This presentation discusses methods of obtaining export and import finance such as Accounts Receivable Financing, Factoring (Cross-Border Factoring), Letters of Credit (L/C) Banker’s Acceptance (BA), Working Capital Financing, Medium-Term Capital Goods, Financing (Forfaiting) and Countertrade. It also discusses methods of payment of international trade; Cash in Advance, Letters of Credit, Documentary Collections and Open Account followed by a comparative study of different methods. Furthermore, types of letter of credit and procedure of working of a letter of credit are also discussed.

1. Mrs. Charu Rastogi, Asst. Prof.
METHODS OF PAYMENT IN
INTERNATIONAL TRADE/EXPORT AND
IMPORT FINANCE
International Business Management

2. WORLD BANK
 The World Bank is an international financial institution
that provides loans to developing countries for capital
programs
Mrs. Charu Rastogi, Asst. Prof.
 The World Bank's official goal is the reduction of poverty.
 According to the World Bank's Articles of Agreement (as
amended effective 16 February 1989), all of its decisions
must be guided by a commitment to promote foreign
investment, international trade, and facilitate capital
investment
 The World Bank comprises two institutions:
 The International Bank for Reconstruction and Development
(IBRD) lends to governments of middle-income and
creditworthy low-income countries.
 The International Development Association (IDA) provides
interest-free loans—called credits— and grants to
governments of the poorest countries.

3. EXPORT AND IMPORT FINANCE METHODS
 Accounts Receivable Financing
 An exporter that needs funds immediately may obtain a bank loan that is
secured by an assignment of the account receivable
 Factoring (Cross-Border Factoring)
Mrs. Charu Rastogi, Asst. Prof.
 The accounts receivable are sold to a third party (the factor), that then
assumes all the responsibilities and exposure associated with collecting from
the buyer.
 Letters of Credit (L/C)
 These are issued by a bank on behalf of the importer promising to pay the
exporter upon presentation of the shipping documents.
 The importer pays the issuing bank the amount of the L/C plus associated
fees.
 Commercial or import/export L/Cs are usually irrevocable.
 The required documents typically include a draft (sight or time), a
commercial invoice, and a bill of lading (receipt for shipment).
 Sometimes, the exporter may request that a local bank confirm (guarantee)
the L/C.
 Variations include
 standby L/Cs : funded only if the buyer does not pay the seller as agreed upon
 transferable L/Cs : the first beneficiary can transfer all or part of the original L/C to a
third party
 assignments of proceeds under an L/C : the original beneficiary assigns the proceeds
to the end supplier

4. EXPORT AND IMPORT FINANCE METHODS
 Banker’s Acceptance (BA)
 This is a time draft that is drawn on and accepted by a bank (the
importer’s bank). The accepting bank is obliged to pay the holder
Mrs. Charu Rastogi, Asst. Prof.
of the draft at maturity.
 If the exporter does not want to wait for payment, it can request
that the BA be sold in the money market. Trade financing is
provided by the holder of the BA.
 The bank accepting the drafts charges an all-in-rate (interest rate)
that consists of the discount rate plus the acceptance
commission.
 In general, all-in-rates are lower than bank loan rates. They
usually fall between the rates of short-term Treasury bills and
commercial papers.
 Working Capital Financing
 Banks may provide short-term loans that finance the working
capital cycle, from the purchase of inventory until the eventual
conversion to cash.

5. EXPORT AND IMPORT FINANCE METHODS
 Medium-Term Capital Goods Financing (Forfaiting)
 The importer issues a promissory note to the exporter to pay
for its imported capital goods over a period that generally
Mrs. Charu Rastogi, Asst. Prof.
ranges from three to seven years.
 The exporter then sells the note, without recourse, to a bank
(the forfaiting bank).
 Countertrade
 These are foreign trade transactions in which the sale of
goods to one country is linked to the purchase or exchange of
goods from that same country.
 Common countertrade types include barter, compensation
(product buy-back), and counterpurchase.
 The primary participants are governments and multinationals.

