Slide 2-66lnweb90.worldbank.org/ECA/Transport.nsf/0/786e3f9f... · Slide 2-66 Slide 2-67 . ... What are the disadvantages of this method of payment? ... The Letter of Credit has been

Module 2-3: Trade Payment Methods Facilitator

2-80

Overview

Start Trade Payment Methods with the overview of the part. Show

the Slide 2-66 and clarify each topic given in the overview.

Objectives

What are you expecting to learn in the Trade Payment Methods

Part?

(Let the participants share their expectations.)

Show the Slide2-67. Inform the participants about the objectives.

Make sure the participants understand each objective clearly.

Please turn to page 2-81 of your manual.

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5 minutes

Question

Objective

5 minutes

Overview

Slide 2-66

Slide 2-67


2-81

Scenario

Let the participants read the scenario, and then discuss it from

different perspective. Give concrete examples from SECI region.

Introduction

Show the Slide 2-68 and start process with introducing the Part 3.

Introduce the part and emphasize the distinction of trade between

past and today.


Slide

5 minutes

Facilitator

New Page

Scenario

5 minutes

Slide 2-68


2-82

Trade Payment Methods

Show the Slide 2-69 and continue process with explaining Trade

Payment Methods.

Let the participants discuss their opinions about recent trade

methods. Are these methods facilitating or complicating recent

trade methods?

Cash in Advance

Show the Slide 2-70 and continue process with explaining the

process of the first payment method Cash in Advance.

Attention that paying in advance gives the greatest protection for the

seller and puts the risk on the buyer.


Discussion

Slide

Attention

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5 minutes

7 minutes

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Slide 2-69

Slide 2-70


2-83

Could you give an example to what kind of problems the buyer

could have?

(Ask several of the participants. Give 2 minutes for answers.)

Summarize and write the answers of the participants on the flipchart.

Although this method of payment is not uncommon, the seller

requiring full payment in advance may cause lost sales to a foreign

or domestic competitor who is able to offer more attractive payment

terms. In some circumstances this cash in advance method can be

modified to a partial payment in advance with agreed upon

installments or additional terms available.


Facilitator

Flipchart

Question

New Page


2-84

Advantages and Risks of Cash in Advance Method


advantages and risks of cash in advance method

As a buyer and a seller in which positions do you choose /

accept cash in advance method?


How do you think the seller uses the money received from the

buyer?


Show the Slide 2-72 and explain the suitable situations for Cash in

Advance.


Question

Slide

Slide

7 minutes

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Slide 2-71

Slide 2-72

Question


2-85

Open Account

Show the Slide 2-73 and continue process with explaining the open

account.

An open account transaction means that the goods are

manufactured and delivered before payment is necessary. Attention

that the method provides great flexibility and in many countries

sales are likely to be made on an open account basis if the

manufacturer has been dealing wit the buyer over a long period of

time and has established a secure working relationship.


Slide

4 minutes

Facilitator

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Slide 2-73


2-86

Advantages and Risks of the Open Account Method

Show the Slide 2-74 and continue process with the Advantages and

and Risks of the Open Account Method.

What do you think about how the seller could decrease the

risks of open account method?


Show the Slide 2-75 and explain suitable situations.

Show the Slide 2-76 and explain unsuitable situations.

Give a 10 minutes break.


Slide

Slide

Question

7 minutes

Slide

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Slide 2-74

Slide 2-75

Slide 2-76

Break


2-87

On Consignment

Show the Slide 2-77 and continue process with explaining the On

Consignment process.

With consignment sales, the seller does not receive payment until

the importer sells or resells the goods. Explain On Consignment as

explained in the paragraph.

What are the disadvantages of this method of payment?



Slide

Facilitator

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5 minutes

Slide 2-77

Question


2-88

Advantages and Risks of the On Consignment Method


advantages and risks of the On Consignment Method.

In your business life, have you used on consignment method?

If yes, could you give examples of advantages and risks of that

method from your experiences?



Show the Slide 2-79 and explain the suitable situations for on

Consignment.


Slide

Question

Slide

Flipchart

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8 minutes

Slide 2-78

Slide 2-79


2-89

Draft or Documentary Collection

Show the Slide 2-80 and continue process with explaining the Draft

or Documentation Process.

The Draft or Documentary Collection method is employed when

either the cash in advance method is not acceptible to the buyer, or

the open account method is not acceptable to the seller. Explain the

method as explained in the page (Appendix A-17).

