Methods of international trade payments

This focuses the principal methods of international trade payment methods with details, To settle international trades different methods are applied by the banks which are describe with clarity in few slides so that one can know the process spending a little but in detail.

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Methods of International Trade Payments
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2. WHAT IS INTERNATIONAL TRADE?
International Traderefers to trade between the residents of two different
countries. It includes both exports and imports. Import means
procurement of goods or services into Bangladesh from abroad. On the
other hand, export means sale of goods or services to other countries.
WHY ?
- Every country lacks some vital resources.
- Acountryisrelativelyefficientproducerinsomegoodsandinefficient
producerinsomeothergoods.
-
- Trade leads to specialization.
WHETHER TO EXPORT OR IMPORT
-If W
MP> D
MPcountry will export
-If W
MP< D
MPcountry will import.

3. Domestictradehasthefollowingcharacteristicsthatapplytobothparties:
acommonlanguageandculture;
thesamelaws;
absenceofcustomformalities;
usuallyrelativelysimpledocumentation;
asinglecurrency;
relativelysimpleformalitiesfortransportationofgoods.
Ontheotherhand,forInternationalTrade–
-DifferentcountrieshavedifferentLanguageandCulture,Currency,Monetary
Policy,LegalPractices.
-RestrictionsimposedbycountriesonImportandExportofgoodsandalsoon
Paymentfromandintotheircountries
-Customsformalitiesmustbecompletedbefore(export)andafter(import)of
shipment
-CostofTransportandMarketingEfforts,DutyandTaxesincreasethecostof
goods
Exportersandimportersarerequiredtoknowglobalmarketenvironment,
InternationalandBangladeshRules,ShippingProcedure,CustomFormalitiesetc.
DOMESTIC VS. INTERNATIONAL TRADE

4. Risks in International Trade
Wheneveraninternationalsalescontractisenteredinto,sellersandbuyersin
differentcountriesfaceanumberofrisksthattheydonotfaceindomestic
sales.
CountryRisk:
Countryriskcomprisespolitical,socialandeconomiccomponentsand
includes:Exchangecontrolregulationsinbuyer’s&seller’scountryand
sometimeslackofforeigncurrency.Countryriskalsoincludesunfavourable
changeingovernmentpolicies,lawsorintroductionoftradeembargoes.
BuyerRiskofpayment:
Buyer’sabilitytopaythesellerforreasonsthatarenotcountryrisk.
Examplebuyergoesbankruptorunwillingtopay.
SellerRiskofsupply:
Seller’sabilitytosupplytherightqualityand/orquantityofgoodsatthe
righttimeandplaceforreasonsotherthancountryrisk.Exampleamajor
machinefailurewillaffectseller’sproductionorevensupplyapoorquality
product.
RiskofHonouring–Bankers:
Bankersabilitytohonourtheirownundertakingsforreasonsotherthan
countryrisk.Forexampleifabankissuedabankguaranteeorendorseda
billofexchange,butcouldnothonouritondemand.
Performanceriskofthirdparties:inspectioncompanies,shipping
companies,clearing&forwardingagentsorcustomsdepartments.
IncompleteDocuments,InadequateInsurance,DistanceandDelay,
ExchangeRateFluctuations,DifferentLegalSystems.

5. ROLE OF BANKS IN INTERNATIOANL TRADE
• Cross Country Transactions
• Cross Currency Transaction
• Foreign Exchange
• Trade Payment
Methods of International Trade Payment:
• Cash in Advance• Open Account• Documentary
Collection[DP(Documents Against Payment) or CAD(Cash
Against Documents)& DA(Documents against Acceptance)]
•Consignment Sale• Documentary Credit
• Trade Finance
• Import Financing • Export Financing
• Flows of Funds
• Recording of Fund Flows