6. METHODS OF PAYMENT IN INTERNATIONAL
TRADE
 To succeed in today’s global marketplace and win sales
against International trade presents a spectrum of risk,
which causes uncertainty over the timing of payments
Mrs. Charu Rastogi, Asst. Prof.
between the exporter (seller) and importer (foreign
buyer).
 For exporters, any sale is a gift until payment is
received.
 Therefore, exporters want to receive payment as soon
as possible, preferably as soon as an order is placed or
before the goods are sent to the importer.
 For importers, any payment is a donation until the goods
are received.
 Therefore, importers want to receive the goods as soon
as possible but to delay payment as long as possible,
preferably until after the goods are resold to generate
enough income to pay the exporter.

7. METHODS OF PAYMENT IN INTERNATIONAL TRADE :
CASH IN ADVANCE / PREPAYMENTS
 With cash-in-advance payment terms, the exporter can
avoid credit risk because payment is received before the
ownership of the goods is transferred.
Mrs. Charu Rastogi, Asst. Prof.
 Wire transfers and credit cards are the most commonly
used cash-in-advance options available to exporters.
 However, requiring payment in advance is the least
attractive option for the buyer, because it creates cash-
flow problems. Foreign buyers are also concerned that
the goods may not be sent if payment is made in
advance.
 Thus, exporters who insist on this payment method as
their sole manner of doing business may lose to
competitors who offer more attractive payment terms.

8. METHODS OF PAYMENT IN INTERNATIONAL TRADE:
LETTERS OF CREDIT
 Letters of credit (LCs) are one of the most secure
instruments available to international traders.
 An LC is a commitment by a bank on behalf of the buyer
Mrs. Charu Rastogi, Asst. Prof.
that payment will be made to the exporter, provided that
the terms and conditions stated in the LC have been
met, as verified through the presentation of all required
documents.
 The buyer pays his or her bank to render this service.
 An LC is useful when reliable credit information about a
foreign buyer is difficult to obtain, but the exporter is
satisfied with the creditworthiness of the buyer’s foreign
bank.
 An LC also protects the buyer because no payment
obligation arises until the goods have been shipped or
delivered as promised.

9. METHODS OF PAYMENT IN INTERNATIONAL TRADE:
DOCUMENTARY COLLECTIONS/DRAFTS/BILLS OF
EXCHANGE)
 A documentary collection (D/C) is a transaction whereby the
exporter entrusts the collection of a payment to the remitting
bank (exporter’s bank), which sends documents to a collecting
bank (importer’s bank), along with instructions for payment.
Mrs. Charu Rastogi, Asst. Prof.
 Funds are received from the importer and remitted to the
exporter through the banks involved in the collection in
exchange for those documents.
 D/Cs involve using a draft that requires the importer to pay the
face amount either at sight (document against payment) or on
a specified date (document against acceptance).
 The draft gives instructions that specify the documents
required for the transfer of title to the goods. Although banks
do act as facilitators for their clients, D/Cs offer no verification
process and limited recourse in the event of non-payment.
 Drafts are generally less expensive than LCs.

10. METHODS OF PAYMENT IN INTERNATIONAL TRADE:
OPEN ACCOUNT
 An open account transaction is a sale where the goods are
shipped and delivered before payment is due, which is usually
in 30 to 90 days.
Mrs. Charu Rastogi, Asst. Prof.
 Obviously, this option is the most advantageous option to the
importer in terms of cash flow and cost, but it is consequently
the highest risk option for an exporter.
 Because of intense competition in export markets, foreign
buyers often press exporters for open account terms since the
extension of credit by the seller to the buyer is more common
abroad. Therefore, exporters who are reluctant to extend
credit may lose a sale to their competitors.
 However, the exporter can offer competitive open account
terms while substantially mitigating the risk of non-payment by
using of one or more of the appropriate trade finance
techniques, such as export credit insurance.

