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What are roles of banks in the four common payment methods?
Passive Role: transfer docs and funds- DC, open account, advance payment
Active role: banks get involved in the payment process, supporting both Im and Ex - L/C - check the accuracy of docs and guarantee payment
What are the risks faced by exporters in the 4 common payment methods?
Open account: Non-payment. The exporters lose control of the Goods
L/C: few risks. Failure to present compliant docs to the bank will result in the Exporter losing the protection of the credit
Advance payment: No risks associated with nonpayment.. The Exporter receives payment in full before the goods are dispatched
Collection: Importer may fail to accept the B/E or dishonor the accepted B/E at maturity. The Exporter may have to ship the goods back home
What is the difference between documents against payment (D/P) and documents against acceptance (D/A)?
-D/P: the B can only receive the documents once he has paid the sight draft. The S retains title to and control over the Goods until he gets payments.
-D/A: The B can get the documents just by accepting payment on a future date. The B writes the word “ACCEPTED” on the draft and sign it.
How does a documentary collection differ from a letter of credit as a mean of financing international trade?
• Documentary Collection: The bank acts an intermediary. The Banks do not verify the documents, take risks, nor guarantee payment. The banks just control the flow of documents.
• L/C provides increased assurance to both Exporter and Importer so long as they fulfil their obligations. The bank not only verifies the document accuracy and authenticity, but also guarantees payment.
Why would an exporter ask for a confirmed letter of credit?
The risks of issuing bank are borne by the confirming bank. If the I bank gets out of biz, the confirming is obliged to pay the L/C
When do people use the 4 payment methods?
• Open account: 2 sides have long-established trading relation.
• Advance Payment: 2 sides are unfamiliar.
• L/C: the Importer's credit rating is questionable, The Exporter needs an L/C to obtain financing.
• Documentary Collection: there is ongoing business relation between the Parties, and the importer is situated in a politically and economically stable market.
