TIẾNG ANH KINH TẾ Financing international trade slides

 Open account Documentary letter of credit  Bills for collection  Advance payment 10... Documentary Letter of credit• A document issued by a bank, whereby the bank replaces the buy

UNIT 4 FINANCING INTERNATIONAL TRADE

What are some of the risks involved in

trading internationally?

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 Risk of receiving goods which are

different from those ordered or of lower quality or in a damaged condition

 Risk of force majeure (Eg: storms,

disasters etc.)

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What payment methods do you know

that are used when exporting or

importing goods?

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What is the role of the banks in

international trade?

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Suggested answer

 Active role: When the Banks get

involved in the payment process, supporting both the exporter and the importer to complete their obligations

so that the contract is carried out as agreed For example, in the

documentary credit method of payment

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Suggested answers

 Passive role: When the bank only do

things as requested For example, just transferring money to the account

of the seller/exporter

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 Open account

 Documentary letter of credit

 Bills for collection

 Advance payment

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Open account

 Is only used for transactions

between exporters and importers which have already established a trust-worthy and long-term business relation

 Saving time for both exporter and

importer as they deal directly with each other – not much involvement

of banks

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Documentary Letter of credit

• A document issued by a bank, whereby the bank

replaces the buyer as the paying party The exporter

is basing his risk of getting paid on the bank rather than on the importer The bank will have to be

reimbursed by the importer

Some of the Documents Called for under a LC

• Financial Documents: Bill of Exchange, Co-accepted

Draft

• Commercial Documents: Invoice, Packing list

• Shipping Documents: Transport Document, Insurance

Certificate, Commercial, Official or Legal Documents

• Official Documents: License, Embassy legalization,

Origin Certificate, Inspection Cert , Phyto-sanitary

Certificate

• Transport Documents: Bill of Lading (ocean or

multi-modal or Charter party), Airway bill, Lorry/truck

receipt, railway receipt

• Insurance documents: Insurance policy, or Certificate

but not a cover note

Irrevocable LC

• A letter of credit that cannot be canceled nor

amended without agreement of all parties

Revocable LC

• A letter of credit that may be canceled at any moment

without prior notice to the beneficiary

Sight & Time Letter of Credit

• If payment is to be made at the time of presenting

the document then it is referred as the Sight Letter

of Credit In this case banks are allowed to take the necessary time required to check the documents

If payment is to be made after the lapse of  a

particular time period as stated in the draft then it is referred as  the Term Letter of Credit

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Deferred payment LC

• A letter of credit under which the documents are

forwarded to the importer’s bank, while sight draft is presented at a latter future date

Red clause LC

• A letter of credit permitting the beneficiary to receive a

sum prior to shipment

Transferable LC

• A letter of credit that can be utilized by someone

designated by the original beneficiary

Revolving LC

• A letter of credit calling for renewed credit to be made

available when the issuing bank informs the

beneficiary that the buyer has reimbursed the issuing bank for the drafts already drawn

Back to back LC

• Two letter of credit with identical documentary

requirements, except for the difference in the price as shown by the invoice and draft

Traveler LC

• A letter of credit issued by a bank, addressed to all its

correspondents, permitting the bearer to draw drafts

up to the total amount named in the letter

Standby LC

• A letter of credit that can be drawn against, but only if

another business transaction is not performed

Bid or performance bond

• A financial guarantee, given by a contracting

company, which states that it has the capability to start and satisfactorily complete the project

Advised LC

• A letter of credit issued by a bank and forwarded to

the beneficiary by a second bank in his area The second bank validates the signatures and attests to the legitimacy of the first bank

Confirmed LC

• 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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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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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

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