The document discusses various methods for financing international trade: open account, letter of credit, bills for collection, and advance payment. It provides details on each method, including how they work, their level of risk for the exporter, and the role of banks. A letter of credit issued by a bank is the safest method, as it guarantees payment for the exporter if documents are presented as stated in the letter. Bills for collection are less safe since payment depends on the importer. Advance payment is the safest for exporters but may not be practical in all cases.

1. UNIT
FINANCING INTERNATIONAL TRADE

2.  Open account
 Documentary letter of credit
 Bills for collection
 Advance payment
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3. Open account
 Is only used for transactions
between exporters and importers
which have already established a
trust-worthy and long-term business
relation.
 Saving time for both exporter and
importer as they deal directly with
each other – not much involvement
of banks.
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4. Documentary Letter of credit
• A document issued by a bank, whereby the bank
replaces the buyer as the paying party. The exporter
is basing his risk of getting paid on the bank rather
than on the importer. The bank will have to be
reimbursed by the importer.

5. Some of the Documents Called for
under a LC
• Financial Documents: Bill of Exchange, Co-accepted
Draft
• Commercial Documents: Invoice, Packing list
• Shipping Documents: Transport Document, Insurance
Certificate, Commercial, Official or Legal Documents

6. • Official Documents: License, Embassy legalization,
Origin Certificate, Inspection Cert , Phyto-sanitary
Certificate
• Transport Documents: Bill of Lading (ocean or multi-
modal or Charter party), Airway bill, Lorry/truck
receipt, railway receipt
• Insurance documents: Insurance policy, or Certificate
but not a cover note.

7. Irrevocable LC
• A letter of credit that cannot be canceled nor
amended without agreement of all parties

8. Revocable LC
• A letter of credit that may be canceled at any moment
without prior notice to the beneficiary

9. Sight & Time Letter of Credit
• If payment is to be made at the time of presenting
the document then it is referred as the Sight Letter
of Credit. In this case banks are allowed to take the
necessary time required to check the documents.
If payment is to be made after the lapse of a
particular time period as stated in the draft then it is
referred as the Term Letter of Credit.
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10. Deferred payment LC
• A letter of credit under which the documents are
forwarded to the importer’s bank, while sight draft is
presented at a latter future date

11. Red clause LC
• A letter of credit permitting the beneficiary to receive a
sum prior to shipment

12. Transferable LC
• A letter of credit that can be utilized by someone
designated by the original beneficiary

13. Revolving LC
• A letter of credit calling for renewed credit to be made
available when the issuing bank informs the
beneficiary that the buyer has reimbursed the issuing
bank for the drafts already drawn

14. Back to back LC
• Two letter of credit with identical documentary
requirements, except for the difference in the price as
shown by the invoice and draft

15. Traveler LC
• A letter of credit issued by a bank, addressed to all its
correspondents, permitting the bearer to draw drafts
up to the total amount named in the letter

16. Standby LC
• A letter of credit that can be drawn against, but only if
another business transaction is not performed

17. Bid or performance bond
• A financial guarantee, given by a contracting
company, which states that it has the capability to
start and satisfactorily complete the project

18. Advised LC
• A letter of credit issued by a bank and forwarded to
the beneficiary by a second bank in his area. The
second bank validates the signatures and attests to
the legitimacy of the first bank

19. Confirmed LC
• A letter of credit issued by one bank to which a
second bank adds its commitment to pay

20. Documentary credit
 Being used worldwide
 Safer for exporter as it makes sure
he will get his money for the goods
sold provided that he presents the
correct documents
 Ensure the importer that he will get
the goods bought as long as he
pays for them or agreed to pay in a
fixed date in the future.
 Greatly supportive involvement of
banks in the transaction process.
 Taking more time than other
methods of payment
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21. Look at the 2 diagrams below to
explain how a letter of credit works
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22. 30

23. 31

24. Bills for collection
 Clean collection: more risky as the
importer can use the documents of
the title to receive the goods only by
agreeing to pay in a fixed date in
the future
 Documentary collection: safer as
the importer has to pay in return of
the documents of title to receive the
goods after all.
 More passive roles of the banks.
They only do what is required.
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25. • Documents Against Payment D/P
• In this case documents are released to the importer
only when the payment has been done.
• Documents Against Acceptance D/A
• In this case documents are released to the importer
only against acceptance of a draft.
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26. Advance payment
 Safest for the exporter if the
importer has to fully pay for the
good bought in advance
 Still safe if the importer pays in part
in advance
 Time saving
 Being used if there is more demand
than supply for that kind of
commodity.
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27. Conclusions about each method of
payment mentioned above.
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