Terms of payment pt1 (3. Collection
a term payment whereby a bank…
Terms of payment pt1
a term payment whereby a bank arranges on its customer's behalf, to present documents to an overseas buyer (via another bank) with a view to obtaining payment from the buyer in accordance with instructions given by exporter.
If advance payment cannot be negotiated, the exporter may get some security of payment by using the services of a third part
(a bank) in the importer's country to :
- collect payment and
- handover the documents of title (if it is documentary collection)
under this method, the exporter despatches the goods but instead of relying on the importer to pay under open account, he uses the banking system to help secure payment. there are 2 methods of payment in collection:
- D/P documents against payment
- D/A documents against acceptance
Parties to a collection
a. principal - exporter
b. remitting bank - Principla's (exporter's) bank which remits collection order with documents to its agent bank in the importer's country
c. collecting bank - the agent bank which receives the collection order and documents in the importer's country
d. Presenting bank - the bank which presents the documents to the importer and requests payment. it is usually the importer's bank. it may also be the agent bank above, in which case the collecting bank and presenting bank is the same party
e. drawee - buyer/importer or whom the bill of exchange is drawn
1. Open Account
- the seller allows the buyer (importer) to pay at a predetermined future date after the goods and documents have been received (by the buyer).
- the exporter loses all control of the goods at the time he despatches them. Therefore, the exporter must trust the importer totally before he will extend an open account term of payment.
- Terms such as ‘net cash on receipt of goods’ are sometimes used for an open
Advantages to Importers
1.Gets good before payment
Disadvantages to importers
- Enjoys control over the timing of payment
- Less documentation
- Less commission and handling costs
- No control over timing in receiving goods
Advantages to Exporter
Disadvantages to Exporter
- flexible method
- less documentation
- loses control and title of goods
- risk of non-payment by importer
- exporter exposed to economic/political risk of the importer's country
- difficult to control cash flow
- payment received in the form of foreign cheque will cause further delay
- Advance payment
- buyer will pay with order ie. before the goods and documents are despatched to him
- in contrast to open account, this method is to the advantage of the exporter. the buyer bears the risk and must trust the exporter to despatch goods to him
Why buyers users Advance payment:
a. seller's market
b. customary practice
c. single small transaction
d. related companies
Advantages To Importer:
Disadvantage to importer
- Importer usually gets a discount
- High risk - must trust exporter.
Advantages to Exporter:
- Exporter gets payment before goods are despatched.
- No risk of non-payment
- Importer extends credit to exporter
How to reduce importer's risk under advance paymenta. check on exporter’s reliability.b. Check on exporter’s financial standingc. Check on economic and political stability of exporter's countryd. Obtain a repayment guarantee from the seller.
- Less commission and handling costs.
all collections must be accompanied by collection order. banks are permitted to act with accordance with:
- it is a standard form of authority which enables the exporter to give specific instructions to his bank regarding a collection.
- the instructions given in a collection order and,
- the uniform rules for collections (URC522)
Information in a collection order
a. D/A or D/P
b. Protection of goods ->instructions on whether to warehouse and insure
goods when documents are still not taken up on arrival of goods.
c. Collection charges - instructions on whether bank charges have to be
collected in addition to face value of the bill of exchange.
d. Protest - instructions on whether to protest in the event of dishonour i.e.
non-payment or non-acceptance.
If a bill of exchange is protested, a lawyer will be appointed to undertake
formal procedures against the drawee.
e. Advice of dishonour - how exporter is to be advised
How to reduce exporter's risk under Open account
a. check on the creditworthiness and integrity of importer
b. check on the economic and political condition of the importer's country
c. insure against non-payment through Export Credit Insurance
f. instructions on whether payment/acceptance may await arrival of goods. If so, bank will not press the drawee for payment or acceptance
until goods have arrived.
g. case of need - an agent of the exporter who is resident in the importer's country. if a case of need is named the oversees bank will refer him for guidance or instruction in the event of dishonour