- Which international payment methods are most commonly used by exporters and importers?
- From an exporter's perspective how do the most commonly used international payment methods rank in terms of the most secure to the least secure?
- From an importer's perspective how do the international payment methods rank in terms of the most secure to the least secure?
- Which factors should an exporter consider when determining which payment method to use?
- What procedures are involved in a cash in advance transaction?
- Should a U.S. exporter who is paid on a cash in advance basis attempt to retain control over product that has been exported to a foreign buyer even though the U.S. exporter received payment for the export before the export was made?
- In what types of situations is a cash in advance payment typically used?
- What is a confirmed letter of credit?
- How do the banks involved in a confirmed letter of credit transaction function?
- Should a U.S. exporter who is the beneficiary of a confirmed letter of credit attempt to retain control over the product that has been exported to a foreign buyer until such point that the U.S. exporter receives payment under the confirmed letter of credit?
- In what types of situations is a confirmed letter of credit typically used?
- What is an advised (or unconfirmed) letter of credit (L/C)?
- How do the banks involved in an advised letter of credit transaction function?
- Should a U.S. exporter who is the beneficiary of an advised letter of credit attempt to retain control over the product that has been exported to a foreign buyer until such point that the U.S. exporter receives payment under the advised letter of credit?
- In what types of situations is an advised letter of credit typically used?
- How does an advised letter of credit differ from a confirmed letter of credit?
- What is a documentary letter of credit?
- What is a standby letter of credit?
- How does a documentary letter of credit differ from a standby letter of credit?
- How many banks are typically involved in a letter of credit transaction?
- Which international payment methods are most commonly used by exporters and importers?
Cash in advance, confirmed letter of credit, advised letter of credit, documents against payment, documents against acceptance, and open account.
- From an exporter's perspective how do the most commonly used international payment methods rank in terms of the most secure to the least secure?
Cash in advance, confirmed letter of credit, advised letter of credit, documents against payment, documents against acceptance, and open account.
- From an importer's perspective how do the international payment methods rank in terms of the most secure to the least secure?
Open account, documents against acceptance, documents against payment advised letter of credit, confirmed letter of credit, and cash in advance
- Which factors should an exporter consider when determining which payment method to use?
Credit standing of the buyer, political and economic conditions in the buyer's country, exchange controls in the buyer's country, the value of the export, customary payment practices in the exporter's industry and payment methods offered by the exporter's competitors.
- What procedures are involved in a cash in advance transaction?
The importer buyer pays the exporter seller by check, draft or wire transfer before the exporter seller ships the product to the importer buyer. An exporter seller who receives payment by check or draft should not consider such payment as "cash in advance" until the check or draft has cleared and good funds have been deposited in the exporter's seller's bank account.
- Should a U.S. exporter who is paid on a cash in advance basis attempt to retain control over product that has been exported to a foreign buyer even though the U.S. exporter received payment for the export before the export was made?
No, unless the exporter is motivated to do so for a reason other than securing payment, such as a tax-motivated reason.
- In what types of situations is a cash in advance payment typically used?
A cash in advance payment is typically used by a seller when the seller manufactures goods in accordance with a particular buyer's specifications and cannot sell such "custom-made" goods to another buyer. Cash in advance payment may also be appropriate when: (a) insufficient credit information on a buyer is available; (b) the buyer's credit is so bad that no other payment terms are desirable; (c) the political and / or economic situation in the buyer's country is so bad that no other payment terms are appropriate; or (d) a seller is enjoying a seller's market for a particular product.
- What is a confirmed letter of credit?
A confirmed letter of credit is a formal written undertaking issued by a bank in the buyer's country (issuing bank) and guaranteed or confirmed by a bank in the seller's country (confirming bank) in accord with which both banks agree to pay a seller (the letter of credit beneficiary) a specified amount on behalf of a buyer (the letter of credit applicant account party), if the seller complies with the terms and conditions that are specified within the letter of credit.
- How do the banks involved in a confirmed letter of credit transaction function?
The bank that issues a confirmed letter of credit (the issuing bank) assumes the role of the foreign buyer, whereas the bank that confirms the letter of credit (confirming bank) assumes the role of the foreign issuing bank. By functioning in this manner, the issuing bank effectively eliminates payment risk associated with the foreign buyer whereas the confirming bank effectively eliminates payment risk associated with the issuing bank.
- Should a U.S. exporter who is the beneficiary of a confirmed letter of credit attempt to retain control over the product that has been exported to a foreign buyer until such point that the U.S. exporter receives payment under the confirmed letter of credit?
While not necessarily essential or critical, it may prove to be in the exporter's best interest to do so. This is likely to be the case when a seller is unable to perform exactly as required under a confirmed letter of credit and is also unable to correct its performance deficiency. In such a circumstance the seller will have to ask the buyer to waive or accept the seller's performance deficiency. It is obviously much easier for a seller to obtain a buyer's agreement to waive a discrepancy under a confirmed letter of credit if the buyer does not yet have access to or possession of goods that have been shipped. Sellers must always keep in mind that letter of credit discrepancies which cannot be corrected by the seller and which the buyer refuses to waive will cause a seller to fail to meet a letter of credit's performance requirements and force a seller to forfeit the payment protection that had been available to the seller under the confirmed letter of credit.
- In what types of situations is a confirmed letter of credit typically used?