11. Mrs. Charu Rastogi, Asst. Prof.
COMPARISON

12. COMPARISON
Cash in
Letter of Credit DC/BoE Open Account
Advance
Time of Before When shipment is On presentation of As agreed
Mrs. Charu Rastogi, Asst. Prof.
Payment Shipment made draft upon
Goods
After payment After payment Before
available to After payment
payment
buyers
Relies on buyer
Risk to Disposal of
None Very little - None to pay as
exporter unpaid goods
agreed upon
Assured shipment but
Relies on Relies on exporter
relies on exporter to
Risk to exporter to to ship goods as
ship goods as None
importer ship goods as described in the
described in the
ordered documents
documents

13. LETTER OF CREDIT: PROCEDURE
1. Sale Contract
Buyer (Importer) Seller (Exporter)
5. Deliver Goods
Mrs. Charu Rastogi, Asst. Prof.
2. Request 8. Documents 6. Present 4. Deliver Letter
for Credit and claim for Documents of Credit
payments
7. Present Documents
Importer’s bank Exporter’s bank
(Issuing Bank) (Advising Bank)
3. Send Credit

14. TYPES OF LETTER OF CREDIT
 Irrevocable and revocable letters of credit
 A revocable letter of credit can be changed or cancelled by the bank that
issued it at any time and for any reason.
Mrs. Charu Rastogi, Asst. Prof.
 An irrevocable letter of credit cannot be changed or cancelled unless everyone
involved agrees. Irrevocable letters of credit provide more security than
revocable ones.
 Confirmed and unconfirmed/Advised letters of credit
 When a buyer arranges a letter of credit they usually do so with their own
bank, known as the issuing bank. The seller will usually want a bank in their
country to check that the letter of credit is valid.
 For extra security, the seller may require the letter of credit to be 'confirmed' by
the bank that checks it. By confirming the letter of credit, the second bank
agrees to guarantee payment even if the issuing bank fails to make it. So a
confirmed letter of credit provides more security than an unconfirmed one.
 In case of unconfirmed LC, the advising bank forwards an unconfirmed letter
of credit directly to the exporter without adding its own undertaking to make
payment or accept responsibility for payment at a future date, but confirming
its authenticity.

15. TYPES OF LETTER OF CREDIT
 Transferable letters of credit
 A transferable letter of credit can be passed from one
'beneficiary' (person receiving payment) to others. They're
Mrs. Charu Rastogi, Asst. Prof.
commonly used when intermediaries are involved in a
transaction.
 Stand-by LC
 A standby letter of credit is like a guarantee that is used as
support where an alternative, less secure, method of
payment has been agreed.
 It is an assurance from a bank that a buyer is able to pay a
seller. The seller doesn't expect to have to draw on the
letter of credit to get paid.

16. TYPES OF LETTER OF CREDIT
 Revolving LC
 The revolving credit is used for regular shipments of the same commodity to
the same importer. It can revolve in relation to time or value. If the credit is
Mrs. Charu Rastogi, Asst. Prof.
time revolving once utilised it is re-instated for further regular shipments until
the credit is fully drawn. If the credit revolves in relation to value once utilised
and paid the value can be reinstated for further drawings.
 Revolving letters of credit are useful to avoid the need for repetitious
arrangements for opening or amending letters of credit.
 Back to Back LC
 A back-to-back letter of credit can be used as an alternative to the transferable
letter of credit. Rather than transferring the original letter of credit to the
supplier, once the letter of credit is received by the exporter from the opening
bank, that letter of credit is used as security to establish a second letter of
credit drawn on the exporter in favour of his importer.
 Many banks are reluctant to issue back-to-back letters of credit due to the
level of risk to which they are exposed, whereas a transferable credit will not
expose them to higher risk than under the original credit.

17. POSSIBLE QUESTIONS
 Explain all the modes of payment used in international business.
Discuss various types of L/Cs.
 Write short notes on:
Mrs. Charu Rastogi, Asst. Prof.
 Balance of payment vs. balance of trade
 Asian Development Bank
 Balance of payment
 Types of Letter of Credit
 Explain the role played by ‘International Monetary Fund’, ‘Asian
Development Bank’ and World Bank in promotion of International
Trade
 Explain the functions of International Monetary Fund.
 What are various methods of payment in International Trade?
 Discuss the role of World Bank in International Financial
Management.

18. Mrs. Charu Rastogi, Asst. Prof.