Payments schedule (when?)
Payment mode or method of payment (how?)
Place of payment (where?)
Currency of payment (which?)
Payments Forms
Advance payments (cash in advance)
Open account credit
Cash Against Documents (CAD)
Documents for collection, Cash on Delivery (COD)
Letter of Credit or Documentary Credit (L/C)
General Principles of Payment
If cash was paid in advance by buyer, seller will give buyer
the documents, courier them to the buyer or airmail them (Captain Mail them).
COD – the carrier delivers the good against cash (collect).
But in all other forms of payment:
The carrier of the goods is hired by either the seller or the buyer to carry the
goods, in accordance with instructions, to a destination.
The seller sends the goods to a bank in geographical proximity to the final
destination of the goods.
The transport documents (bill of lading, waybill, receipt) are sent to that
CONSIGNEE bank.
The consignee bank – having received the transport documents, the commercial
invoice, the certificate of origin, the insurance policy and other documents,
invites the buyer to buy (to redeem) these documents (with which he can get the
goods).
The buyer pays the bank and the bank endorses the bill of lading and instructs
the carrier (if the BL is non-negotiable) to give the goods to the buyer.
The buyer pays the carrier, presents the endorsed bill of lading and gets a
delivery order with which the buyers releases the goods, having paid customs,
duties, taxes and port expenses. He receives a gate pass which allows him to
load the goods to his lorries and transport them to his yards.
Open Account
Either with big, reliable clients, or with agents,
distributors, subsidiaries which maintain a consignment warehouse or a forward
warehouse.
Use Exchange Note – A financial instrument in which the seller instructs
the buyer to pay his bank for the goods. The buyer signs the note. Buyer’s
signature confirms receipt of the goods in good order and the buyer’s debt.
Exchange notes are transferable, negotiable, endoreseable and assignable.
It is a stand-alone document which does not refer to the underlying transaction.
It is recommended to date the exchange note (on its back) and thus transform it
into a Time Note.
Cash On Delivery (COD)
Payment with delivery of goods.
Exporters which maintain warehouses in destination countries – use COD.
Payment can be in cash, deposit receipt, bank guarantee, bankers’ acceptance.
Be careful to receive payment only by your authorized representative.
Cash Against Documents
Contract
Carriage of goods to port of discharge
Documents (commercial invoice, bill of lading, insurance
policy, certificate of origin) transferred by to seller’s bank for
collection
Seller’s bank (usually through carrier) transfers
documents to buyer’s bank
Buyer’s bank (the consignee) invites buyer to receive
endorsed (ownership transferred to buyer) documents
Buyer deposits payment (or arranges credit line) for the
goods in his bank
Goods delivered to buyer (using the endorsed documents)
Buyer’s bank transfers the payment to seller’s bank
Seller’s bank credits seller’s account with the payment
minus fees and charges and commissions
If bank endorses documents to buyer prior to receipt of
payment – the bank assumes the buyer’s obligation to pay. CAD not to be used with branded or customized goods (buyer might refuse
the goods and if they are branded or customized – they cannot be sold to another
buyer).
Banker’s or Bank’s Acceptance (Accept)
Exporter can ask buyer to provide a bank draft. An acceptance
stamp and signature on the draft (“Accept”) transforms it into an obligation of
the bank itself to pay, on a given date to bearer.
Both Exchange Notes and Bankers’ Acceptances are traded in special exchanges in
the world.
Letter of Credit and Documentary Credit
A letter in which a bank undertakes to pay the exporter if and when the exporter
meets certain terms and conditions enumerated within the L/C.
The bank’s commitment is usually irrevocable (the L/C should contain this word:
“irrevocable” – although it is irrevocable even by default).
If the exporter fulfils all the conditions of the L/C - the bank will pay,
regardless of the situation of the buyer. If the seller did not comply with the
conditions in the L/C, the bank will pay only if buyer expressly agrees to it.
IMPORTANT
The letter of credit is only as good as the issuing bank
Check: are the conditions of the L/C identical to the
conditions specified in the sale contract, the commercial invoice or the
order?
UCP-500
These are the uniform rules of international payments
determined by the ICC in Paris, France:
Importer signs sales contract which includes prices,
schedules of delivery and payment, types of packing, modes of carriage,
volume, documents to be exchanged and more. Importer gets pro-forma invoice
from exporter
Based on the pro-forma invoice, Importer asks his bank to
open letter of credit in favor of Exporter. Importer instructs the opening
bank which details to add to the L/C which are not included in the Sales
Contract or in the pro-forma invoice. Such details may include: permission
or prohibition of transit, transshipment, division of the L/C, part
shipment, the number of copies of the documents, certificates of origin, the
coverage amount of the insurance policy, should the policy be endorsed and
so on.
