Methods of

international
payment
 Payment in advance

Open account
Chapter outline
Collection

Documentary credit
4.1 Payment in advance
4.1.1 Definition
In a “payment in advance” (also referred to as a “cash in
advance”) transaction, the seller gets paid before “delivery of
goods” (e.g. shipment of goods, arrival of goods, etc.).
Payment in advance requires the buyer to pay prior to the
delivery of the goods.
4.1 Payment in advance
4.1.2 Process
4.1Payment in advance
4.1.2 Process

The fee for an international telegraphic

transfer can be paid by a sender (or
importer)

The fee can be deducted from the

receiver’s (exporter’s) account

The fee can be split between sender

and receiver
4.1 Payment in advance
4.1.3 Advantages and disadvantages
ADVANTAGES DISADVANTAGES
4.2 Open account
4.2.1 Definition
In an open account transaction, the seller ships (or delivers)
goods and sends the shipping documents including invoice
directly (not using a banking system) to the buyer without
receiving payment, and the buyer will pay at a future due
date. The seller extends credit to the buyer by allowing them
to pay in arrears.
4.2 Open account
4.2.1 Definition
In an open account transaction, the seller ships (or delivers)
goods and sends the shipping documents including invoice
directly (not using a banking system) to the buyer without
receiving payment, and the buyer will pay at a future due
date. The seller extends credit to the buyer by allowing them
to pay in arrears.
4.2 Open
account
4.2.2 Process
4.2 Open account
4.2.3 Advantages and disadvantages
ADVANTAGES DISADVANTAGES
4.3 Collection
A seller sells the goods to a buyer and asks his banker to
collect money on his behalf from the buyers. Therefore, the
bank acts as agent of the seller in collecting money from the
buyer.
• Clean collection - is collection of financial documents
(drafts) when they are not accompanied by commercial
documents
• Documentary collection - is collection of financial
documents (drafts) accompanied by commercial documents
(invoices, transport and insurance documents, etc.).
 Parties to a
collection
• The principal
4.3 Collection • The remitting bank
• The collecting bank
• The drawee
4.3 Collection
Legal framework
• A set of rules has been developed by ICC called Uniform
Rules for Collections, International Chamber of Commerce
Publication (URC 522). The Rules are the basis on which the
customer should instruct the bank.
4.3 Collection
4.3.1 Clean collection
Remitting bank Payment/ Acceptance Collection bank
(5)

(5) (3) Draft + Collection letter

Payment/
Acceptance
(2) (4)
Collection Draft
instruction (5)
+
Payment/
Draft
Acceptance
(1) Goods

Documents
Seller Buyer
 Applicable
cases The buyer has a strong
credit history and is well-
known to the seller

Small export transactions

4.3 Collection
4.3.1 Clean
collection

Services related to export

and import of goods
4.3 Collection
4.3.1 Clean collection

ADVANTAGES DISADVANTAGES
4.3 Collection
4.3.2 Documentary collection
Document against payment (D/P)
In a documents against payment, the collecting bank releases
shipping documents to the buyer against payment of a bill of
exchange (namely sight bill), and the collecting bank will remit
the payment to the seller through the remitting bank. As the
collecting bank will hold the documents unless the buyer pays
a bill of exchange, the seller will not lose control of goods
without payment.
4.3 Collection
4.3.2 Documentary collection
Document against payment (D/P)
4.3 Collection
4.3.2 Documentary collection
Document against acceptance (D/A)
In a documents against acceptance, the collecting bank
releases the documents to the buyer against acceptance of a
bill of exchange (namely time bill), and the buyer will pay the
bill of exchange on a specified future date. When a collecting
bank receives payment from the buyer on the future due
date, they will remit the payment to the seller through the
remitting bank. Therefore, the seller loses control of the
documents and the goods in exchange for an accepted bill of
exchange only.
4.3 Collection
4.3.2 Documentary collection
Document against acceptance (D/A)
4.3 Collection
4.3.2 Documentary collection
ADVANTAGES DISADVANTAGES
4.4 Documentary credit

ISBP

UCP
e.UC
URR
P
4.4 Documentary credit
4.4.1 Definition
The Uniform Customs and Practice for Documentary Credits
(the sixth revision of 2007, UCP 600) Article 2 defines a
documentary credit (“credit”):
“Credit means any arrangement, however named or described,
that is irrevocable and thereby constitutes a definite undertaking
of the issuing bank to honour a complying presentation.”
4.4 Documentary credit
4.4.1 Definition
A documentary credit (or letter of credit) is a definite
undertaking of the issuing bank to pay a complying
presentation (presentation of documents). An issuing bank
would pay a beneficiary (normally the seller), if the documents
presented complies with the terms and conditions of the
credit.
 Independence principle
4.4
Documentary
credit
Abstractness principle
 4.4.2 Parties to documentary credit

The Applicant/Buyer

The Seller/Beneficiary
4.4
Documentary The Issuing Bank
credit
The Advising Bank

The Confirming bank

The Nominated Bank

 ISSUING BANK ADVISING BANK
6. Acceptance and
Payment

5. Present documents
4.4 Documentary
credit 2. Issue L/C

4.4.3 Process

7. Documents

6. Payment
3. L/C advice

5. Documents
8. Payment

application
1. L/C
4. Ship goods

APPLICANT/BUYER BENIFICIARY/SELLER
4.4
Documentary
credit
4.4.4 Content of a letter of
credit
4.4
Documentary
credit
4.4.4 Content of a letter of
credit
4.4 Documentary credit
4.4.5 Types of L/C

Basic Types of Credit Under UCP

Deferred payment
Sight credit
credit

Acceptance credit Negotiation credit

4.4 Documentary credit
4.4.5 Types of L/C

Other Forms of Credit

Transferable credit Back-to-back credit Red clause credit

 4.4.5
Types Revolving credit
of L/C
Other
Forms of
4.4 Credit
Standby letter of
Documentary
credit credit

Confirmed credit
Casestudy and discussion
Ocean Traders of North America is a firm based in Mobile, Alabama, that specializes in seafood exports

and commonly uses letters of credit (L/Cs) to ensure payment. It recently experienced a problem,

however. Ocean Traders had an irrevocable L/C issued by a Russian bank to ensure that it would receive

payment upon shipment of 16,000 tons of fish to a Russian firm. This bank backed out of its obligation,

however, stating that it was not authorized to guarantee commercial transactions.

a. Explain how an irrevocable L/C would normally facilitate the business transaction between the Russian

importer and Ocean Traders of North America (the U.S. exporter).

b. Explain how the cancellation of the L/C could create a trade crisis between the U.S. and Russian firms.

c. Why do you think situations like this (the cancellation of the L/C) are rare in industrialized countries?

d. Can you think of any alternative strategy that the U.S. exporter could have used to protect itself better when

dealing with a Russian importer?