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Five Steps inNegotiating Payment
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OPEN ACCOUNT
DOCUMENTARYCOLLECTION
DOCUMENTARYCREDIT
ADVANCEPAYMENT
1
3
2
4STEP 1
MODE OFPAYMENT
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Open Accountpay at specific date in the futuretake place when importer has strong credit history orwell-known to seller
without any negotiating instruments
only evidence his commitment to pay at thecommitted time
no security (no protection for seller)
security (bank guarantees, credit exportersinsurance)
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Documentary Collections
Sales transaction is settled bybanks through an exchange of document
Process is governed by set of rules(Uniforms Rules for Collection byInternational Chamber of commerce)
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Documentary Credit
Bank to bank commitment of payment in favorof an exporter (Beneficiary) guaranteeing thatpayment will be made against certain documentwhich is found with terms set by buyer(Applicant)Set of rules from ICC (Uniform Custom andPractice (UCP600) - 90% bank use this)
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ADVANCE PAYMENT
pay before delivery
most secure for exporter butnot attractive for importer
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STEP 2
TIMING
OFPAYMENT
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Non-paymentState clear date of payment response to thekind of the method used in the payment ter
of the Contract :E.g : Letter of creditPayment shall be made by means of an irrevocableconfirmed letter of the credit. The buyer shall openthe letter of credit on or before < DATE OF OPENINOF LETTER OF CREDIT > on the term agreed by parti and annexed to this contract as
Appendix
How to solve problemsin payment by timing
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DelayOffer discounts to encourage
customers who have the cash to payearly and save money
E.g: Cash against invoice
a 1% discount if payment is made within 30 daysof the date of invoice.
How to solve problemsin payment by timing (cont)
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Calendar date (Fixed date)The Buyer will pay not later than on 15th of next month after receiving payment request of the Seller on the end of month.
Interval times Payment shall be effected by the Buyer, by M/T( Mail Transfer), within 7 days after receipt from the Seller of theshipping documents.
Ways to state time inpayment term
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PLACEOF
PAYMENT
Easilyto be
mistaken
Causingdisputes if not
be made clearly
Delayed paymentoften costs a lot of
money for compensationSTEP 3STEP 3STEP 3STEP 3
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The banks are able to makeforeign transfers
Differences in trade Law andcustoms between 2countries
Conflicts of interest
DIFFICULTIES IN NEGOTIATING
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POINT OF PAYMENT
When the
buyer instructs thebank to pay
When the
buyer paysthe money
into his bank
When the
buyers bank transfers
funds
When funds
reach thesellers bank
account
Buyer prefers Seller prefers
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Example
Payment shall be deemed to have beenreceived only when the full amount of thevalue of the goods and services as invoicedhas been credited to the Companys bankaccount without recourse or the Company hasreceived the full amount in cash.
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Vic thanh ton s c coi l hon tt chkhi ton b s tin ng vi gi tr ca hngha v dch v nh trong ha n cchuyn vo ti khon ngn hng ca cng tym khng b truy i hoc khi cng ty nhn c ton b bng tin mt.
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any payment made after theagreed date of payment1
Force Majeure2
Might be excused during a graceperiod3
STEP 4
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In most legal systems: the exporter has a right to becompensated for losses due to late payment
In fact: depends on the paymentagreement negotiated
Results of Payment
Step 5
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the confirmed, irrevocable, at-sight letter of credit
obliges a bank to pay
The exporter tries to exert pressure on thebuyer
open account, nosecurities and no
agreement on latepayment
The exporter has right to receive intereston the amount unpaid during the period of delay
Contract regulates latepayment
Agreement tostrengthen the payment
provisions with a paymentguarantee
Create a paymentregulation which makeslate payment impossible
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Confirmed, irrevocable, at-sight LC
Irrevocable : It can be neither amended nor cancelled without the agreement of allthe parties to the creditThe Issuing bank gives a binding undertaking to the Beneficiaryprovided all the credit terms and conditions are fulfilled
Under UCP 600 all letters of credit are irrevocable Confirm:
Where a bank usually in the Beneficiary's country, adds its ownundertaking confirming that payment will be made as long ascompliant documents are presented
Confirmation gives the exporter added security, particularly if thestanding of the Issuing bank is unknown or the current political andeconomic state of the importer's country is uncertain
At-sight:The terms of the letter of credit require immediate payment