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Figure 20. Single Administrative Document Form

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Figure 21. Russian Goods Customs Declaration Form

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Chapter 4. Bank Documents

1. Risks in International Trade

1a. Discussion

1.List as many ways of payment in trade as possible. Use the pictures to help you.

2.What method of payment would you use to pay for the following? In some cases there may be more than one way.

3.Does payment in international trade involve any of these methods? Is it risky or safe?

1b. Reading

Read the text about risks for exporters and importers and methods of payment used in international trade and see if your suggestions were right.

Risks in International Trade

Getting paid for providing goods or services is important for any business. However, getting paid for an international transaction can be a very different experience from securing payment on business within one country due to the number of extra factors that can influence the process.

Both sides can face risks¹ in an export transaction. This is because there is always the possibility that the other side may not fulfil the contract.

For the exporters there is the risk of buyer default², the customers might not pay in full for the goods. There are several possible reasons for this: the importers might go bankrupt; a war might start or the importer’s government might decide to ban³ trade with the exporting country; or they might ban imports of certain commodities. Another possibility is that the importers might run into difficulties getting the foreign exchange to pay for the goods. It is even possible that the importers are not reliable and simply refuse to pay the agreed amount of money.

For the importers there is a risk that the goods will be delayed and they might only receive them a long time after paying for them. This may be caused by port congestion or strikes6.

Delays in fulfillment of orders by exporters and difficult Customs clearance in the importing country can cause loss of business. There is also a risk that the wrong goods might be sent or products might get damaged.

There is also a risk of financial loss because of a change in the exchange rate . This can happen in any export-import situation where the national currencies go up and down in terms of the payment currency. The risk can be avoided with the help of a bank by buying the foreign exchange on the forward exchange market .

Many factors make exporting riskier than domestic sales. However, there are also several methods of reducing risks. One of the most important factors in reducing risks is to know a suitable method of payment for each transaction.

There are several basic methods of receiving payment for products sold abroad. As with domestic sales, a major factor that determines the method of payment is the amount of trust in the buyer's ability and willingness to pay. For sales within one country, if the buyer has good credit, sales are usually made on open account9; if not, cash in advance¹° is required. For export sales, the same methods may be used; however, other methods are also often used in international trade. Ranked in order from the least secure for the exporter to the most secure, the basic methods of payment are (see the Payment Risk Ladder below (Fig. 22)):

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–open account;

–documentary collection (bills for collection)¹¹;

–letter of credit;

–cash in advance.

It should be underlined that none of the methods completely eliminates¹² the payment risks associated with international trade.

Figure 22. Payment Risk Ladder

Notes:

¹ face risks – подвергаться рискам

² buyer default – неуплата покупателем ³ to ban – запретить

to run into difficulties – испытывать затруднения

port congestions – заторы в порту

6 strikes – забастовки

exchange rate – валютный курс

forward exchange market – валютный форвардный рынок 9 open account – открытый счет

¹° cash in advance – предоплата

¹¹ documentary collection (bills for collection) – документарное инкассо (векселя на инкассо) ¹² eliminates – устраняет, исключает

1c. Vocabulary

Insert a suitable preposition or an adverb into B and match the word in A with the word or word com-

1.The company could not pay the people who had supplied it with goods because it _____.

2.All countries need _____ to pay for imports.

3.Before dealing with a buyer, one should always make sure that the buyer is _____.

4.The new government _____ all trade with several countries.

5.The company had a _______ in payment and the partners lost $4 million.

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6.It took ten years for the government to _____ its economic plan.

7.In all businesses there are _____ of losing money.

8.The man _____ to go away until he saw the manager.

Choose the word or word combination which means the following and tick (√) it.

1d. Comprehension

Decide if the statements are true of false:

1.Exporters should find out everything they can about their buyers.

2.Banks can solve all payment problems.

3.The information about foreign exchange availability cannot help to avoid certain problems in international trade.

4.Exporters should know if the country has a habit of changing rules regularly or quickly.

