Professional Documents
Culture Documents
U4 Financing International Trade
U4 Financing International Trade
FINANCING INTERNATIONAL
TRADE
What are some of the risks involved in trading
internationally?
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Suggested answer
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What payment methods do you know that are
used when exporting or importing goods?
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Suggested answer
Open account
Document credit
Bills for collection
Advance payment
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What is the role of the banks in international
trade?
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Suggested answer
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Suggested answers
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Open account
Documentary letter of credit
Bills for collection
Advance payment
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Open account
Open account means the exporter ships the goods to the buyer and
just waits till a fixed date as agreed in their contract for payment from
the buyer. Normally, the exporter only accepts open account method
of payment if he has known the buyer quite well and they have
established a long-term and trustworthy business relationship.
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Open account
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Open account
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Open account with security
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Documentary Letter of credit
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LETTER OF CREDIT
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LETTER OF CREDIT (cont.)
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LETTER OF CREDIT (cont.)
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Irrevocable LC
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Time Letter of Credit
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Deferred payment LC
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Red clause LC
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Traveler LC
• A letter of credit that can be drawn against, but only if another business
transaction is not performed
Bid or performance bond
• A letter of credit issued by one bank to which a second bank adds its
commitment to pay
Documentary credit
Being used worldwide
Safer for exporter as it makes sure he will get
his money for the goods sold provided that he
presents the correct documents
Ensure the importer that he will get the goods
bought as long as he pays for them or agreed
to pay in a fixed date in the future.
Greatly supportive involvement of banks in the
transaction process.
Taking more time than other methods of
payment
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Look at the 2 diagrams below to
explain how a letter of credit works
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1. The applicant (the buyer) completes a contract with the seller.
2. The buyer fills in a letter of credit application form and sends it to his
or her bank for approval.
3. The issuing bank (the buyer’s bank) approves the application and
sends the letter of credit details to the seller’s bank (the advising
bank).
4. The advising bank authenticates the letter of credit and sends the
beneficiary (the seller) the details. The seller examines the details of
the letter of credit to make sure that he or she can meet all the
conditions. If necessary, he or she contacts the buyer and asks for
amendments to be made.
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5. When the seller (beneficiary) is satisfied
with the conditions of the letter of credit,
he or she ships the goods.
6. The seller presents the documents to his
or her bankers (the advising bank). The
advising bank examines these documents
against the details of the letter of credit
and the International Chamber of
Commerce rules.
7. If the documents are in order, the
advising bank
sends them to the issuing bank for
payment or acceptance. If the details are
not correct, the advising bank tells the
seller and waits for corrected documents
or further instructions.
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8. The issuing bank (the buyer’s bank) examines the
documents from the advising bank. If they are in
order, the bank releases the documents to the buyer,
pays the money promised or agrees to pay it in the
future, and advises the buyer about the payment. (If
the details are not correct, the issuing bank contacts
the buyer for authorization to pay or accept the
documents.) The buyer collects the goods.
9. The issuing bank advises the advising (or confirming)
bank that the payment has been made.
10.The advising/confirming bank pays the seller and
notifies him or her that the payment has been made.
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Bills for collection
Clean collection: more risky as the importer
can use the documents of the title to receive
the goods only by agreeing to pay in a fixed
date in the future
Documentary collection: safer as the importer
has to pay in return of the documents of title
to receive the goods after all.
More passive roles of the banks. They only do
what is required.
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• Documents Against Payment D/P
• In this case documents are released to the importer only when the
payment has been done.
• Documents Against Acceptance D/A
• In this case documents are released to the importer only against
acceptance of a draft.
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The procedure for documentary collection
• 1.The first step the exporter takes is to ask his bank to ………….. a bill
of exchange on the overseas buyer.
• 2. The exporter’s bank ………………. the bill of exchange, together
with the commercial documents, to the importer’s bank.
• 3. At the same time, the exporter…………………. the goods.
• 4. The exporter must take care to ………………….the correct
documents to the bank.
• 5. When the importer……the bill of exchange, the bank
will………….the documents of title to the goods.
• 6. If the importer…………………..the bill, the exporter may have to find
an alternative buyer or ship the goods back again.
• 7. In some parts of the world, banks may be slow to ……………..
payment to the exporter’s bank.
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Advance payment
Safest for the exporter if the importer has to
fully pay for the good bought in advance
Still safe if the importer pays in part in
advance
Time saving
Being used if there is more demand than
supply for that kind of commodity.
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Conclusions about each method of
payment mentioned above.
Open account
Documentary letter of credit
Bills for collection
Advance payment
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Importer
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Exporter
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