoring allows the exporter to offer open accounts, improves liquidity position, and boosts competitiveness in the global marketplace. Factoring foreign accounts receivables can be a viable alternative to export credit insurance, long-term bank financing, expensive short-term bridge loans or other types of borrowing that will create debt on the balance sheet.

Key Points

• Recommended for continuous short-term export sales of consumer goods on open account.
• 100 percent protection against the foreign buyer’s inability to pay – no deductible/risk sharing.
• An attractive option for small- and medium-sized businesses, particularly during periods of rapid growth, because cash flow is preserved and risk is virtually eliminated.
• Unsuitable for the new-to-export company as factors generally
(1) do not take on a client for a one-time deal and
(2) require access to a certain volume of the exporter’s yearly sales.

How Does Export Factoring Work?

The exporter signs an agreement with the export factor who selects an import factor through an international correspondent factor network, who then investigates the foreign buyer’s credit standing. Once credit is approved locally, the foreign buyer places orders for goods on open account. The exporter then ships the goods and submits the invoice to the export factor, who then passes it to the import factor who handles the local collection and payment of the accounts receivable. During all stages of the transaction, records are kept for the exporter’s bookkeeping.

Two Common Export Factoring Financing Arrangements and Their Costs

1. In discount factoring, the factor issues an advance of funds against the exporter’s receivables until money is collected from the importer. The cost is variable, depending on the time frame and the dollar amount advanced.
2. In collection factoring, the factor pays the exporter, less a commission charge, when receivables are at maturity, regardless of the importer’s financial ability to pay. The cost is fixed, ranging generally between 1 and 4 percent, depending on the country, sales volume, and amount of paperwork involved. However, as a rule of thumb, export factoring usually costs about twice as much as export
credit insurance.

Limitations of Export Factoring

• Only exists in countries with laws that support the buying and selling of receivables.
• Generally does not work with foreign account receivables having greater than 180-day terms.
• May be cost prohibitive for exporters with tight profit margins.

Characteristics of Export Factoring

Applicability
Ideal for an established exporter who wants (1) the flexibility of selling on open account terms, (2) to avoid incurring any credit losses or (3) to outsource credit and collection functions.
Risk
Risk inherent in an export sale is virtually eliminated.
Pros
• Eliminate the risk of nonpayment by foreign buyers
• Maximize cash flows
Cons
• More costly than export credit insurance
• Generally not available in developing countries

Methods of Payment in International Trade - Open Account

2011-01-15T23:26:00.000+05:30

Open Account

An open account transaction means that the goods are shipped and delivered before payment is due, usually in 30 to 90 days. Obviously, this is the most advantageous option to the importer in cash flow and cost terms, but it is consequently the highest risk option for an exporter. Because of the intense competition for export markets, foreign buyers often press exporters for open account terms. In addition, the extension of credit by the seller to the buyer is more common abroad. Therefore, exporters who are reluctant to extend credit may face the possibility of the loss of the sale to their competitors. However, while this method of payment will definitely enhance export competitiveness, exporters should thoroughly examine the political, economic, and commercial risks, as well as cultural influences to ensure that payment will be received in full and on time. It is possible to substantially mitigate the risk of nonpayment associated with open account trade by using such trade finance techniques as export credit insurance and factoring. Exporters may also wish to seek export working capital financing to ensure that they have access to financing for both the production for export and for any credit while waiting
to be paid.

Key Points
• The goods, along with all the necessary documents, are shipped directly to the importer who agrees to pay the exporter’s invoice at a future date, usually in 30 to 90 days.
• Exporter should be absolutely confident that the importer will accept shipment and pay at agreed time and that the importing country is commercially and politically secure.
• Open account terms may help win customers in competitive markets, if used with one or more of the appropriate trade finance techniques that mitigate the risk of nonpayment.

How to Offer Open Account Terms in Competitive Markets

Open account terms may be offered in competitive markets with the use of one or more of the following trade finance techniques:
(1) Export Working Capital Financing,
(2) Government-Guaranteed Export Working Capital Programs,
(3) Export Credit Insurance,
(4) Export Factoring, and
(5) Forfaiting.