5.In general, the more generous the sales terms are to the buyer, the smaller the risks are to the exporter.

2. Open Account and Advance Payment

2a. Reading

Open Account and Advance Payment

Open account is the least secure method of trading for the exporter but the most attractive to buyers. Under open account, the exporter simply bills¹ the customer who is expected to pay under agreed terms at a future date. Some of the largest firms abroad make purchases² only on open account.

Goods are shipped and documents are remitted³ directly to the buyer, with a request for payment at the appropriate time (immediately, or 30, 60, 90 days following shipment or delivery).

However, open account sales also pose risks . An exporter has little or no control over the process, except for imposing future trading terms and conditions on the buyer.

Clearly, this payment method is the most advantageous for the buyer, in cash flow6 and cost terms. As a consequence, open account trading may be satisfactory if the buyer is well-established , has demonstrated a long and good payment record, or has been thoroughly checked for creditworthiness .

In certain markets, such as Europe, buyers will expect open account terms. Before issuing a pro forma invoice9 to a buyer, exporters should thoroughly examine the political, economic, and commercial risks and consult with their bankers if financing will be needed for the transaction. The financial risk can often be mitigated¹° by obtaining a credit insurance policy¹¹ to cover the potential insolvency¹² of a customer.

Advance payment (cash in advance /payment in advance) is the most secure method of trading for exporters and, consequently the least attractive for buyers. Payment is expected by the exporter in full, prior to goods being shipped. Receiving payment by cash in advance of the shipment might seem ideal. In this situation, the exporter is relieved of collection problems¹³ and has immediate use of the money. A wire transfer¹ ,

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or telegraphic transfer (T/T) is commonly used and has the advantage of being almost immediate. It takes 3-4 days for the exporter to receive the wire transfer from abroad. T/T payment in advance is usually used when the sample and small quantity shipments are transported by air. The reason is that the documents like an air waybill, a commercial invoice and a packing list will be sent to the importer along with the shipment by the same plane. As soon as the shipment arrives, the consignee can clear the customs and pick up the goods with the documents. T/T payment in advance presents risk to the importer if the supplier is not an honest one.

Payment by cheque may result in a collection delay of up to six weeks. Therefore, this method may defeat15 the original intention of receiving payment before shipment.

Many exporters accept credit cards in payment for exports of consumer and other products, generally of a low dollar value, sold directly to the end user. International credit card transactions are typically done by telephone or fax. Due to the nature of these methods, exporters should be aware of fraud.

For the buyer, however, advance payment tends to create cash flow problems, as well as increase risks. Furthermore, cash in advance is not as common in most of the world as it is in the United States. Buyers are often concerned that the goods may not be sent if payment is made in advance. Exporters that insist on this method of payment as their sole method of doing business may find themselves losing out to competitors who offer more flexible payment terms.

Notes:

¹ bills – выставляeт счёт ² purchases – покупки

³ are remitted – пересылаютсяpose risks – несут риски

except for imposing future trading terms and conditions – кроме навязывания будущих торговых условий 6 cash flow –поток денежных средств

well-established – заслуживающий доверия, признанныйcreditworthiness – кредитоспособность

9 pro forma invoice – предварительный счет ¹° be mitigated – быть уменьшенным

¹¹ a credit insurance policy – полис кредитного страхования ¹² insolvency – неплатежеспособность

¹³ is relieved of – освобожден от

¹ a wire transfer – телеграфный перевод 15 defeat – сводить к нулю

2b. Comprehension Complete the table.

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Complete the gaps with one suitable word:

Risks in International Trade. Methods of Payment.

Getting paid for an international transaction is a very complicated experience due ____ the number of extra factors that can ____ the process. Both sides can ____ risks in an export transaction.

For the exporters there is the risk of buyer ____. The importers might ____ bankrupt; a war might start or the importer’s government might decide to ____ trade with the exporting country; or ban imports of certain commodities. Another possibility is that the importers might run ____ difficulties getting the foreign

____ to pay for the goods. The importers may not be reliable and simply ____ to pay the agreed amount of money.

For the importers there is a risk that the goods will be ____or that the ____goods might be sent, or products might get damaged. There is also a risk of ____ loss because of a change in the exchange ____.