What do you think about the reason why the seller or the buyer

may accept draft or documentary collection method instead of

cash in advance or open account?



Slide

Question

Facilitator

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8 minutes

Slide 2-80


2-90

Attention that the buyer, after examine the documents, has three

options.

Explain these options as mentioned in the page.


Attention

Facilitator

New Page


2-91

Sight Drafts

Show the Slide 2-81 and continue process with explaining the Sight

Draft.

Explain the sight draft as explained first paragraph of the page

(Appendix A-18,19).


Slide

Facilitator

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5 minutes

Slide 2-81


2-92

Time Drafts

Show the Slide 2-82 and continue process with explaining the Time

Draft process.

If the seller has provided credit terms to the buyer, thereby allowing

the merchandise to be released before payment is received; it is

called a time draft. Explain the time draft as explained at the bottom

of the page. (Appendix A-20)

Advantages and Risks of Draft or Documentary Collection Method

Show the Slide 2-83 and continue proces with explaining the

advantages and risks of Draft or Documentary Collection Method.


Slide

Facilitator

5 minutes

Slide

5 minutes

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Slide 2-82

Slide 2-83


2-93

Letter of Credit

The Letter of Credit has been a keystone of international trade for

many years. Introduce Letter of Credit as explained in the first

paragraph of the page.

What do you know about Letter of Credit and its differences

from other payment methods?


What is a Letter of Credit?

Explain Letter of Credit as explained at the bottom paragraphs of

the page.


Facilitator

Question

Facilitator

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4 minutes

10 minutes


2-94

Show the Slide 2-84 and continue process with explaining the Letter

of Credit Process.

Show the Slide 2-85 and explain what a Letter of Credit is not. Direct

attention of the participants to post-it box at the same time.


Slide

Slide

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Slide 2-84

Slide 2-85


2-95

Continue explaining Letter of Credit as explained in the paragraphs.

Direct attention of the participants to the post-it box and explain

“Letter of Credit’s Usefullness in International Trade”.

What do you think about the advantages of the Letter of

Credit’s instructions?




Question

Facilitator

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Post-it

Break


2-96

Parties and Terms in Letters of Credits

To understand Letter of Credit exactly, the parties and terms which

are used in Letter of Credit should be examined.


parties of Letter of Credit.

There are four parties in Letter of Credit. Explain these parties as

explained in the paragraphs.

Letter of Credit Terms and Conditions

Show the Slide 2-87 and continue process with explaining Letter of

Credit Terms and Conditions.

Explain the Draft as explained in the last paragraph of the page.


Slide

Slide

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4 minutes

10 minutes

Slide 2-86

Slide 2-87


2-97

A letter of credit should contain a stated expiry date. Explain the

Expiration Date of a Letter of Credit as explained in the second

paragraph of the page.

Most Commercial Letters of Credit contain a Latest Shipping Date.

Explain the subject as explained in the third paragraph of the page.

Who opens L/C and for whom?



Facilitator

New Page

Question

Facilitator


2-98

Unless the credit stipulates otherwise, the UCP requires that

documents be presented within 21 days of the date of shipment or at

another such period stated in the Letter of Credit. Explain the subject

Latest Date for Presentation as explained in the related

paragraphs.

Any idea about UCP?


Attention that the letter of credit process has been standardized by a

set of rules published by the International Chamber of Commerce

(ICC). These rules are called the Uniform Customs and Practice for

Documentary Credits (UCP) and are contained in ICC Publication

No. 500.


Facilitator

Attention

New Page

Question


2-99

Basic Procedures for Establishing a Letter of Credit

Show the Slide 2-88 and continue process with explaining Issuance

Letter of Credit.

Explain issuance process of Letter of Credit as explained in the

bulleted sentences of the page (Appendix A-21).


Slide

Facilitator

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8 minutes

Slide 2-88


2-100

Show the Slide 2-89 and continue process with explaining Payment

under Letter of Credit Process.

Explain Payment Under a Letter of Credit process as explained in

the bulleted sentences of the page.


Slide

Facilitator

New Page

Slide 2-89


2-101

Documentary Requirements

Show the Slide 2-90 and continue process with explaining

requirements for Drafts.

Draft is drawn on whom?


Show the Slide 2-91 and explain the requirements for Invoices.


Slide

Slide

New Page

6 minutes

Question

Slide 2-90

Slide 2-91


2-102

Show the Slide 2-92 and continue process with explaining

requirements for Insurance Documents.