Characteristics of an Open Account

Applicability
Recommended for use (1) in secure trading relationships or markets or (2) in competitive markets to win customers with the use of one or more appropriate trade finance techniques.
Risk
Exporter faces significant risk as the buyer could default on payment obligation after shipment of the goods.
Pros
• Boost competitiveness in the global market
• Establish and maintain a successful trade relationship
Cons
• Exposed significantly to the risk of nonpayment
• Additional costs associated with risk mitigation measures

Methods of Payment in International Trade - Documentary Collections

2011-01-15T23:22:00.000+05:30

Documentary Collections

A documentary collection (D/C) is a transaction whereby the exporter entrusts the collection of payment to the remitting bank (exporter’s bank), which sends documents to a collecting bank (importer’s bank), along with instructions for payment. Funds are received from the importer and remitted to the exporter through the banks involved in the collection in exchange for those documents. D/Cs involve the use of a draft that requires the importer to pay the face amount either on sight (document against payment—D/P) or on a specified date in the future (document against acceptance—D/A). The draft lists instructions that specify the documents required for the transfer of title to the goods. Although banks do act as facilitators for their clients under collections, documentary collections offer no verification process and limited recourse in the event of nonpayment. Drafts are generally less expensive than letters of credit (LCs).

Key Points

• D/Cs are less complicated and less expensive than LCs.
• Under a D/C transaction, the importer is not obligated to pay for goods prior to shipment.
• The exporter retains title to the goods until the importer either pays the face amount on sight or accepts the draft to incur a legal obligation to pay at a specified later date.
• Banks that play essential roles in transactions utilizing D/Cs are the remitting bank (exporter’s bank) and the collecting bank (importer’s bank).
• While the banks control the flow of documents, they do not verify the documents nor take any risks, but can influence the mutually satisfactory settlement of a D/C transaction.

Typical Simplified D/C Transaction Flow
1. The exporter ships the goods to the importer and receives in exchange the documents.
2. The exporter presents the documents with instructions for obtaining payment
to its bank.
3. The exporter’s remitting bank sends the documents to the importer’s collecting bank.
4. The collecting bank releases the documents to the importer upon receipt of payment.
5. Or the collecting bank releases the documents on acceptance of draft from
the importer.
6. The importer then presents the documents to the carrier in exchange for the goods.
7. Having received payment, the collecting bank forwards proceeds to the

remitting bank.
8. Once payment is received, the remitting bank credits the exporter’s account.

Documents Against Payment (D/P) Collection
Under a D/P collection, the exporter ships the goods, and then gives the documents to his bank, which will forward them to the importer’s collecting bank, along with instructions on how to collect the money from the importer. In this arrangement, the collecting bank releases the documents to the importer only on payment for the goods. Upon receipt of payment, the collecting bank transmits the funds to the remitting bank for payment to the exporter.

Time of Payment: After shipment, but before documents are released

Transfer of Goods: After payment is made on sight

Exporter Risk: If draft is unpaid, goods may need to be disposed

Documents Against Acceptance (D/A) Collection
Under a D/A collection, the exporter extends credit to the importer by using a time draft. In this case, the documents are released to the importer to receive the goods upon acceptance of the time draft. By accepting the draft, the importer becomes legally obligated to pay at a future date. At maturity, the collecting bank contacts the importer for payment. Upon receipt of payment, the collecting bank transmits the funds to the remitting bank for payment to the exporter.

Time of Payment: On maturity of draft at a specified future date

Transfer of Goods: Before payment, but upon acceptance of draft

Exporter Risk: Has no control of goods and may not get paid at due date

When to Use Documentary Collections

Under D/C transactions, the exporter has little recourse against the importer in case of nonpayment. Thus, the D/C mechanism should only be used under the following conditions:
• The exporter and importer have a well-established relationship.
• The exporter is confident that the importing country is stable politically
and economically.
• An open account sale is considered too risky, but an LC is also too expensive
for the importer.

