Financing

&
Methods of
Payment

Introduction
Export Financing
Definition:
Loans made for the shipping of products
outside a country or region.
To enables businesses to bring their products
all over the world.

Export Financing Methods/

Termsofof
Payment
7 methods
receiving
payment for products
sold abroad:
Consignment
Open Account
Documentary Collections
Letter of credit/ Documentary Credit
Cash on Delivery
Cash with Order
Long-term Financing

Consignment
Demand for payment is usually made by
means of a clean draft( no documents
attached).
Payment typically occurs after the products
have been resold by the buyer.

Open Account
A term of payment in which no banks are
involved, only an agreement between seller and
buyer that payment will be made within an
agreed period of time.
Banks become involved through wire transfers,
but no negotiations.
Some procedure and methods as in domestic
trade.
Normally be willing to use this method only when
he/ she has confidence in the creditworthiness of
the buyer.

Documentary Collections
A collection, which is accompanied by
commercial documents.
Means that the bank handles documents
according to the instructions received.
This payment method is most often used in
international trade in the exchange of
merchandise for money.
With this method, the goods are shipped to
the foreign country, but the documents are
sent to the buyers bank.

Cont..
DOCUMENTS AGAINST ACCEPTANCE
When shipping documents are delivered to
the buyer by the collecting bank after the
buyer has accepted the draft for payment at
a certain maturity date.

DOCUMENTS AGAINST PAYMENT

When documents are delivered to the buyer
upon payment of a draft.

Letter of credit/ Documentary Credit

International trade procedure in which the
credit worthiness of an importer is substituted
by the guaranty of a bank for a specific
transaction.
Under documentary credit arrangement also
called letter of credit arrangement, a bank
(usually in the importers country) undertakes
to pay for a shipment, provided the exporter
submits the required documents (such as a
clean bill of lading, certificate of insurance,
certificate of origin) within a specified period.

Cash on Delivery
A transaction in which goods are paid for in
full cash or by certified check immediately
when they are received by the buyer.

Cash with Order

Cash or part cash with order
Cash in Advance/Prepayment occurs when a
buyer sends payment in the agreed currency
and through agreed method to a seller
before the product is manufactured and or
shipped.

Long-term Financing
Is a major project, large capital equipment
sales and special exports such as
agricultural commodities moving under
government programs may require longtern financing.
Allow the procedures to receive funds in the
near future while allowing the purchaser to
spread payments over several years.

Payment / Financing
Procedures
There are 2 general categories :

Letter of credit
Drafts or bills of exchange

Letter of Credit
Use of letters for financing export shipments
popular with exports.
Arranging payment affords a high degree of
protection against the risk inevitably arising
in export business.
A letter of credit is only as good as the bank
that issues it and it confirmed the bank that
confirms it.
Except in their general form and phraseology,
letter o f credit very greatly.

Type of Letters of Credit

(a) Revocable and Irrevocable
Ability of the establishing to revoke before
expired day.
Revocable - changed or cancelled at any
time without notice to the beneficiary
Example : issuing banks client.
Irrevocable cannot be unilaterally cancelled
or amended by the importer.

b) Confirmed and Unconfirmed

The bank in the exporters country

announces its confirmation.

Words to the following effect are to be found

in the letter of credit.

If the credit does not require that drafts be

drawn, the wording

Will be adjusted but still must state that the

bank has added its

Confirmation to the credit.

(c) Clean and Documentary

Beneficiary clean draft or receipt for

funds.

Notifying

bank

against

drafts delivery of full set.

documentary

(d) Transferable and

Nontransferable
Transfer of all or part of the letter credit.
Nontransferable may not be transferred by
the beneficiary.
3 main reasons why an exporter may
request a transferable letter credit :
(i) Beneficiary/exporter may actually be a
middlemen
(ii) Providing only a part know who the actual
supplier.
(iii) Buyers/importers agent.

(e) Assignment of Proceeds

The proceeds due to him or her to another

party.

The legal procedure similar to the

assignment of rights under any contract.

(f) Revolving letters of credit

Devised to meet the needs business

transactions are more or less regular and
continuous.

(i) Credit indicating the maximum amount to

negotiate fresh bills.
(ii) Credit providing for a specified maximum
payment.

Noncumulative revolving credit, cumulative,

credit unused shipment.

(g) Deferred payment credit

Exporter will paid at specified dates after
shipment.
Single shipment will paid by number of payment.
Substantial difference between a usance credit
by negotiation and one
By acceptance or deferred credit.
Recent court cases have indicated only
obligation of the book to honor
Pay at maturity and not before.

