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Terms of Payment - Coggle Diagram
Terms of Payment
Documentary Credit
Definition
Guarantee by bank to effect payment to exporter.
Parties Involved
Applicant (Importer)
Issuing Bank (Importer's Bank)
Advising Bank (Exporter's Country)
Beneficiary (Exporter)
Confirming Bank (Usually same as Advising Bank)
UCP 600
Article 5
Article 6
Article 9
Article 14
Article 18
Article 34
Types of Documentary Credit
Irrevocable Credit
Confirmed Credit
Variations of Documentary Credit
Red Clause Credit
Revolving Credit
Transferable Credit
Back-to-Back Credit
Payment Methods
Sight Payment (Sight B/E)
Acceptance (Term B/E)
Negotiation (Sight/Term B/E)
To Exporter
Advantages
Better protection
Quick payment
Flexible
Disadvantages
Not as safe as advance payment
Discrepancies in documentation may cause delays in payment
Exposed to importer's country risk if payment is guaranteed only by issuing bank
To Importer
Advantages
Request required documents to ensure performance by exporter
Request latest shipment date and date for presentation of shipping documents
Obtain financing via term documentary credit
Partial shipments arrangement for goods to be spread over a certain period
Disadvantages
More expensive than documentary collections
Goods may be of sub-standard
Credit is irrevocable
Collection
Definition
Using banks as middlemen to collect payment for exporter.
Parties Involved
Principal (Exporter)
Remitting Bank (Exporter's Bank)
Collecting Bank (Agent Bank in Importer's Country)
Presenting Bank (Importer's Bank)
Drawee (Importer)
URC 522
Article 7
Article 9
Article 10
Article 24
Article 25
Types of Collection
Clean Collection (D/A or D/P)
Documentary Collection (D/A or D/P) (Exporter Preferred)
Difference
Exporter will send B/L to importer in clean collection, while exporter send B/L with other documents to remitting bank in documentary collection.
To Exporter
Advantages
Control over title of goods in documentary collection (D/P)
Collecting bank pursue payment on behalf of exporter
Term B/E: Exporter can obtain bank financing using bill discounting
Cheaper than documentary credit
Disadvantages
Clean Collection: Risk of non-payment or non-acceptance
Documentary Collection: Risk of non-payment or delay in payment
To Importer
Advantages
Gets goods first before payment. Finance raised using goods as security
Term B/E: Enjoys trade credit
Convenient and cheaper than documentary credit
Exporter bear collection charges
Disadvantages
No control over quality of goods
Open Account
Definition
Buyer pays at a pre-determined date after receiving goods and documents.
To Exporter
Advantages
Flexible
Less documentation
Disadvantages
Lose control and title of goods
Risk of non-payment
Exposed to economic/political risk of importer's country
Difficult to control cash flow
Payment received via foreign cheque
To Importer
Advantages
Gets goods before payment
Control over timing of payment
Less documentation
Less commission and handling costs
Disadvantages
No control over timing in receiving goods
Discrepancies
Common Discrepancies
Late shipment
L/C expired
Drawing exceeds amt of credit
Wrong description of goods
Stale B/L (21 days from shipment date)
Missing documents
Alternatives for Negotiating Bank
Documents may be rectified
Documents may not be rectified:
Payment under Reserve
Cable Issuing Bank for Authority to Pay
Send Documents on Collection Basis
Alternatives for Issuing Bank
May take up documents for Payment under Reserve or Cable Issuing Bank for Authority to Pay
Advance Payment
Definition
Buyer pay before goods
and documents are dispatched.
To Exporter
Advantages
No risk of non-payment
Less commission and handling costs
To Importer
Advantages
Importer usually gets a discount
Disadvantages
High risk