METHODS OF FOREIGN PAYMENT

PAYMENT:
Compensation, discharge or performance of an obligation, or reimbursement, by giving over something that is of satisfactory value to its recipient, such as money.

ROLE OF PAYMENTS IN INTERNATIONAL TRADE:

The uncertainty of international sales reinforces the earlier discussion regarding sources of credit information. A significant reason for obtaining and effectively utilizing sources of information is to make the best decision for a seller as far as what payment terms are most appropriate, payment terms that minimize risk while allowing a seller to be competitive in the market place. Each of these payment terms can be measured by levels of risk, and an international credit manager needs to be in a position to understand and describe these methods of payments. The concept of extending credit in the international environment requires than an international credit manager learn methods for mitigating payment risks for the organization. One way to do so is with different methods of payment. There are a variety of payment methods available for international transactions. Some companies, who are new to selling in overseas markets, believe that the letter of credit or some type of secured transaction is the best (or only) way to transact business when selling offshore. However, a pro-active international credit manager recognizes that in an attempt to obtain new business, many different payment terms are important in a competitive business environment.

IMPORTANCE OF UNDERSTANDING MODES OF FOREIGN PAYMENT:

It helps to

identify the methods of payment available for international transactions. identify the risks to a buyer associated with each method of payment. identify the risks to a seller associated with each method of payment

MODES OF FOREIGN PAYMENTS:

1)Advance Payment: An amount paid before it is earned or incurred, for example, a prepayment by an importer to an exporter before goods are shipped, or a cash advance for travel expenses. The seller requires receipt of payment from the buyer before shipping goods. Payment may be made by wire-fund

transfer from the buyers bank to the sellers bank, or by company check, credit card, or other agreed upon means. This method is the most desirable for the Exporter, the Importer has to rely on the integrity of the Exporter and his capacity to execute the order in time. More than that, the entire transaction is financed by the Importer in this method thereby making the transaction more costly for him; besides exposing the Importer to credit risks. On account of the above factors some countries have imposed Exchange Control restriction regarding imports. 2) Letter of Credit A commercial letter of credit is, essentially, an agreement in international trade whereby a bank assumes a conditional obligation on behalf of its customer, a buyer, to make payment to a seller. Payment is conditional upon a sellers compliance with the terms and conditions specified in the letter of credit. These terms and conditions require the seller to present stipulated documents, which are usually those required for transport, commercial, and official purposes ( bill of landing, commercial invoice, insurance certificate, consular invoice). Once the seller has complied with the documentary requirements of the letter of credit, prompt payment is secured. In effect, a bank in the letter of credit transaction substitutes its credit standing for that of the buyer. Thus, the seller, who is the beneficiary of the letter of credit, has the undertaking of a bank to pay when the terms and conditions of the credit have been complied with. On the other side, the buyer is assured that payment will not be made unless the seller meets the conditions stipulated in the letter of credit. The buyers bank substitutes its creditworthiness for that of its customer and agrees to honor a sellers demand for payment if that seller complies with all the requirements specified in the letter of credit. 3) Open Account It is just opposite to the Advance payment. When an Exporter agrees to sell the commodity on open account system to the Importer, he dispatches the goods to the buyer directly followed by the transport documents and an invoice requesting payment. The Exporter loses control over the goods completely and leaves everything on the integrity of the buyer. It is beneficiary to the Importer; the Exporter bears the entire financial and commercial risks. This system is normally resorted to when the goods command buyer's market. A seller ships the goods and all the necessary shipping and commercial documents directly to a buyer. This buyer agrees to pay the sellers invoice at a future date ( net 15 days, net 30 days or with a discount offered--for example, 1% if paid within 20 days of invoice date). 4)Documentary Collections: A documentary collection is a payment mechanism in which a seller uses a bank as his/her "agent" in collecting payment from a buyer located overseas. After shipping the goods, the seller submits a draft (a demand for payment) and the relevant shipping documents to the bank. The

draft will include instructions to release the documents to the buyer upon the buyers payment or acceptance of the draft. The sellers bank sends the documents, draft, and collection instructions to a branch or correspondent bank in the buyers country. This bank carries out the sellers collection instructions and, upon receipt of payment from the buyer, remits payment to the sellers bank for the credit of the seller. The sellers bank, called the remitting bank, sends the documents, draft, and instructions to one of its branches or correspondent banks in the buyers country. This bank, called the collecting or presenting bank, contacts the buyer and informs him/her that the documents have arrived and can be obtained when he/she complies with the payment terms, which may be documents against payment or documents against acceptance 5)Mail Transfer: Imports (that is, the debtor or call the sender) will be delivered to remittance and money transfer fee to a bank (remitting bank), commissioned by the bank where the payee by letter asked the bank transfer (Huiru Xing), the money paid to the export (that is, creditors or said payee.) The remittance methods, require a regional postal process of time, usually about 7-15 days air mail, depending on regional distance varies. If by courier (Express) can speed up 3-5 days.