A confirmed letter of credit is a desirable (albeit expensive) payment method for a company that is buying a product internationally and a desirable (albeit expensive) payment method for a company that is selling product internationally. The buyer who uses this payment method can feel comfortable that two banks are assessing the seller's performance under the letter of credit which has been issued on behalf of the buyer. Likewise, the buyer can feel comfortable that the seller will not be paid if the seller does not perform exactly as the confirmed letter of credit requires. The seller, on the other hand, should also feel comfortable with a confirmed letter of credit transaction in that the seller knows that it will be paid in the U.S. by a U.S. bank if it performs in accordance with the terms and conditions that are specified by the letter of credit.- What is an advised (or unconfirmed) letter of credit (L/C)?
An advised (or unconfirmed) letter of credit is a formal written undertaking issued by a bank in the buyer's country (issuing bank) and conveyed to the seller / exporter (letter of credit beneficiary) by a bank in the seller's country (advising bank) in accord with the issuing bank agrees to pay the seller a specified amount on behalf of a buyer (the letter of credit applicant account party), if the seller complies with the terms and conditions that are specified within the letter of credit.- How do the banks involved in an advised letter of credit transaction function?
The bank that issues an advised letter of credit (the issuing bank) assumes the role of the foreign buyer, whereas the bank that conveys the letter of credit to the seller (advising bank) assumes no role other than conveying the letter of credit to the beneficiary. By functioning in this manner, the issuing bank effectively eliminates the payment risk associated with the foreign buyer. Since the advising bank assumes no role other than conveying the letter of credit terms to the beneficiary, however, the payment risk associated with the issuing bank remains the payment risk with which the seller exporter must contend.- Should a U.S. exporter who is the beneficiary of an advised letter of credit attempt to retain control over the product that has been exported to a foreign buyer until such point that the U.S. exporter receives payment under the advised letter of credit?
While not necessarily essential or critical, it may prove to be in the exporter's best interest to do so. This is likely to be the case when a seller is unable to perform exactly as required under an advised letter of credit and is also unable to correct its performance deficiency. In such a circumstance the seller will have to ask the buyer to waive or accept the seller's performance deficiency. It is obviously much easier for a seller to obtain a buyer's agreement to waive a discrepancy under an advised letter of credit if the buyer does not yet have access to or possession of goods that have been shipped. Sellers must always keep in mind that letter of credit discrepancies which cannot be corrected by the seller and which the buyer refuses to waive will cause a seller to fail to meet a letter of credit's performance requirements and force a seller to forfeit the payment protection that had been available to the seller under the advised letter of credit.- In what types of situations is an advised letter of credit typically used?
An advised letter of credit is a desirable (albeit expensive) payment method for a company that is buying a product internationally and a desirable (albeit expensive) payment method for a company that is selling product internationally. The buyer who uses this payment method can feel comfortable that the issuing bank will assess the seller's performance under the letter of credit which has been issued on behalf of the buyer before the issuing bank pays the seller under the letter of credit. Consequently, the buyer can feel comfortable that the seller will not be paid under the letter of credit if the seller does not perform exactly as the letter of credit requires. The seller, on the other hand, should also feel comfortable with an advised letter of credit transaction in that the seller knows that it will be paid under the letter of credit if it performs in accordance with the terms and conditions that are specified by the letter of credit.- How does an advised letter of credit differ from a confirmed letter of credit?
The principal difference between an advised letter of credit and a confirmed letter of credit is the absence of a U.S. confirming (guaranteeing) bank in an advised letter of credit. The risk for payment under an unconfirmed letter of credit, therefore, is the foreign issuing bank, not a U.S. confirming Bank. The involvement of a U.S. bank in an unconfirmed letter of credit will be limited to "advising" the unconfirmed letter of credit's details to the seller and possibly to paying the seller under the unconfirmed letter of credit with recourse, i.e. with the ability to retrieve from the seller any funds paid to the seller, in the event that the U.S. bank does not receive reimbursement from the foreign issuing bank.- What is a documentary letter of credit?
A documentary letter of credit (also known as a commercial letter of credit or a merchandise letter of credit) is a letter of credit that is issued for the purpose of making payment to a specified beneficiary if the beneficiary performs as required. Documentary letters of credit are called documentary letters of credit because the banks involved in the letter of credit transaction deal in documents as opposed to goods. The terms and conditions specified in a documentary letter of credit generally involve the presentation of specific documents within a stated period of time.- What is a standby letter of credit?
A standby letter of credit is a letter of credit that is issued in favor of the standby letter of credit beneficiary for the purpose of "backing-up" certain specified obligations of the standby letter of credit applicant. A standby letter of credit requires the beneficiary's presentation of documents which indicate that the letter of credit applicant has not met the obligations which the standby letter of credit backs-up. A standby letter of credit, therefore, is not intended to be drawn upon by the standby letter of credit beneficiary unless the standby letter of credit applicant does not meet its obligations as specified by the standby letter of credit.- How does a documentary letter of credit differ from a standby letter of credit?
The principal difference between a documentary letter of credit and a standby letter of credit is the fact that a documentary is an active payment instrument under which payment is intended if the terms and conditions prescribed by the letter of credit are met, whereas a standby letter of credit is a passive payment instrument under which payment is not intended and will occur only if the standby letter of credit applicant fails to meet its obligations as specified by the standby letter of credit.- How many banks are typically involved in a letter of credit transaction?
At least two separate banks are involved in a letter of credit transaction, i.e. the issuing bank in the applicant's country and the advising confirming bank in the beneficiary's country.