6. Regulations Governing Foreign Exchange Transactions
ICC Publications:
UCPDC-600 : Uniform Customs and Practice for Documentary Credits
URC-522 : Uniform Rules for Collections
URR-725: Uniform Rules for Bank-to-Bank Reimbursements
ISBP-745: International Standard Banking Practice
Incoterms –2020 :International Commercial Terms
URDG-758: Uniform Rules for Demand Guarantees
ISP-98 : International Standby Practices
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7. Exporter Importer
(2) Shipment
(3) Documents
(1)
Payment
Guiding
Framework :
Sales/Purchas
e Contract
Who is at
Risk?
Cash In Advance

8. 8
Cash in Advance
TheBuyerplacesthefundsatthedisposaloftheSellerpriortoshipmentoftheGoodsor
Services.Keyfeaturesofthepaymentareasunder:
#Buyer pays before shipment # Used in new relationship
#Transactions are small and buyer has no choice
#Maximum security to sellers #No guarantee that goods are shipped
Thismethodisusuallyused-
#WhenBuyer’sintegrityisdoubtful.
#WhenunstablepoliticaloreconomicenvironmentexistsinBuyer’scountry.
#WhenthereisapotentialreasontobelievethattheBuyerforsomeobviousreasonsmay
delayinmakingpayment.
Advantage to Buyer
None
Advantage to seller
Goods shipped when convenient
Use buyer’s funds
Risk to Buyer
No control over the goods
Use of the funds is lost
Seller may refuse to ship.
Risk to seller
None

9. Open Account
Exporter Importer
(3)
Payment
(1) Shipment
(2)
Documents
Guiding
Framewo
rk:
Sales/
Purchase
Contract
Who
is at
Risk?

10. 10
AnarrangementbetweentheBuyerandSellerwherebyGoodsaremanufacturedanddelivered
beforepaymentisrequired.Goodsareshippedtothebuyerandpaymentismadethrough
anarrangementnegotiatedinadvancewiththeseller.
InOpenAccountmethodpaymentismadeatsomestatedspecificfuturedateagainstwhich
buyerneedsnottoissueanynegotiableinstrumentinsupportofhislegalcommitment.
TheSellerdeliversthegoodsbasedontrustuponBuyerthattheBuyerwillpaythe
considerationvalueonagreed.
AdvantagetotheBuyer:(NoRiskofBuyer)
Buyerpaysforgoodsorservicesonlyafterreceivedofgoodsorservices(Controlover
thegoods)
BuyergetsscopetoplaceconditionincaseofPayment(Paywhenconvenient)
Disadvantage to the Seller (Risk to seller):
Sellerreleasethetitletothegoodswithouthavingassuranceforpayment(Nocontrolover
thegoodsorpayment).Buyermayrefusetopay
AnypoliticaleventsofBuyer’scountrymayimposeregulationwhichcandeferorblock
movementoffundtoSeller.
Hisowncapitalremainstiedupuntilthegoodsarereceived/inspectedbytheBuyeroruntil
theservicesarefoundtobeacceptableandpaymentismade.

11. Documentary Collection
Importer
Collecting
Bank
Presenting
Bank
Remitting
Bank
Exporter
Guiding
Framework:
Sales/Purchase
Contract & URC
Who
is at
Risk?

12. The goods are shipped to the buyer. The seller’s draft and documents
covering the shipment are presented through the buyer’s bank for
payment.
Advantage to Buyer
May refuse to pay or accept the draft
Advantage to Seller
Title documents controlled through the banking system
Risk to Buyer
Goods may not be as represented in the documentation
Risk to seller
Buyer may refuse to pay or accept the draft.
DocumentaryCollection:
AnarrangementwherebythegoodsaresuppliedandrelevantBillofExchange
(Draft)isdrawnbythesellerontheBuyerand/ordocumentsissenttothe
Seller’sBankwithclearinstructionforcollectionthroughoneofits
correspondentBanklocatedintheBuyer’sCountry.
CleanCollection:
AnarrangementwherebytheSellerdrawsonlyadraft(BE)ontheBuyerforthe
valueofgoods/servicesandpresenttheDrafttohisBankforcollection
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14. 14
DocumentaryCreditcanbedefinedasacreditcontractwherebythe
buyer’sbankiscommitted(onbehalfofthebuyer)toplacean
agreedamountofmoneyattheseller’sdisposalundersome
agreedconditions.
Sincetheagreedconditionsincludes;amongsttheotherthings,the
presentationofsomespecifieddocuments,theLetterofCreditis
thencalledDocumentaryLetterofCredit
Creditmeansanarrangement,howevernamedordescribed,that
isirrevocableandtherebyconstitutesadefiniteundertakingofthe
issuingbanktohonoracomplyingpresentation.
Documentarycreditisandefiniteundertakingissuedbyabank
(issuingbank)topaythebeneficiarythevalueofdraft/documents
providedthatthetermsanconditionsofthecreditarecomplied
withandthedocumentsrequiredbythecreditarepresented
withinthespecifiedtimeframe.