6)Telegraphic Transfer: T/T means Telegraphic Transfer, quickest and easiest payment method. or simply Wire Transfer. It's the simplest,

T/T Payment in Advance is usually used when samples and small quantity shipments are transported by air. The documents, Air Waybill, Commercial Invoice and Packing List, will be sent to you along with the shipment on the same airplane. As soon as the shipment arrives, you can clear the customs and pick up the goods with the documents. As it is acknowledged, T/T Payment in Advance presents a risk to the importer if the supplier is not honest.A sender to a certain amount of remittances and remittance of fees paid to a local bank (remitting bank), requiring the bank by telex or cable notice the location of their foreign branches of the payee or agency (Hui Ruxing) will transfer paid to the payee. This transfer included the time difference is generally available the same day or the next day, the most efficient, but the relatively high cost of telecommunications. 7)Demand Draft: Is the sender to their local bank (remitting bank) to buy bank demand draft and sent directly to the payee, the payee can be received by the bill to the bank and withdraw to the designated payment. Such bank drafts and bills of exchange against the Department of Commercial Law is different from the valet bank draft funding for banks, so by the votes and the payer is the same bank (or agency).

COMPARISON OF RISK BEARED BY IMPORTER AND EXPORTER IN FOREIGN PAYMENTS:

On the left side of the chart, you see the risk evaluation of the methods of payment from the perspective of an exporter or seller. For example, selling products or services on a cash in advance basis has a low uncertainty or low risk to the seller because cash or funds are made available to the seller prior to the sale. A letter of credit, next on the level of certainty/uncertainty scale, is also a sound method of payment, although there could be discrepancies in the documents that could possibly affect payment. The same applies to the documentary collections. When open account, the last item on the list, is considered as to an exporters certainty/uncertainty of payment, the international manager should understand that by agreeing to open account (selling on net 30-day payment terms) there is a risk element of when and if payment will be made. On the right side of the chart, you can see the level of uncertainty in terms of payment made by the importer or buyer. For example, if the importer (buyer) pays cash in advance for a product or service, the uncertainty is that money is paid before the product/service is available. What if there is a quality problem or delay in receiving the product or service which has already been paid for by the buyer? The buyer has no recourse. At the other end of the scale, the buyer has a low level of uncertainty if he/she has been given open account (30 days to pay) for product or service that has been delivered. The buyer has the product/service but has not yet paid for the invoice.

CONCLUSION:
This discussion has focused on how to identify a variety of payment methods available to a risk manager. Businesses who sell in the 21st century global market appreciate that secured transactions are not only way transact business when selling internationally if they want to be both competitive and grow their business. A significant responsibility of a credit manager is to understand the use of the various payment terms in a competitive business environment. However, an international manager is not the only person who needs to learn to describe and apply the various payment methods that will apply to buyers. Senior financial management of the seller as well as the business people marketing, operations are well-advised to seek information as to payment decisions with buyers so that they are able to evaluate payment terms. Payment terms are an important component of the relationship with buyers. A pro-active international manager involves other business units and individuals, such as those in sale management, not only in the process of why certain credit terms are determined for a buyer, but also how they are determined. Even though in most organizations the credit risk group has the responsibility of establishing and determining payment terms of customers, good business judgment in an organization should be exercised by bringing in internal customers to the decision process since they have stakes in the relationship with existing or potential buyers.

METHODS OF FOREIGN PAYMENTS

ASSIGNMENT OF INTERNATIONAL TRADE AND FOREIGN EXCHANGE

Submitted To: Maam Qudsiya

Submitted By: Naila Azmat Roll#17 7th Semester BBA(B&F)

DEPARTMENT OF BANKING AND FINANACE GOVERNEMENT COLLEGE UNIVERSITY FAISALABAD