The bank uses its letter of credit form and incorporate
all the terms and conditions of the sales contract in the letter of credit
The Importer’s bank send the details of the L/C to the
Exporter’s bank (the Correspondent Bank)
The Correspondent Bank informs the Exporter that an L/C
was opened in the Exporter’s favor and conveys to the Exporter the details
of the L/C
Exporter compares the conditions of the L/C to the
conditions of the sales contract and especially whether the Importer’s Bank
has irrevocably agreed to accept the Correspondent Bank’s signature
regarding the receipt of the documents
Exporter consults his bank and others whether the
Importer’s bank is a prime, world bank of good standing
Exporter makes sure the L/C is valid and corresponds to
the timetables agreed with the Importer regarding both the delivery of the
goods and payments. Another question: can the documents be negotiated or
transferred within the term of the L/C? Can the Exporter accept all the
restrictions and limitations of the L/C? Are there any impossible conditions
(for instance, in contravention of the foreign exchange regime) or wrong
details (name of a port which does not exist, etc.)
If the L/C is accepted by the Exporter, he starts
production and manufacturing operations. When the goods are ready, Exporter
contacts a carrier. After the goods are loaded, Exporter gets a bill of
lading, a certificate of origin EUR1 or FORM A signed by the Customs, an
export list and other documents
Exporter presents documents to his bank which checks
whether all required documents have been presented and whether they comply
with the conditions of the L/C. The correspondent bank then issues an
ACCEPTANCE. The L/C then becomes a bank guarantee
If the correspondent bank is also the confirming bank, it
also pays the Exporter
The correspondent bank transfers the documents and the
acceptance to the opening bank
The opening bank checks the documents. But if the
correspondent bank is also the confirming bank – even if the documents are
wrong or faulty – the opening bank must pay
The opening bank transfers the payment to the
correspondent and confirming bank
The opening bank informs the Importer that the documents
arrived. Importer deposits payment with the opening bank (or opens a credit
line with it)
Importer gets from the opening bank the documents
endorsed
Importer clears the goods and takes delivery of them
through the carrier (he gets a delivery order from the carrier,
having settled all outstanding accounts with carrier)
Settlement by Acceptance
Seller transfers documents to correspondent bank with a
note made out to the bank (the bank is the note’s beneficiary)
Correspondent bank confirms acceptance of dated note to
the seller
Opening bank gets the document
Opening bank credits correspondent bank
Settlement by Negotiation
Seller transfers documents to correspondent bank with a
note made out to the buyer (the buyer is the beneficiary of the note)
The correspondent bank pays seller against documents and
note
Correspondent bank transfers documents and note to
opening bank
Opening bank credits correspondent bank
Letters of Credit - Form, Structure and Details
Number and ID (this number must be placed on all
subsequent documentation pertaining to the same transaction
Names and details of buyer, seller, opening bank (buyer’s
bank), correspondent bank
Description of goods – usually the proforma invoice is
attached and this sentence is then added: “In accordance with proforma
invoice number … dated … herewith attached to this letter of credit and
which constitutes an integral and inseparable part thereof”.
Total cost or price
A list of documents (with the presentation of which by
the seller payment to the seller will be effected):
Commercial invoice, including a list of the goods,
details of buyer and seller and signatures
Packing list signed by seller
Insurance policy including its type, the coverage it
affords, amount covered. The policy’s beneficiary must be the opening
(importer’s) bank and it must be fully endorseable
Detailed billways, receipts or bill of lading: who is
entitled to receive delivery of the goods, who pays for the carriage, is
carriage prepaid and where, etc.
Other documents
Dates – when was the L/C opened, how long is it valid,
date of loading and date of presentation of documents at the bank (maximum
21 days after loading of goods, if not otherwise specified)
Special instructions: is transit or transshipment allowed
(best to write “transshipment allowed”), is part shipment allowed (best to
write “part shipment or partial shipment allowed”)
If carriage or delivery not according to L/C – L/C will
NOT BE PAID!!!
Types and Specifications of Documentary Credits
Confirmed versus Unconfirmed
Opening bank uses a bank in the Exporter’s country (usually
the correspondent bank) to interface with the exporter.
The corresponding bank informs exporter about opening of L/C and checks and
verifies the exporter’s documentation after goods have been loaded (such
verification subject to opening bank’s consent).
Sometimes the correspondent bank verifies the documents AND pays for them – this
is known as CONFIRMATION. With a confirmed L/C, the correspondent bank
must pay the exporter upon verification of the documents. The exporter pays a
confirmation fee.
Transferable and Divisible
An L/C that can be transferred to or be paid in parts to
sub-contractors and suppliers of the Exporter. Only one transfer is allowed:
1) The name and details (address, etc.) of first beneficiary can be changed to
name and details of second beneficiary
2) The amount of transferred credit must be smaller than original amount of
credit
3) The period of validity of the L/C or its parts can be altered
4) The percentage of insurance can be increased
5) The details of the new L/Cs issued on basis of original L/C can be different
to details of original L/C – as long as new L/C are less (in amount) or shorter
(in period) or partial and do not expand the original L/C or otherwise enhance
it
Revolving
For a series of identical transactions with known delivery
and payment schedules.
If irrevocable, cannot be revoked even if revolving and even if the buyer went
bankrupt. The bank is responsible to pay.
Counter Credit (Back to Back)
The L/C is pledged by the Exporter to his bank (the
corresponding bank) or (more often) to another bank against receipt of credit
from the bank. This credit is then used to pay suppliers.
The exporter’s obligation to pay the back to back credit it received from its
bank – is NOT dependent upon the payment of the L/C used as a collateral.
