ASTRON BUILDING

Payment Techniques in International Trade

1 st october 2008

Global Trade Service

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Payment Techniques in International Trade

1. Risks in International Trade
2. Payment systems
3. Risk and cost price of different modes of payment
4. Documentary collection
5. Documentary credit
6. Verification at receipt of the documentary credit
7. Documents
8. Frequently occurring discrepancies
9. Conclusions

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1. Risks in International Trade

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1.1. Commercial Risk

breach of contract
delivery of goods
quality of goods

payment risk
non-payment/insolvency - buyers creditworthiness
secured payment

Commercial risk is determined by the nature of the

parties and their contractual relationship

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1.2. Political Risk

political facts :
war - insurrection
force majeure : governmental measures
embargo - sanctions

economic and monetary facts :

foreign exchange (transfer risk)

temporary currency shortage
deferral/suspension of payments
currency fluctuations

Political risk is determined by location

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1.3. Litigation risk & other problems

litigation risk : obtaining a remedy in the event of breach
judgment risk - difference in (applicable) law
execution risk : can you recover if you win ?
what will it cost ?

transportation risk : insurance !

administrative : customs formalities and others
(documentation) - Incoterms
communication : distance- languages - psychology
(local standards - specific rules - weight and measurement
systems)

Litigation risk is determined by contractual conditions

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2. Payment systems

Advance payment
Cash
Transfer
Cheque
Deferred payment
Transfer or Cheque at a fixed date
Draft at a fixed date

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2.1. MODE AND DELAY OF PAYMENT

Annex 2

ADVANCE PAYMENT(transfer,Cheque) at the time of order or at least

before shipment of the goods
ABSENCE OF DELAY OF PAYMENT
Execution of a double engagement taken by

EXPORTER in a
strong position and/or
inspiring
full confidence

- both the importers bank

- and the exporters bank

CONFIRMED DOCUMENTARY CREDIT

DELAY OF PAYMENT OCCASIONING A RISK ON THE EXPORTERS BANK

BALANCE OF
POWER

Execution of an engagement by the importers bank

BALANCE
OF POWER

NON CONFIRMED DOCUMENTARY CREDIT

DELAY OF PAYMENT OCCASIONING A RISK ON THE IMPORTERS BANK
Without any engagement taken by a bank

DOCUMENTARY COLLECTION
DELAY OF PAYMENT OCCASIONING A RISK ON THE IMPORTER, THE EXPORTERS
CLAIMS ARE MATERIALISED BY COMMERCIAL DOCUMENTS

IMPORTER in a
strong position and/or
inspiring
full confidence

OPEN ACCOUNT (transfer,Cheque) after reception of the goods

DELAY OF PAYMENT OCCASIONING A RISK ON THE IMPORTER, CLAIMS ARE
NOT MATERIALISED BY COMMERCIAL DOCUMENTS

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3. Risk and cost price of different modes of

payment

For Exporter
Risk
6
5
4
3

Cost

1. Advance payment

4. Documentary Collection D/P

2. Confirmed irrevocable documentary credit

5. Documentary Collection D/A

3. Non confirmed irrevocable documentary credit

6. Open account

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3. Risk and cost price of different modes of

payment

For Importer
Risk
1

Cost

1. Advance payment

4. Documentary Collection D/P

2. Confirmed irrevocable documentary credit

5. Documentary Collection D/A

3. Non confirmed irrevocable documentary credit

6. Open account

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4. Documentary collection

Definition
Scheme & routing
Types
Remarks

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4.1. Documentary Collection: routing & scheme

Seller/ Supplier

Buyer

Goods shipped (1)

Presentation of
documents (4)

Payment/
Acceptance
(5)

Comm.docs +
collection
instructions (2)

Payment/
Acceptancenotice (7)

Comm.docs +
Collection-instructions(3)

Presenting
bank

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Payment/
(6)
Acceptance-notice

Remitting
bank

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4.2. Documentary Collection: Main Types

Presentation of documents in order to obtain immediate

payment = D/P = Documents against Payment
Presentation of documents in order to have a draft accepted
(+ paid at maturity) = D/A = Documents against Acceptance

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4.2. Documentary Collection: Main Types

Documents against Payment ( D/P)

D/P at sight
D/P arrival of the goods
Documents against Acceptation (D/A)
D/A at fixed maturity date
D/A at X days after sight
D/A at X days after date of transport document

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4.3. Documentary collection: remarks

retention of title document

goods already shipped
payment risk on buyer remains (no liability from banks)
different risks
securing payment : guarantee or stand-by letter of credit
ICC rules : URC 1995 <no 522>