If other documents are required such as weight lists, consular

invoices, certificates of quantity or quality, and the like, they must be

issued and presented in accordance with the Letter of Credit. Give

information about other documents as explained in the first and

second paragraph of the page.

Amendment of a Letter of Credit


amendment Letter of Credit.

If the seller doesn't agree with the terms of the Letter of Credit, the

buyer will normally receive a Request for an Amendment. Explain

the amendment process as explained at the bottom of the page.


Slide

Slide

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5 minutes

Slide 2-92

Slide 2-93


2-103

Continue explaining the amendment process.

Could you discuss the advantages and risks of amendment in a

letter of credit?




Attention

Question

Flipchart

New Page


2-104

Advantages and Risks of the Letter of Credit Method


advantages and risks of the Letter of Credit.

Show the Slide 2-95 and continue explaining the advantages and

risks.

A Case about Letter of Credit

In this case a classic situation about Letter of Credit is given.

Continue process with the case.


Slide

Slide

Facilitator

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4 minutes

5 minutes

Slide 2-94

Slide 2-95


2-105

Explain the role of Letter of Credit in this situation.

A letter of credit gives both parties some guarantee of a fair trade

transaction. Explain the position of seller and buyer and their risks.


Attention

Facilitator

New Page


2-106

Types of Letter of Credit

Show the Slide 2-96 and continue process with the types of Letter of

Credit.

All Letters of Credit are issued in either a "revocable" or an

"irrevocable" form and "confirmed" or "unconfirmed." They should be

read carefully and understood to determine the advantages and to

decide which one is fitting for a particular situation.

Revocable Letter of Credit

Unless stated otherwise all credits are revocable. (Appendix A-22)


“Revocable Letter of Credit for Importer and Exporter”.

How does the seller prevent “no payment” under revocable

letter of credit?



Slide

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Post-it

Question

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1 minute

2 minutes

Slide 2-96


2-107

Irrevocable Letter of Credit

With this type of credit the buyer's bank has given an irrevocable

promise to pay the seller, on his/her proof of compliance with the set

conditions of the Letter of Credit, and the bank without the

authorization of the exporter cannot change this. (Appendix A-23)


“Irrevocable Letter of Credit for Importer and Exporter”.

Confirmed

A confirmed letter of credit is when a second guarantee is added to

the document by another bank. Explain the subject as explained in

the related paragraph.

Who is going to pay for the confirmation charges?


Unconfirmed

An unconfirmed letter of credit is when the document carriers the

assurance of just the issuing bank. Explain the subject as explained

in the last paragraph of the page.

What do you think in which situations confirmed and in

confirmed Letter of Credit is acceptable?


Give a lunch break.


Facilitator

Post-it

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Question

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2 minutes

1 minute

2 minutes

Break

Question


2-108

Confirmed and Unconfirmed Credit for Importer and Exporter

Confirmation is never to the importer’s advantage. Direct attention of

the participants to the post-it box and explain “Confirmation from

the Importer’s Viewpoint”.

Inform the participants about the directions for confirmation of the

credit as explained at the related paragraphs. Give concrete

examples for each situation (Appendix A-24,25,26).

Could you compare all types of letter of credit’s (revocable,

irrevocable, confirmed, unconfirmed) advantages and risks for

the seller and the buyer?




Facilitator

Post-it

Question

Flipchart

New Page

5 minutes


2-109

Special Letters of Credit

Show the Slide 2-97 and continue process with explaining Special

Letters of Credit.

Explain each type of Special Letters of Credit briefly.

Red Clause Letter of Credit provides the seller with cash prior to

shipment to finance production of the goods.

Deferred Payment Letter of Credit gives the buyer a grace period for

payment.

Usually Revolving Letter of Credit arrangements limit the number of

times the buyer may drawn down its line over a predetermined

period.

Back–to–Back Letter of Credit is used by traders to arrangements to

pay the ultimate supplier.


Slide

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Attention

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7 minutes

Slide 2-97


2-110

Transferable Letter of Credit allows the seller to transfer all or part of

the proceeds of the original Letter of Credit to a second beneficiary,

usually the ultimate supplier of the goods (Appendix A-27).

What is the risk of Transferable L/C?


Assignment of Proceeds is riskier than Transferable Letter of Credit

because the assignee is dependent upon the beneficiary for

compliance.

Export Letters of Credit

Continue process with explaining the export Letter of credit as

explained in the last paragraph of the page (Appendix A-28,29,30).


