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Negotiating PAYMENT (tiep), confirmed LC, unconfirmed LC - Coggle Diagram
Negotiating PAYMENT (tiep)
What is the guarantee triangle
the principal makes a promise to pay money to the seller
then, the principal askes the guarantor to issue a guarantee
this is the relationship between the principal, the guarantor and the beneficiary in terms of guarantee
if the principal breaks the promises, the guarantor promises to pay money to the seller
What is Export credit insurance
which issues an export credit insurance policy covering risk of non-payment
the exporter has to pay the costs for that guarantee
it is a guarantee of payment for the exporter from a third party, an IC
the company has to pay the exporter in case of the buyer fails to do so
What is a bank guarantee
it is a guarantee of payment for the exporter from a third-party, a bank
the bank may issue a bank guarantee assuring the bank will pay the exporter in case the buyer fails to do so
the buyer has to pay the costs for that guarantee
Distinguish Export credit insurance and Bank Guarantee
similarities
both of them are third-party security
both covering the risk of non-payment
both are trade finance techniques
fee depends on (4 things)
differences
third-party involved
the insurance companies or govermental export credit agencies/ the bank
coverage
not 100% / normally 100%
fee paid by
the exporter / the importer
limitations of Export Credit Insurance?
unlikely to cover 100% of original invoice price
the importer engages in "bad faith" behavior
a long wait (6 months is typical)
some common guarantees in business
risk of revocation: Tender Guarantee
it protects the employer against the risk of a project falling behind as a tender is withdrawn
is usually for 1.5% - 5% of the contract price
risk of non-performance: Performance Guarantee
it pays the costs if the contractor fails to perform
is usually for 5%-10% of the contract price
risk of non-payment: Payment Guarantee
the bank commits to pay the exporter if the buyer defaults.
normally for 100% of the contract price
risk of losing prepayment: Prepayment Guarantee
the bank will return advance payments if the exporter fails to deliver
usually for 100% of the prepayments
what does it mean by “without demur or objection
the bank agrees to pay on first demand
whenever the exporter demands payment under the guarantee, the bank will pay
Conditional Guarantee
a guarantee from a bank but with serious, objective conditions that must be met by the bank is possible
What is a Letter of Credit
it is a binding agreement by the bank to pay a certain sum of money when the exporter presents necessary documents to the bank.
What method of payment makes late payment impossible
at-sight L/C
irrevocable L/C
confirmed L/C
two principles that make letters of credit safe for both exporter and buyer:
AUTONOMY means that L/C is a contract in its own right, entirely separate from the contract for the safe of the goods
STRICT COMPLIANCE means the exporter must present to the bank the shipping documents that comply with all respects with terms of the credit. Small deviations will result in refusal by the bank to pay
About the expiry date of a Letter of Credit, why does buyer wants an early date while exporter wants a later date?
the importer wants to save bank charges
the exporter wants enough time after delivery to present documents and to correct all discrepancies that might be discovered by the bank.
Distinguish Partial shipments and Shipment in installments
a partial shipment is simply an incomplete shipment with some part of the goods follow later
shipmen in installments means an agreed schedule has been set up
name of types L/C
standby
at-sight and the alternatives
confirmed and unconfirmed
back-to-back
Transferable/ Untransferable
revolving
Revocable / Irrevocable
red clause and green clause
confirmed LC
he knows for sure that he will get money as long as
he summits a set of documents
strictly complying with the terms and conditions stated in the LC
there is a promise from another bank, the confirming bank, usually the advising bank too
pay for the goods if the buyer fails to do so
it's kind of double guarantee for the exporter
unconfirmed LC
is less secure than confirmed one.
normally, the exporter has certain security for risk of non-payment when using LC as a method of payment in their sales of goods to the buyer
the issuing bank will pay the exporter for the goods in case of the buyer fails to do so.