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5. Documentary credit

Definition
Types
Scheme & routing
Remarks

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5.1. Documentary Credit: definition

Commitment of a bank (issuing bank) at the request of the

buyer (applicant) to put a certain amount at the disposal of
the seller/supplier (beneficiary), against very specific
conditions
These conditions are verified by the issuing bank, by means
of the documents imposed on the supplier/seller
Irrevocable:
once established, the documentary credit cannot be amended
or withdrawn without the consent of the beneficiary (and
confirming bank) until the expiry date

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5.2. Documentary Credit: main types

Unconfirmed

Confirmed

Guaranteed (= silent confirmation)

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5.3. Documentary Credit: routing & scheme

Buyer

Seller
contract

(1)

Request to open a
Documentary Credit

(3)

advising

Opening/Issuing
(2)

Issuing bank

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Advising bank

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Unconfirmed documentary credit

No commitment from the advising bank; only guarantee of
authenticity.
Only the issuing bank is committed (exposure to bank and
country risk)

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5.3. Documentary Credit: routing & scheme

Buyer

Seller
contract

(1)

Request to open a
Documentary Credit

(3)

Confirmation

Opening/Issuing
(2)

Issuing bank

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Confirming bank

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Confirmed documentary credit

On demand of the issuing bank, the nominated bank (in beneficiarys
country) adds its own independent undertaking, in exactly the same
terms of the issuing bank, to that of the issuing bank - at a price.
Beneficiary avoids country risk and eliminates bank risk.
If confirmation refused : issuing bank must promptly be informed.

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Guaranteed documentary credit (China !!)

Usually known as silent confirmation.
No request (or permission) from issuing bank.
At request of beneficiary, payment is guaranteed by advising
bank.
Undertaking :
independent from documentary credit
can be conditional

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5.3. Documentary Credit: routing & scheme - utilization

(by payment at the counters of the advising/confirming bank)

Buyer / Applicant

Seller / Beneficiary

(1)Goods shipped
(4 bis) debit +
documents

(2) documents

(3 bis)
payment

(3) documents

(4) reimbursement
Issuing bank

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Advising or
Confirming bank

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5.4. Documentary Credit: remarks

Important Principles:
Banks stick exclusively to the text of the documentary credit
Banks only take full account of the documents, never take
into consideration the goods.

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5.4. Documentary Credit: remarks

avoiding different risks

a bankers payment obligation (creditworthiness)
separating performance and payment obligations
relationship with negotiable instruments
facilitating financing of trade
internationally agreed upon and on solid ground
Uniform Rules and Practice for Documentary Credits
(UCP) Publ no 600 - 2007

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5.5.Documentary Credit: Discount without recourse

LC has to be confirmed by Fortis Bank

assumption of country & Bank risk
Makes the discounting bank a contracting party
to avoid legal notification abroad
Payable at our counters
if not you need an assignment/subrogation
Compliant documents have to be presented
to avoid technical risk. Non-compliant documents can
provoke non-payment

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6. Verification at receipt of the documentary

credit:
That the type of the documentary credit and its terms
and conditions comply with the sales agreement,
That there are no unacceptable conditions,
That all documents can be presented as required per
LC terms,
That both the goods description and the unit price are in
conformity with the sales agreement,
That the credit amount is sufficient to cover all charges.
That the latest date of shipment, the expiry date of the
credit and the presentation period of the shipping
documents, permit the beneficiary to :
meet the order,
to realize the expedition,
present the documents

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6. Verification at receipt of the documentary credit

That the place of loading in charge and the place of delivery

doesnt differ from those in the sales agreement,
That the insurance clauses are in conformity with the sales terms,
That beneficiarys name and address are mentioned correctly,
Which party pays which charges,
That no documents are to be issued by the applicant.

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7. Documents
Commercial invoice

Transport document
Insurance

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7. Documents
Commercial invoice

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BENEFICIARYSNAMEANDADDRESS

INVOICE
A...APPLICANT

DESCRIPTIONOFGOODS
(complyingwithLCterms)

Amount
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7.1.Documents : Commercial invoices Must appear on their face to be issued by the beneficiary
Must be made out in the name of the applicant
Need not be signed ( unless otherwise stipulated in the Credit)
Amount in excess of the amount permitted by the Credit
Description of the goods must correspond with the description in the
Credit

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7. Documents
Commercial Invoice
Transport document:
Bill of Lading

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BILLOFLADING
SHIPPER
CONSIGNEE
NOTIFY
OCEANVESSEL
PORTOF
DISCHARGE

MARKS

PORTOFLADING
NUMBERORIGINAL

DESCRIPTIONGOODS

NOLINESLTD
WEIGHT

SHIPPEDinapparentgoodorder...