Facilitator

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10 minutes

Question


2-111

What do you think about the kind of problems exporters could

meet? Could you give examples from your business

environment?



Show the Slide 2-98 and 2-98. Continue process with explaining the

ten common mistakes.


Flipchart

Slide 2-98

Slide

New Page

Slide 2-99


2-112

Show the Slide 2-100, 2-101 and continue process with explaining

the checklist.

Let the participants fill the checklist during your explanations.


Slide

Attention

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Slide 2-100


2-113

Import Letters of Credit

Continue process with explaining the Import Letter of Credit

(Appendix A-31,32).

Could you compare and discuss the advantages and risks that

the complying and uncomplying documents for importer?




Facilitator

Question

Flipchart

New Page

5 minutes


2-114

Questions Importers Commonly Ask About Letters of Credit

Show the Slide 2-102 and continue process with the questions

importers commonly ask.

When the Letter of Credit expiry date is established, should

enough time be allowed for the goods to get to me or for

payment to be made when extended payment terms have been

negotiated (e.g. 60 days after sight)?

Answer the question with a concrete example.

What are the costs to issue a Letter of Credit?


Is there anyway that I can protect myself from receiving inferior

quality goods by using a Letter of Credit?



Slide

Question

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10 minutes

Slide 2-102


2-115

How quickly will the exporter take delivery my Letter of Credit?


Under a Letter of Credit, what kind of recourse available to me if

the goods arrive and they are not the the quantity or quality

agreed upon?


What happens if my ocean shipment arrives before my

transportation documents?



Question

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Question

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2-116

Problems that may be encountered and Tips

Show the Slide 2-103 and continue process with notifying the most

common problems of Letter of Credit and tips.

The banks use limited discreation in matching the terms and

conditions of the Letter of the Credit against the documents

presented. Notify this problem with the given example and suggest

the tip as explained in the paragraph.

In some cases the letter of credit fails to anticipate an aspect of the

transaction. Notify this problem with the given example and suggest

the tip as explained in the paragraph.


Slide

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7 minutes

Slide 2-103


2-117

Sometimes it is possible to miss the time limits when presenting the

required documents. Explain the situation and suggest the tip as

given in the paragraph.

Have you had such problems? Do you want add other problems

and tips you know? What should be done to avoid those kinds

of problems?



Suggest solutions if it is possible.

Comparison of Various Methods of Payment

The five explained payment methods are used for different situations

and each has some advantages and risks.


Facilitator

Question

Flipchart

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6 minutes


2-118

Show the Slide 2-104 and continue process with comparing the

Payment Methods as shown in the table.

Give a 10 minute break.


Slide

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Slide 2-104

Break


2-119

Case: Fruit Juice for Europe

�� After this exercise the participants will be able to analyze the

payment terms in a trade operation.

�� Give each participant one copy of case.

�� Let the participants read the case.

�� Ask the case questions to different participants.

�� After all give feedback to the participants and finish the

exercise.

1- b

2- a

3- Agents and distributors

4- No exclusivity. First, they should try.


Exercise

16 minutes

New Page

Facilitator


2-120

Case: Be Careful with the Contract

�� After this exercise the participants will be able to the role or

irrevocable confirmed documentary credit in trade.

�� Divide the participants into groups of three.

�� Let each group select a leader.

�� Give each group one copy of case.

�� Let the groups discuss and find solutions for the situation in the

case.

�� After group discussion let the group leaders to explain their

group solutions.

�� After all give feedback to the participants and finish the

exercise.

The comments for feedback can be found in Appendix B.


Exercise

Attention

New Page

17 minutes


2-121

Case: Real Documentary Credits

�� After this exercise the participants will be able to analyze the

terms of payment.

�� Give each participant one copy of case.

�� Let the participants read the case.

�� Ask the case questions to different participants.

�� Finally, give feedback to the participants and finish the exercise.

Credits of this kind definitely are not what are normally expected as

documentary credits, and they should be discouraged. There is the

fact, on the other hand, that the credit clearly stated that 60% of its

amount was without responsibility or engagement on the part of the

issuing bank. Any objection by the beneficiary to such a credit

should be made on receipt, not after the credit applicant’s non-

payment of the amount not covered by the credit.


Role Play: International Trade Deal

�� Divide participants into groups and give each group one copy of

case (Appendix B).

�� Let participants study their roles.

�� Ask groups to play their role and fill in the necessary documents

(in the appendix A) according to their role.


