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PAYMENT METHODS

Agenda
Pros and Cons

Types of payments

Other types of payments

Dispute Settlement Arbitration

Advance Payment Method


Clean payments
Advance payment( E.g. Wire transfers, Credit Cards)
Open account

In advance payment method the exporter is trusted to ship the goods after receiving payment from the importer.

Pros and Cons


PROS
Protection against non-payment Avoid credit risk

CONS
Creates cash flow problems Goods may not be sent if payment is made May lose customers to competitors over payment

terms

When To Use APM?


Importer is new Importers creditworthiness is doubtful Political and commercial risks of importers

home country is high Exporters product is unique Exporter operates and internet based business

Examples
Pre paid cellphones Prepaying rent and other utilities Prepaying suppliers to buy goods

CASH-IN-ADVANCE
Avoid credit risk for exporter Types: Wire transfer commonly used and has the advantage of being almost immediate Credit card - low value products, sold directly to the end user Payment by check - result in a collection delay of up to six weeks Buyer: The least attractive option for the buyer, as this method creates cash flow problems increase risks

LETTER OF CREDIT
Document issued mostly by a financial institution, used primarily in trade finance, which usually provides an irrevocable payment undertaking Participants of LC:
Buyer
Issuing Bank Advising Bank

Seller (Beneficiary)

Types
1.Revocable & Irrevocable LC
Irrevocable LC - cannot be changed unless both buyer

and seller agree Revocable LC - changes can be made without the consent of the beneficiary
2. Sight & Time LC
Sight LC - If payment is to be made at the time of

presenting the document Term LC- If payment is to be made after the lapse of a particular time period as stated in the draft

Process of Letter of Credit

DOCUMENTARY COLLECTION
Exporter entrusts collection of a payment to the

remitting bank (exporters bank)

sends documents to a collecting bank (importers bank),

along with instructions for payment

Involves use of a draft that requires the importer to

pay the face amount


acceptanceD/A)

on sight (document against paymentD/P) on a specified date in the future (document against

Drafts are generally less expensive than letters of

credit Offer no verification process and limited recourse in the event of nonpayment

OPEN ACCOUNT
Goods are shipped and delivered before payment is due Exporter simply bills the customer, who is expected to pay under agreed terms at a future date Most advantageous option to the importer Highest risk option for an exporter The absence of documents and banking channels might make it difficult to pursue the

legal enforcement of claims

Consignment Sale
Exporter signs a contract with an overseas

Distributor
Distributor : Business Agreement

Imports, stocks & sells goods No ownership & Intermediary to sell goods Repatriates the money realized Commission or service charges No fixed payment mechanism

Drawbacks (Exporter) - Greatest risk

- Least Control
- Delay in payment

Risk Insurance Contract should clarify responsibility for property risk insurance Conduct credit check on Foreign Distributor

Countertrade
One party accepts goods, services, or other

instruments of trade in partial or whole payment for its products Exports are linked with return purchase of some other items from the importer or from another source in the country. Practiced due to lack of foreign exchange Fulfils financial, marketing, or public policy objectives of the trading parties

Trading through an intermediary with countertrade expertise:


- International Broker

- International Bank
- Export Management company Drawbacks - Higher transaction costs

- Greater risk

Counter purchase Goods purchased from a country in exchange for that country's purchase of the exporter's product Typically unrelated but of equivalent value

Barter Merchandise is traded directly for other merchandise or services No exchange of money Parties' needs for the goods of the other seldom coincide Valuation of the goods may be problematic.

Pepsi
Vodka - PepsiCo Wines & Spirits International

and Stolichnaya Russian Vodka had a countertrade arrangement where Pepsi had the rights to sell Russian vodka in the US in exchange for Pepsi to be sold in Russia. Pepsi delivers syrup paid for with Stolichnaya Vodka. Naval Vessels - Pepsi accepted 17 submarines, a cruiser, a frigate, and a destroyer in payment for Pepsi products. The fleet of 20 naval vessels will be sold for scrap steel to repay.

Switch trading One company sells to another its obligation to make a purchase in a given country
Buyback Occurs when a firm builds a plant in a country or supplies technology, equipment, training, or other services Takes a certain percentage of the plant's output as partial payment for the contract

Prudent credit practices


An experienced exporting firm extends credit cautiously Other good credit practices include: a. Being aware of changes in the customers' payment patterns

b. Refraining from going beyond normal commercial terms c. Consulting with your international banker d. Check a buyer's credit eg. Through the ICP provided by the Dept. Of Commerce

Payment Problems
More easily avoided than rectified after they occur Claiming Insurance can be an unattractive option

Simplest option: contact and negotiate with the customer


If negotiations fail and the sum involved is large,

assistance of the companys bank, legal counsel, and other qualified experts should be taken Arbitration is faster and less costly, this is preferable to legal action if both parties can agree to take their dispute to an arbitration agency

Arbitration
An arbitration clause inserted into the business agreement Non-judicial nature of arbitration makes it both attractive and effective Litigation in a foreign court can be timeconsuming, complicated, and expensive Decision rendered in a foreign court is potentially unenforceable, however arbitral awards have a great degree of international recognition Arbitration is administered by a panel of

arbitrators have specialized competence in the relevant field Arbitral awards are usually final and binding & also can be kept confidential

Arbitration Organizations

International Chamber of Commerce (ICC) International Court of Arbitration (ICA) Permanent Court of Arbitration London Court of International Arbitration (LCIA) World Intellectual Property Organization Arbitration and Mediation Center International Centre for Settlement of Investment Disputes World Trade Organization (WTO) Arbitration Institute of the Stockholm Chamber of Commerce (SCC) Court of Arbitration for Sport (CAS)

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