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7.2.Transport documents - Marine /Ocean Bill of

Lading ...

Appears on its face to indicate the name of the carrier and to have
been signed
Indicates that the goods have been loaded on board or shipped on a
named vessel
Indicates the port of loading and discharge stipulated in the Credit
Sole original , or full set
Appears to contain all the terms and conditions of carriage
Contains no indication that it is subject to a charter party
Meets the stipulation of the credit ...

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7. Documents
Commercial Invoice
Transport document:

Bill of Lading
CMR
Airway Bill
Railway Bill (duplicate)

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7. Documents
Commercial Invoice
Transport document:

Bill of Lading
CMR
Airway Bill
Railway Bill (duplicate)

Insurance

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7. Documents

Packing list
Certificate of origin
Inspection certificate
Weight list
........

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INCOTERMS 2000 of the ICC

Objective is to clarify the most

important responsibilities of
buyer and seller
* Responsibility at the level of
risk
* Responsibility at the level of
charges

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INCOTERMS

EXW
FCA
FAS

EXW = EX WORKS

FOB

FCA = FREE CARRIER

FAS = FREE ALONGSIDE SHIP
FOB = FREE ON BOARD
CFR = COST AND FREIGHT
CIF = COST,INSURANCE AND FREIGHT
DES = DELIVERY EX SHIP

CFR/CIF

DES
DEQ
DDU

DEQ = DELIVERY EX QUAY

DDU = DELIVERED DUTY UNPAID
DDP = DELIVERED DUTY PAID

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DDP

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8. Frequently occurring discrepancies

Credit expired,
Late presentation,
Late shipment,
Incomplete shipment (not all goods delivered) ,
Buyers name/address not correct,
Documents not presented,
Incomplete documents,
Documents not corresponding with each other,
Certificates not signed
Incomplete remarks/ not in conformity with,
Different weights,
Incorrect and incomplete description of goods,

Documents not legalized.

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Discrepancies: Bill of lading

Shipment on board not mentioned,

Non approved corrections/additions,
INTENDED vessel,
INTENDED port of loading/ discharge,
Consignee incorrect,
No mention regarding to charges,
Shipment on deck,
Full set of documents not presented,
Late presentation (STALE),
Reserves made regarding to goods and its packing
(UNCLEAN),
Port of loading / port of discharge incorrect,
Charter party bill of lading if not authorized by the credit terms,
Signature.

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Discrepancies: Insurance

Other currency than in letter of credit,

Issued after shipment of goods,
Insurance for less than 110%,
Not all risks (see LC terms) covered,
Vessels name not mentioned or incorrect
CLAIMS PAYABLE incorrect.

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9. Documentary Credits: Conclusions

9.1. Advantages for the Buyer/Applicant

certitude that payment (undertaking) will only take place on
presentation of documents complying with the terms of the credit
(normally after shipment of goods)
goods have to be shipped within the time limit set by himself in the
conditions of the credit
he can negotiate a discount or preferential conditions due to the
payment guarantee given through the credit

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9. Documentary Credits: Conclusions

9.2. Disadvantages for the Buyer/Applicant

no certainty as to the conformity of the goods
no guarantee that goods will actually be shipped
the documents presented may not reflect the reality (and banks
would not be liable as per art 15 - UCP)
once the (irrevocable) credit is issued, it can only be amended or
cancelled with the agreement of all parties concerned

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9. Documentary Credits: Conclusions

9.3. Advantages for the Seller/Beneficiary

payment guarantee from the issuing (and confirming) bank on
presentation of credit conform documents
once the credit has been issued, it can not be amended or
cancelled without his consent
the credit enables financing more easily

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9. Documentary Credits: Conclusions

9.4. Disadvantages for the Seller/Beneficiary

documentary requirements can be complex
if he fails to present credit conform documents, he will loose
guarantee of payment
amendments of the credit can only be made if the buyer and
the involved bank(s) agree to instruct so

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9. Documentary Credits: General Conclusions

The documentary credit is the banking technique par excellence to

avoid the different kinds of risks in international trade
The credit and its derivative products create a lot of possibilities to
facilitate international trade
The credit is an outstanding instrument for the banker to prove its
professional skill and to improve the services given to its customers.

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Conclusion

EXPORT IS IMPORTANT AND GOOD FOR BUSINESS . . .

BEING PAID IS EVEN BETTER !

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Your Contact:
Carina SUTERA SARDO
Senior Trade Finance Manager
Global Trade Services
Tel: + 32 (81) 245 315
Mobile: + 32 (0)479.99.61.47
carina.suterasardo@fortis.com

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Thank you for your attent

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