Characteristics of a documentary collection

Applicability
Recommended for use in established trade
relationships and in stable export markets.
Risk
Exporter is exposed to more risk as D/C terms are more convenient and cheaper than an LC to
the importer.
Pros
• Bank assistance in obtaining payment
• The process is simple, fast, and less costly than LCs
Cons
• Banks’ role is limited and they do not
guarantee payment
• Banks do not verify the accuracy of the documents

Methods of Payment in International Trade -- Letters of Credit

2011-01-15T23:17:00.000+05:30

Letters of Credit

Letters of credit (LCs) are among the most secure instruments available to international traders. An LC is a commitment by a bank on behalf of the buyer that payment will be made to the beneficiary (exporter) provided that the terms and conditions have been met, as verified through the presentation of all required documents. The buyer pays its bank to render this service. An LC is useful when reliable credit information about a foreign buyer is difficult to obtain, but you are satisfied with the creditworthiness of your buyer’s foreign bank. This method also protects the buyer, since no payment obligation arises until the documents proving that the goods have been shipped or delivered as promised are presented. However, since LCs have many opportunities for discrepancies, they should be prepared by well-trained documenters or the function may need to be outsourced. Discrepant documents, literally not having an “I-dotted and T-crossed,” can negate payment.

Key Points
• An LC, also referred to as a documentary credit, is a contractual agreement whereby a bank in the buyer’s country, known as the issuing bank, acting on behalf of its customer (the buyer or importer), authorizes a bank in the seller’s country, known as the advising bank, to make payment to the beneficiary (the seller or exporter) against the receipt of stipulated documents.
• The LC is a separate contract from the sales contract on which it is based and, therefore, the bank is not concerned whether each party fulfills the terms of the sales contract.
• The bank’s obligation to pay is solely conditional upon the seller’s compliance with the terms and
conditions of the LC. In LC transactions, banks deal in documents only, not goods.
Illustrative Letter of Credit Transaction
1. The importer arranges for the issuing bank to open an LC in favor of the exporter.
2. The issuing bank transmits the LC to the advising bank, which forwards it to the exporter.
3. The exporter forwards the goods and documents to a freight forwarder.
4. The freight forwarder dispatches the goods and submits documents to the advising bank.
5. The advising bank checks documents for compliance with the LC and pays the exporter.
6. The importer’s account at the issuing bank is debited.
7. The issuing bank releases documents to the importer to claim the goods from the carrier.

Irrevocable Letter of Credit

LCs can be issued as revocable or irrevocable. Most LCs are irrevocable, which means they may not be changed or cancelled unless both the buyer and seller agree. If the LC does not mention whether it is revocable or irrevocable, it automatically defaults to irrevocable. Revocable LCs are no longer in use as per UCPDC 600 guidelines.

Confirmed Letter of Credit

A greater degree of protection is afforded to the exporter when a LC issued by a foreign bank (the importer’s issuing bank) is confirmed by a U.S. bank (the exporter’s advising bank). This confirmation means that the U.S. bank adds its guarantee to pay the exporter to that of the foreign bank. If an LC is not confirmed, the exporter is subject to the payment risk of the foreign bank and the political risk of the importing country. Exporters should consider confirming LCs if they are concerned about the credit standing of the foreign bank or when they are operating in a high-risk market, where political upheaval, economic collapse, devaluation or exchange controls could put the payment at risk.

Special Letters of Credit

LCs can take many forms. When an LC is issued as transferable, the payment obligation under the original LC can be transferred to one or more “second beneficiaries.” With a revolving LC, the issuing bank restores the credit to its original amount once it has been drawn down. Standby LCs can be used in lieu of security or cash deposits as a secondary payment mechanism.

Tips for Exporters

• Consult with your bank before the importer applies for an LC.
• Consider whether a confirmed LC is needed.
• Negotiate with the importer and agree upon detailed terms to be incorporated
into the LC.
• Determine if all LC terms can be compiled within the prescribed time limits.
• Ensure that all the documents are consistent with the terms and conditions of the LC.
• Beware of many discrepancy opportunities that may cause nonpayment or
delayed payment.

