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Chapter 2: PAYMENT Fr Duong Thuy

1. What is payment by open account? What are the risks for the exporter if he accepts payment by open
Open account means the exporter ships the goods to the buyer and just waits till a fixed date as agreed in
their contract for payment from the buyer. Normally, the exporter only accepts open account method of
payment if he has known the buyer quite well and they have established a long-term and trustworthy
business relationship.
The biggest risk for the exporter in open account payment is non-payment as he has no protection at all,
just relying on the honour of the buyer in payment.
2. What is Export credit insurance?
Export credit insurance is a guarantee of payment for the exporter from a third party, an insurance
company, which issues an export credit insurance policy covering the risk of non- payment. The exporter
has to pay the costs for that guarantee. The insurance company will pay the exporter in case the buyer
fails to do so.
3. What is a bank guarantee?
A bank guarantee is a guarantee of payment for the exporter from a third party, a bank. The bank may
issue a bank guarantee, assuring that the bank will pay for the exporter in case the buyer fails to do so.
The buyer has to pay the costs of that guarantee.
4. Distinguish Export credit insurance and Bank Guarantee?
Both of them are guarantee of payment from a third party, providing the exporter with some level of
security in terms of payment.
For Export Credit Insurance, the exporter has to pay for that guarantee while it is the buyer who pays for a
Bank Guarantee. The third party offering export credit insurance is the insurance company while the bank
offers a bank guarantee.
5. What are some limitations of Export Credit Insurance?
Firstly, there is always a long wait between the time when the buyer fails to pay and the time when the
insurance company compensates the exporter, says six months typically.
Secondly, when compensation is paid, it is unlikely to cover 100% of the original invoice price.
So, with Export Credit Insurance, the exporter is covered against the worst.
6. If shipment is made on CIF or CIP terms, how much is normally the insurance coverage on that
110% of the CIF or CIP value of the goods.
7. What method of payment makes late payment impossible?

The confirmed, irrevocable, at sight Letter of Credit.

8. Distinguish Irrevocable and Revocable Letter of Credit.
A revocable L/C is the L/C that can be cancelled at any time by the buyer or by the issuing bank while an
Irrevocable L/C is the L/C that can only be cancelled with the written consent of the exporter.
9. Distinguish the Confirmed and Unconfirmed L/C.
The Unconfirmed L/C is less secure than the Confirmed one. Normally, the exporter has got certain
security for the non-payment risk when using the L/C as a method of payment in their sales of goods to
the buyer. The issuing bank will have to pay the exporter for the goods in case the buyer fails to do so.
With the Confirmed L/C, there is a promise from another bank, the confirming bank, usually the advising
bank too, to pay for the goods if the buyer fails to do so. It is a kind of double guarantee for the exporter
so he knows for sure that he will get money as long as he submits a set of documents strictly complying
with the terms and conditions stated in the L/C.
10. What are the most common problems with the Letter of Credit that cause discrepancies?
Any three of the following discrepancies will be enough for the answer of this question.

Documents required by the credit are missing;

Documents required to be signed are not signed;
Credit amount is exceeded;
Late submission of documents;
Late shipment;
Shipment is short.

11. Why do exporters greatly prefer confirmation of credit from their bank?
Because the bank in his own country not only handles the paperwork but also makes payment itself and
recovers the funds from the buyers bank.
12. Distinguish Partial shipments and Shipment in installments.
Shipment in installments means that an agreed schedule has been set up, for example, three equal
shipments in March, August and October 2012.
A partial shipment is simply an incomplete shipment with some part of the goods to follow later.
13. Explain the two principles that make letters of credit safe for both exporter and buyer: Autonomy and
Strict compliance.
Autonomy means that the L/C is a contract in its own right, entirely separate from the contract for the sale
of goods.
Strict compliance means that the exporter must present to the bank shipping documents that comply in all
respects with the terms of the credit. Small deviations will result in refusal by the bank to pay.

14. Why do people ask for a Prepayment Guarantee?

For some custom - made goods, the manufacturers often ask for an advance payment. Making this
prepayment is risky for the buyer until the items arrive in working order. The advance payment guarantee
promises the buyer that the bank will return advance payments if the exporter fails to deliver. The
guarantee is normally for 100% of the prepayment.
15. In terms of guarantee, what does it mean by without demur or objection?
It means on first demand. Whenever the beneficiary demands payment under the guarantee, the bank
will pay.
16. What is Non-payment Guarantee? What is Prepayment Guarantee?
Non-payment Guarantee commits the bank to pay if the buyer defaults. It is usually for 100% of the
contract price.
Prepayment Guarantee means a promise to the buyer that the bank will return advance payments if the
exporter fails to deliver. Normally, the guarantee is for 100% of the prepayment, decreasing as deliveries
are made.
17. What does Settlement by Sight Payment mean?
It means the exporter presents the necessary documents to the paying bank (normally the confirming
bank). If they are in order, the bank pays the full face value of the L/C.
18. What does Settlement by deferred Payment mean?
It means the letter of credit is not payable until a number of days after delivery. Payment is safe but it is
If the seller needs money immediately, he can exchange the L/C for cash (at a discount) with any
agreeable bank.
19. Why do exporters prefer Letter of Credit as a security for payment to asking for a payment guarantee
from the buyer?
Because payment guarantees are expensive to set up and they run into trouble so often.
20. What is a Letter of Credit? Why it is also called Documentary Credits?
A Letter of Credit is a binding agreement by a bank to pay a certain sum of money when the exporter
presents the necessary documents to the bank. In a letter of credit transaction, documents are exchanged
for money so they are formally called Documentary Credits.