(h) Standby letter of credit

Used to finance the movement of goods.

Specifically, a standby letter of credit is an
obligation to the beneficiary the issuing
bank of the following.
(i) To repay money borrowed by or advanced
to the account party
(ii) To make payment on the account of any
evidence of indebtedness undertaken by
the account party.
(iii) To make payment on account of any
default by the account party in the
performance of a contractual obligation.

8.2.2 Drafts
An unconditional order in writing prepared by
one (drawer) and addressed to another
(drawee)
The draft is drawn by the beneficiary under
the term of authorization in the letter of credit
and in strait conformance with the condition
stated.
The draft have to include as the name of the
issuing bank.
Draft (in some countries) is said to be drawn
to the account of the bank or buyer.

(I) Acceptance
Acceptance frequently used connection
with a draft, or bill of exchange.
The exporter can grant credit to the importer
with out losing the protection of a letter of
credit.
More easily negotiated or discounted if
countersigned by the bank.

(II) Delivering Document

The most important element beside the
amount to be collected is the statement of
document are to be delivered against the
acceptance of the draft (D/A) or against
payment at the draft (D/P).
When a draft is drawn d/p, the drawee may
secure the document of title only when the
amount shown on the face of the draft.

Types of Draft
(a)Clean or Documentary Draft
Accompanied by the relevant document
needed to complete the export transaction.
Clean draft is one no document attached
and is usually handed to a bank for
collection in a foreign country.
Open account, the sale of stoke and bonds
payment for services.

(b) Sight or Usance

Drawn to be payable either at sight or at

some specified future time.

Name implies, sight draft supposed to paid

first seen by the drawee.

Some countries is customary drawee to

delay payment of sight draft until the
merchandise.

(c) Time or Date Draft (Usance

Draft)

Time or date draft are used where the

seller/exporter is wiling to extend credit to
the buyer/importer.

Great advantage to the drawee of a date

draft is date on which the draft should be
paid is known.

(d) With or Without Recourse

With recourse means parches by a banker
other financial institution of draft.
The purchases draft or bills of exchange
assumes full responsibility for payment,
discharges his obligation as guarantor and
consignees.
With recourse means exact opposite.
Consignee fails for any original drawer of
the draft.

8.3 Countertrade
Definition
Countertrade is exchange goods or
services that are paid for, in whole or part,
with other goods or services.
Each party is both buyer and seller at the
same time.
Appeals to buyers in countries that short of
foreign hard currencies.

Types of Countertrade
8.3.1 Pure Barter
8.3.2 Clearing arrangements
8.3.4 Counter purchase
8.3.5 Switch trading
8.3.6 Buy-back
8.3.7 Offsets

8.3.1 Pure Barter

Simple direct exchange without money
For example:
Product A
Company A

Product B

Company B

Online barter is now operating in the U.S.

and can be expected to develop
internationally.

8.3.2 Clearing Arrangements

2 countries agree to exchange a number of
products, some not easily sold on open
market, for a specified period.
Both parties agree on the quantities and
values to be exchanged and final
settlement date for surpluses must be
cleared up.
Transactions between governments
clearing accounts
Transactions between organizations
evidence accounts

8.3.3 Counter Purchase

Sale of goods and services to a country by a

company that promises to make a future
purchase of a specific product from the
country. For example:
Volkswagen
Sell of goods and services
promises to
purchase
specific product
from country B
in the future
Country A
Country B

East Germany

The products purchased are not related to

the original exporters product line.

8.3.4 Switch Trading

One party agree in a barter or counter
purchase arrangement has goods that the
other does not want.
This kind of goods will sold for the exporter
to some third party by a specialist called a
switch trader.
Company
A

Engine

Company
B

Coffee
Switch
Specialist

Sells to
others

8.3.5 Buy Back

Also called compensation agreement.
A company agrees to supply technical knowledge to build a
plant, or builds the plant or licenses the use of trademark,
in exchange for the production output. For example:
technology, equipment, training,
or other services.

agrees to give a certain percentage of the plant's

output as partial payment for the contract.

Country
A

Plant

output

8.3.6 Offsets
Seller assist in or arrange for the marketing of
products produced by the buyer.
Similar to counter purchase, but different because
offset involved the industry and parties.
Seller will provides benefit to buyer because sellers
purchase of components from the buyer to be used
in producing the sellers products which want sold to
buyer. For example:
Company
A

sell products and assist Company B marketing the products

sell components to be used in producing sellers products

Company
B