PROJECT WORK

METHODS OF INTERNATIONAL PAYMENTS

There are five primary methods of payment for international transactions.

1. Cash-in-Advance
2. Documentary Collections
3. Open Account
4. Consignment
5. Letters of Credit
 DOCUMENTARY CREDIT
A documentary credit is a method of payment that protects both the seller (exporter) and the
buyer (importer) in a contract of sale. In the case of the seller, it gives a guarantee (usually
issued by the buyer’s bank on his request) that the seller will receive payment after the
shipment of goods had been fulfilled. On the buyer’s side, however, the buyer gets a
guarantees that goods ordered will be delivered.
Generally, the seller requests the documentary credit in order to check the credit worthiness of
the buyer. The buyer, upon issuing the requested document, also requests confirmation or
compliance documents from the seller. The confirmation documents could be a bill of lading,
insurance certificate, certificate of origin, et cetera.
At the fulfilment of the agreed terms in the contract by both parties, the buyer gets his goods
and the seller gets paid. In some part of the world, documentary credit is also known as a
letter of credit (L/C).
 TYPES OF DOCUMENTARY CREDIT
Commercial Letter of Credit
• This is a standard letter of credit that’s commonly used in international trade, and may also be referred to
as a documentary credit or an import/export letter of credit. A bank acts as a neutral third party to release
funds when all the conditions of the agreement have been met.
Standby Letter of Credit
• This type of letter of credit is different: It provides payment if something fails to happen. Instead of
enabling a transaction, a standby letter of credit provides compensation when something goes wrong.
Standby letters of credit are generally similar to commercial letters of credit, but they are only payable
when the payee (or “beneficiary”) can prove that they didn’t get what was promised in an agreement.
Standby letters of credit are a form of insurance that ensures you’ll get paid, and they can also guarantee
that services will be performed satisfactorily.
Revolving Letters of Credit
• A revolving letter of credit is useful for multiple payments. If a buyer and seller expect to do business
repeatedly, they may prefer not to get a new letter of credit for every transaction (or for every step in a
series of transactions). This type of letter of credit allows businesses to use a single letter of credit for
numerous transactions until the letter expires, and letters might be valid for three years or less.
Confirmed (And Unconfirmed) Letters of Credit
• When a letter of credit is confirmed, another bank (presumably one that the beneficiary trusts) guarantees
that payment will be made. Exporters might not trust a bank that issues a letter of credit on behalf of a
buyer. For example, if the exporter is not familiar with that bank, the seller may lack confidence that the
payment will ever arrive. As a result, the exporter might require that a bank in their home country
confirm the letter. If the issuing bank fails to pay—and the exporter can meet all of the requirements of
the letter of credit—the confirming bank will have to pay the exporter (and attempt to collect from the
issuing bank later).
Back-to-Back Letters of Credit
• A back to back letter of credit allows intermediaries to connect buyers and sellers. This somewhat
complicated strategy uses two letters of credit so that each party gets paid individually: An intermediary
gets paid by the buyer, and a supplier gets paid by the intermediary. The final buyer and the intermediary
might use a “master” letter of credit, and the intermediary and supplier use a letter of credit based on the
master letter.
Irrevocable Letter of Credit
• An irrevocable letter of credit cannot be changed without authorization from all parties involved. Almost
all letters of credit now are irrevocable, because revocable letters of credit simply do not provide the
security that most beneficiaries want.
Sight Letter of Credit
• Payment under a sight letter of credit occurs as soon as the beneficiary submits acceptable documents to
the appropriate bank. The bank has several days to review the documents and ensure that they meet the
requirements in the letter of credit. If the documents are in good order, the bank must pay immediately.
Deferred Payment Letter of Credit
• With this type of letter of credit, payment does not happen immediately after the documents are accepted.
Some agreed-to period of time passes before the seller receives funds. A deferred payment letter of credit
is naturally a better deal for buyers than for sellers, as it allows the buyer time to find fault with
something the seller does. These letters may also be known as term or usance letters of credit.
Red Clause Letter of Credit
• With a red clause, the beneficiary has access to cash up front. The buyer allows for an unsecured loan to
be issued as part of the letter of credit, which is essentially an advance payment. The seller or beneficiary
can then use the money to buy supplies, manufacture goods or complete work, and ship goods to the
buyer.
 THE PROCESS OF A DOCUENTARY CREDIT

• The contract is made between the importer and the exporter.

• The importer asks its bank to issue a documentary credit to the exporter.
• The importer's bank sends the documentary credit to the exporter's bank (advising bank).
• The exporter's bank advises the exporter of the issue of the documentary credit.
• After dispatch of the goods, the exporter delivers the required documents to its bank. The documents are
examined against the terms and conditions stipulated in the documentary credit. If the requirements have
been complied with, the exporter will be able to obtain payment.
• The exporter's bank sends the documents to the importer's bank and receives payment either at sight or
term.
• The importer's bank delivers the documents to the importer upon reimbursement, after which the goods
may be handed over.
 PARTIES INVOLVED IN A LETTER OF CREDIT

1. Applicant of Letter of Credit.

2. LC Issuing Bank
3. Beneficiary party
4. Advising Bank
5. Confirming Bank
6. Negotiating Bank
7. Reimbursing Bank
8. Second Beneficiary
AN EXAMPLE OF A LETTER OF CREDIT

Citibank offers letters of credit for buyers in Latin America, Africa, Eastern Europe,
Asia, and the Middle East who may have difficulty obtaining international credit on
their own. Citibank’s letters of credit help exporters minimize the importer’s country
risk and the issuing bank’s commercial credit risk.
Letters of credit are typically provided within two business days, guaranteeing
payment by the confirming Citibank branch. This benefit is especially valuable when
a client is located in a potentially unstable economic environment.
 CASE STUDY

Missha cosmetics in india sells face serums and creams in new York and Cosserex cosmetics
Manufactures skin care products in California.
Missha cosmetics wants to import $150,000 worth of skin care serums and creams
manufactured by cosserex but cosserex cosmetics is concerned about missha cosmetics’s ability
to pay them.
To address this Missha cosmetics gets a letter of credit from its bank Duetsche bank ,
indicating that missha cosmetics will make good on the $ 150,000 payment in 50 days or
Duetsche bank will pay the bill itself. Duetsche bank then send the letter of credit to cosserex
cosmetics which then agree to ship the serums and creams.
After the shipment goes out cosserex or cosserex cosmetics’s bank will ask for its $ 150,000 by
presenting a written draft also called a Bills of exchange to Duetsche bank.
Although a letter of credit mostly benefits seller, they also protects buyer because Cosserex
cosmetics must present Duetsche bank with written proof of the skincare shipment in order to
get paid.
This proof usually includes a commercial invoice, bill of laiding or an airway bill.
After Duetsche bank pays to cosserex, it turns to Missha cosmetics for
reimbursements. this usually by debiting Missha cosmetics account.
THANK YOU