15. Payment Risk
Letterofcredit,inabroadperspective,isoneofthepaymentmethods
ininternationaltrade.Someoftheotherpaymentmethodsin
internationaltradeareCash-in-Advance,OpenAccountand
Documentary Collections.Allofthesepaymentmethodsinherit
differentrisklevelsforexportersandimporters.
Lettersofcreditistheonlypaymentmethod,whichhasabalanced
riskstructureforbothparties.
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16. Guiding Framework for Methods of Payment
Cash In Advance
Open Account
Documentary Collection
Documentary Credit
Sales/Purchase
Contract
Sales/Purchase
Contract
Sales/Purchas
e Contract +
URC
UCPDC

17. Sales and Purchase Contract
What is Sales Contract?
Itisanagreementbetweenbuyerandsellerwhere
thesellerwillsellandthebuyerwillpurchasein
accordancewiththeterms,conditionsand
specificationsandthequalitydescribedinthis
contract.
TheContracttobuyandsellgoodsisthestarting
pointofinternationaltrade.Aninternationalsales/
purchasescontractcomesintobeingwhenone
partytheexporter-makesanofferandtheother
party-theimporter-acceptsit.

18. Vienna Convention
TheUnitedNationsConventiononContractsfor
theInternationalSaleofGoods(CISG),sometimes
knownastheViennaConventionisamultilateral
treaty.
Atreatygoverninginternationalcommercethat
definestherightsofimportersandexporters.The
treatyincludesanumberofagreementsthat
exportersandimportersmayadopttosettherules
for transactions.

19. Clauses for a Standard
Contract
Which Conditions to Apply
Definition of the terms
Conclusion of the contract.
Assignment.
Trade-terms.
Quality and Quantity.
Pre-shipment inspection.
Price and Payment

20. Clauses for a Standard Contract
Third Party Claim
Delivery and Liquidated Damages
Warranty.
Force Majeure
Transfer of risk
Shipping documents.
Dispute settlement
ICC Model Int’l Sales Contract should have:
A. Specific Conditions
B. General Conditions

21. Specific Conditions By ICC Model Contract
A-3
Delivery
Terms
A-1
Goods
Sold
A-2
Contract
Price
A-4
Time Of
Delivery
A-5
Inspection of
Goods By
Buyer
A-6
Retention
of Title
A-7
Payment
Conditions
A-8
Documents
A-9
Cancellation
Date
A-10
Liability
of Delay
A-11
Liability
for Lack of
Conformity
A-12 Liability
where Non-
Conforming Goods
Retained by Buyer
A-13
Time
Bar
A-14
Applicable Law
A-15 Resolution
of Disputes

22. General Condition
Inspection of goods before shipment
Payment in advance
Non-conformity of goods
ManufacturedGoods:Themodelcontractdoesnot
coverforthesaleofcommoditieslikeagricultural
produceorfoodandperishablegoods.
IntendedforResale:Themodelcontractdoesnot
coversalestoconsumers,butonlytopurchasers
whoareinthebusinessofre-sellinggoodslike
importer,distributors,wholesalersetc.
DoyouthinkPro-formaInvoiceorPurchase
Contractcanprotectbuyer/supplierofBangladesh
whileimporting/exporting?