Exercise

40 minutes

Facilitator

New Page

17 minutes

Break

Exercise


2-122

Summary

Summarize the important points of Part 3 and continue process with

the progress check .

Two questions often arise in international trade. The first, for sellers, is: “If I ship the

goods, am I certain to be paid for them?” The second, for buyers, is: “If I send the money, will I

be certain to receive the goods?” No transaction should take place unless the answers are

definitely “yes”. Yet the two seem to contradict each other.

The seller can answer “yes” if the seller receives payment in advance, and the buyer

can answer “yes” if the buyer makes payment after delivery, but both of these solutions fail to

protect the other party from nonperformance.

Therefore, importers and exporters are well advised to arrange their contractual terms

to avoid court litigation. They have to use fully discussed payment terms and select the one that

satisfies both parties.

According to the transaction, the most convenient payment terms should be chosen but

in general we conclude that the most popular ones are a letter of credit and documents against

payment.


Summary

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2 minutes


2-123


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2-124

Progress Check

Let the participants take the test and explain the correct answer for

each question after completion of the test.

1. In a documentary collection, the banks;

a. Evaluate the quality of the goods before shipment

b. Act as intermediaries in the collection process

c. Finance the buyer and the seller

d. Dictate the terms

e. Only check the drafts

2. An exporter receives a P/O (purchase order) and payment for 100 kg. of

knitting yarn. This is an example of which type of payment option?

a. Cash in advance

b. On consignment

c. Open account

d. Letter of credit

e. Draft or documentary collection

3. If the bank holds shipping documents in custody and delivers them to the

buyer upon receipt of payment, what type of document of payment term

is this?

a. Letter of credit

b. Cash in advance

c. Cash against goods

d. Documents against collection

e. Open account

Check

8 minutes


2-125

4. An exporter receives a P/O (purchase order) for 1000 pullovers and

ships the goods and the documents directly to the buyer before receiving

payment for the goods. Which payment option is this?

a. Cash against documents

b. On consignment

c. Time draft

d. Cash in advance

e. Open account

5. An “open account” transaction gives all of the advantages to the;

a. Consignee

b. Seller

c. Bank

d. Forwarder

e. Buyer

6. Identify the payment option(s) which place(s) the seller in the risky

position of nonpayment by the buyer (select all that apply)?

I. Cash in advance III. Irrevocable letter of credit at sight

II. Open account IV. On consignment

a. I and II

b. Only II

c. II and IV

d. Only I

e. Only III


2-126

7. What kind of payment option(s) should the seller consider when his/her

products are in low demand (select all that apply)?

I. Cash in advance III. Open account

II. Letter of credit IV. Documents against payment

a. Only II

b. II and III

c. Only III

d. III and IV

e. Only IV

8. Identify the risk(s) faced by the seller when collecting payment from an

overseas buyer (select all that apply).

I. Country III. Industrial

II. Political IV. Foreign exchange

a. Only I

b. Only III

c. II and III

d. III and IV

e. I and IV

9. What payment option(s) should the seller consider when he/she is willing

to extend credit to the buyer?

a. Cash in advance

b. Letter of credit at sight

c. Draft or documentary collection

d. Documents against payment

e. Documents against acceptance


2-127

10. The seller is best protected by which of the following payment terms;

a. Open account

b. Revolving letter of credit

c. Confirmed, irrevocable letter of credit

d. Red clause letter of credit

e. Transferable letter of credit

11. In a letter of credit transaction, the bank deals;

a. Only with goods, not with documents

b. Only with documents, not with goods

c. With documents and goods

d. With quantity and quality of goods

e. Only with payment

12. The exporter is about to close a deal with the importer but he/she does

not know the issuing bank well. So what kind of letter of credit should be

opened to satisfy the exporter and minimize the risk?

a. Confirmed

b. Avalized

c. Straight

d. Red – clause

e. Back – to – back


2-128

13. In some cases the seller may need some advance payment in order to

make the deal possible. A L/C may assure that certain sums be paid in

advance of the presentation of documents and any advance paid will be

deducted from the total credit available when the credit is paid. What sort

of L/C is this?

a. Back – to – back

b. Confirmed

c. Red clause

d. Straight

e. Transferable

14. If you are intermediary purchasing materials under L/C for resale to a

final purchaser and you do not want to disclose your source to the buyer,

what kind of L/C should you use?

a. Back – to – back

b. Red clause

c. Back – to - back

d. Revolving

e. Confirmed