Week 10: Payment Methods

Question 1

Prepayment

Answer 1

Exporter (seller) obtains agreement of the importer (buyer) to pay for goods

Question 2

Prepayment Benefits

Answer 2

• Seller benefits totally
• No chance of buyer insolvency as payment is made
• Buyer has no bargaining power (payment made before goods shipped)

Question 3

Prepayment Risks

Answer 3

• Buyer may be paying for something he may not get
• Buyer may incur supply delays
• Seller has production risks - only until cleared funds are received

Question 4

Letter of Credit

Answer 4

A conditional guarantee of payment given by issuing bank (buyer) to the beneficiary (seller)

Question 5

Documentary Collection (Bill of Exchange)

Answer 5

Request for payment placed on buyer through a bank – bank accepts absolutely no liability

Question 6

1. Documents against Payment

Answer 6

Buyer only receives documents for collecting goods upon payment of draft (seller retains title until payment is received)

Question 7

2. Documents against Acceptance

Answer 7

Buyer receives documents for collecting goods upon acceptance of draft with promise to pay at an agreed future date

Question 8

Documentary Collection Benefits

Answer 8

• Relative simple documentation
• Favour buyer - payment not effected until after shipment of goods
• Not suitable to all situations

Question 9

Documentary Collection Risks

Answer 9

• Seller sends goods then trusts buyer to honour draft
• Seller only partially safeguard under D/P
• D/A more risky option in comparison with D/P
• Seller incur costs on buyer default as goods have been despatched
• When problems occur, even $$ litigation may not provide satisfaction for seller

Question 10

Open Account

Answer 10

(Oppose of prepayment)
Importer (buyer) doesn’t pay until receiving goods. Exporter (seller) sends documents directly to importer for customs clearance / collection

Question 11

Open Account Risks

Answer 11

• Exports delivered before payment is secured

- Longer the period of credit offered = higher the risk

Question 12

Incoterms

Answer 12

Defines obligations / duties / rights and responsibilities of sellers and buyers regarding:

• Movement of goods
• Provision of necessary documentations
• Customs clearance / carriage /insurance
• Division of costs apportioned to either party
• Responsibility for actions to be taken by either party based on incoterm chosen

Question 13

Incoterm 4 Groups

Answer 13

‘E’ = most favourable to seller
‘D’ = most favourable to buyer
‘F’ and ‘C’ = middle ground terms

Question 14

Incoterm Limitations

Answer 14

• Don’t deal with every aspect of transaction
• Trade terms only – limited to movement of tangible goods and not supply of services
• Issue of legal ownership is not dealt with