Characteristics of a Letter of Credit

Applicability
Recommended for use in new or less-established trade relationships when you are satisfied with the creditworthiness of the buyer’s bank.

Risk
Risk is evenly spread between seller and buyer provided all terms and conditions are adhered to.

Pros
• Payment after shipment
• A variety of payment, financing and risk mitigation options

Cons
• Process is complex and labor intensive
• Relatively expensive in terms of transaction costs

Methods of Payment in International Trade - Cash-in-Advance

2011-01-15T23:13:00.000+05:30

Cash-in-Advance

With the cash-in-advance payment method, the exporter can avoid credit risk or the risk of nonpayment, since payment is received prior to the transfer of ownership of the goods. Wire transfers and credit cards are the most commonly used cash-in-advance options available to exporters. However, requiring payment in advance is the least attractive option for the buyer, as this method tends to create cash flow problems, and unless the seller sees no other option or the buyer has other vendors to choose from, it often is not a competitive option. In addition, foreign buyers are often concerned that the goods may not be sent if payment is made in advance. Exporters that insist on this method of payment as their sole method of doing business may find themselves losing out to competitors who may be willing to offer more attractive payment terms.

Key Points
• Full or significant partial payment is required,
usually via credit card or bank/wire transfer, prior to the transfer of ownership of the goods.
• Cash-in-advance, especially a wire transfer, is the most secure and favorable method of international trading for exporters and, consequently, the least secure and attractive option for importers. However, both the credit risk and the competitive landscape must be considered.
• Insisting on these terms ultimately could cause exporters to lose customers to competitors who are willing offer more favorable payment terms to foreign buyers in the global market.
• Creditworthy foreign buyers, who prefer greater security and better cash utilization, may find cash-in-advance terms unacceptable and may simply walk away from the deal.

Wire Transfer—Most Secure and Preferred Cash-in-Advance Method

An international wire transfer is commonly used and has the advantage of being almost immediate. Exporters should provide clear routing instructions to the importer when using this method, including the name and address of the receiving bank, the bank’s SWIFT, Telex, and ABA numbers, and the seller’s name and address, bank account title, and account number. This option is more costly to the importer than other options of cash-in-advance method, as the fee for an international wire transfer is usually paid by the sender.

Credit Card—A Viable Cash-in-Advance Method

Exporters who sell directly to the importer may select credit cards as a viable method of cash-in-advance payment, especially for consumer goods or small transactions. Exporters should check with their credit card company(s) for specific rules on international use of credit cards as the rules governing international credit card transactions differ from those for domestic use. As international credit card transactions are typically placed via online, telephone, or fax methods that facilitate fraudulent transactions, proper precautions should be taken to determine the validity of transactions before the goods are shipped. Although exporters must endure the fees charged by credit card companies, this option may help the business grow because of its convenience.

Payment by Check—A Less-Attractive Cash-in-Advance Method

Advance payment using an international check may result in a lengthy collection delay of several weeks to months. Therefore, this method may defeat the original intention of receiving payment before shipment. If the check is in INR or drawn on a Indian. bank, the collection process is the same as any INR check. However, funds deposited by non-local check may not become available for withdrawal for a few days due to Regulation prescribed by Reserve Bank of India ( Central Bank ). In addition, if the check is in a foreign currency or drawn on a foreign bank, the collection process is likely to become more complicated and can significantly delay the availability of funds. Moreover, there is always a risk that a check may be returned due to insufficient funds in the buyer’s account.

When to Use Cash-in-Advance Terms

• The importer is a new customer and/or has a less-established operating history.
• The importer’s creditworthiness is doubtful, unsatisfactory, or unverifiable.
• The political and commercial risks of the importer’s home country are very high.
• The exporter’s product is unique, not available elsewhere, or in heavy demand.
• The exporter operates an Internet-based business where the use of convenient
payment methods is a must to remain competitive.

