Methods of Payment

Question 1

What is the Payment Risk look like?
(Top to bottom pyramid)

Answer 1

• Consignment.
• Open account.
• Draft payment.
• Documentary credit.
• Cash in advance.

Question 2

What is Open account?

Answer 2

• More use with domestic type businesses.
• All it is:
  Price = $100 CAD DDP your warehouse
  Term of Payment = net 30 (you owe me the full amount in 30 days).
  2/10 net 30 is you get 2% discount is you pay me in 10 days out of the 30 days.
• Basis for granting credit by checking history.
• Factoring as an option.

Question 3

What is Factoring?

Answer 3

• Selling to some or all foreign accounts receivable to a third party.
• Minimize risk of getting paid.
• Done usually by small companies with small accounts.

Question 4

What is Letter of Credit?

Answer 4

For the buyer/importer:
- Helps ensure that order will be delivered under all conditions stipulated (Time, Quality, Quantity).

For the seller/exporter:
- Help ensure the buyer (has the money to pay & will pay if all conditions are met).
- Can be used to obtain short-term financing required to fill the order.

• Based on the legitimacy of the document.
• The L.o.C. will have conditions, which the bank of the buyer is going to issue a L.o.C. to the seller’s bank stating that the buyer has the funds to pay.

-The l.o.c. will say « My company has bought x amount of the product from this seller, and it will arrive on x day ».

Question 5

What is negative of Letter of Credit?

Answer 5

• There are fees.
• If the conditions are altered the fixing is complexed.

Question 6

What is the Documentary Credit?

Answer 6

• Written undertaking by a bank. (Issuing Bank).
• Given to the Seller (Beneficiary).
• At the request and in accordance with the Buyer’s (Applicant) instructions.
• To effect payment at sight or at term up to a stated amount.
• Against stipulated documents within a prescribed time limit.

Question 7

What is the difference between insurance and facturing?

Answer 7

• Fracturing you get your money sooner.
• Insurance you might not get your money back.