Characteristics of a Cash-in-Advance Payment Method

Applicability
Recommended for use in high-risk trade relationships or export markets, and ideal for Internet-based businesses.
Risk
Exporter is exposed to virtually no risk as the burden of risk is placed nearly completely on
the importer.
Pros
• Payment before shipment
• Eliminates risk of nonpayment
Cons
• May lose customers to competitors over
payment terms
• No additional earnings through financing
operations

Methods of Payment in International Trade

2011-01-15T23:06:00.000+05:30

Methods of Payment in International Trade

To succeed in today’s global marketplace, exporters must offer their customers attractive sales terms supported by the appropriate payment method to win sales against foreign competitors. As getting paid in full and on time is the primary goal for each export sale, an appropriate payment method must be chosen carefully to minimize the
payment risk while also accommodating the needs of the buyer. As shown below, there are four primary methods of payment for international transactions. During or before contract negotiations, it is advisable to consider which method in the diagram below is mutually desirable for you and your customer.

Key Points
• International trade presents a spectrum of risk, causing uncertainty over the timing of payments between the exporter (seller) and importer (foreign buyer).
• To exporters, any sale is a gift until payment is received.
• Therefore, the exporter wants payment as soon as possible, preferably as soon as an order is placed or before the goods are sent to the importer.
• To importers, any payment is a donation until the goods are received.
• Therefore, the importer wants to receive the goods as soon as possible, but to delay payment as long as possible, preferably until after the goods are resold to generate enough income to make payment to the exporter.

Cash-in-Advance

With this payment method, the exporter can avoid credit risk, since payment is received prior to the transfer of ownership of the goods. Wire transfers and credit cards are the most commonly used cash-in-advance options available to exporters. However, requiring
payment in advance is the least attractive option for the buyer, as this method creates cash flow problems. Foreign buyers are also concerned that the goods may not be sent if payment is made in advance. Thus, exporters that insist on this method of payment as their sole method of doing business may find themselves losing out to competitors who may be willing to offer more attractive payment terms.

Letters of Credit

Letters of credit (LCs) are among the most secure instruments available to international traders. An LC is a commitment by a bank on behalf of the buyer that payment will be made to the exporter provided that the terms and conditions have been met, as verified through the presentation of all required and credit compliant documents. The buyer pays its bank to render this service. An LC is useful when reliable credit information about a foreign buyer is difficult to obtain, but you are satisfied with the creditworthiness of your buyer’s foreign bank. An LC also protects the buyer since no payment obligation arises until the goods have been shipped or delivered as promised.

Documentary Collections

A documentary collection is a transaction whereby the exporter entrusts the collection of
a payment to the remitting bank (exporter’s bank), which sends documents to a collecting
bank (importer’s bank), along with instructions for payment. Funds are received from the importer and remitted to the exporter through the banks involved in the collection in exchange for those documents. Documentary collections involve the use of a draft that requires the importer to pay the face amount either on sight (document against payment—D/P) or on a specified date in the future (document against acceptance—D/A). The draft lists instructions that specify the documents required for the transfer of title to the goods. Although banks do act as facilitators for their clients under collections, documentary
collections offer no verification process and limited recourse in the event of nonpayment. Drafts are generally less expensive than letters of credit.

Open Account

An open account transaction means that the goods are shipped and delivered before payment is due, usually in 30 to 90 days. Obviously, this is the most advantageous option to the importer in cash flow and cost terms, but it is consequently the highest risk option for an exporter. Due to the intense competition for export markets, foreign buyers often press exporters for open account terms since the extension of credit by the seller to the buyer is more common abroad. Therefore, exporters who are reluctant to extend credit may face the possibility of the loss of the sale to their competitors. However, with the use of one or more of the appropriate trade finance techniques, such as export credit insurance, the exporter can offer open competitive account terms in the global market while substantially mitigating the risk of nonpayment by the foreign buyer.

WELCOME WORLD

2011-01-01T15:26:00.000+05:30

Hi,
On 1st of January 2011, as per my new year resolution for the second decade, I have started this blog. We all shall discuss various matter / issues pertaining to trade finance.

Please make best use of this blog. All valuable suggestions are most welcome.

Regards,
Bhaskar Das