However, there are also several methods of payment which ____ risks. Ranked in order from the least secure for the exporter to the most secure, the basic methods of payment are: ____ account; documentary

____ (bills for collection); letter of credit; cash in ____. ____ of the methods completely eliminates the ____

risks.

Open account is the ____secure method of trading for the exporter, but the most attractive to buyers.

____ open account, the exporter simply ____ the customer, who is expected to pay under agreed terms ____ a future date. Goods are shipped and documents are ____ directly to the buyer, with a ____ for payment at the appropriate time (immediately, or 30,____ ,90 days following shipment or delivery). An exporter has little or no ____ over the process, except for ____ future trading terms and conditions on the buyer. Open account trading may be ____ if the buyer is well established or has been thoroughly checked for ____.

Advance payment (____ in advance /payment in advance) is the most secure method of trading for

____ and, consequently the least attractive for ____. Payment is expected by the exporter in full, prior ____

goods being shipped. Receiving payment by cash in advance of the shipment might seem ideal. In this situation, the exporter is relieved ____ collection problems and has immediate ____ of the money. A ____ transfer, or telegraphic transfer is commonly used and is almost ____. Many exporters ____ credit cards in payment for exports of consumer and other products sold directly to the ____ user. International credit card transactions are typically done by ____ or fax. Due to the nature of these methods, exporters should be aware of ____.

Payment in advance is usually used when the ____ and ____quantity shipments are transported by

____. This method presents risk to the ____ if the ____ is not an honest one. Besides, advance payment tends to create ____ flow problems. Furthermore, cash in advance is not as ____ in most of the world as it is in the United States.

3. Documentary Letters of Credit

3a. Reading

Documentary Letters of Credit

The buyer may be concerned that the goods may not be sent if the payment is made in advance. To protect the interests of both buyer and seller, documentary letters of credit¹ (also referred to by banks and other financial institutions as documentary credits) are often used.

A letter of credit adds a bank's promise of paying the exporter when the exporter has complied with all the terms and conditions of the letter of credit. The foreign buyer applies for issuance of a letter of credit to the exporter and therefore is called the applicant²; the exporter is called the beneficiary³.

Payment under a documentary letter of credit is based on documents, not on the terms of sale or the condition of the goods sold. Before payment, the bank responsible for making payment verifies that all documents are exactly as required by the letter of credit. When they are not as required, a discrepancy exists, which must be cured before payment can be made. Thus, the full compliance of documents with those specified in the letter of credit is mandatory.

Often a letter of credit issued by a foreign bank is confirmed by a local bank. This means that the local bank, which is the confirming bank6, adds its promise to pay to that of the foreign, or issuing, bank. Letters of credit that are not confirmed are advised through a local (advising) bank and are called advised letters of credit. Exporters may wish to confirm letters of credit issued by foreign banks not only because they are un-

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familiar with the credit risk of the foreign bank but also because there may be concern about the political or economic risk associated with the country in which the bank is located.

A letter of credit usually includes the information about: applicant (the importer), beneficiary (the exporter), opening bank , negotiating bank9, specification and quantity of the goods, amount of money, loading port and destination port, shipment date, the validity date of the L/C, terms and conditions agreed by both the importer and seller, and the documents required by the importers (bill of lading, commercial invoice, packing list, insurance certificate, etc.)

A letter of credit may be either irrevocable¹° (that is, it cannot be changed unless both the buyer and the seller agree to make the change) or revocable (that is, either party may unilaterally¹¹ make changes). A revocable letter of credit is inadvisable. A letter of credit may be at sight, which means immediate payment upon presentation of documents, or it may be a time or date letter of credit¹² with payment to be made in the future. Most letters of credit are "irrevocable" once the importer has had them sent.

Any change made to a letter of credit after it has been issued is called an amendment¹³. The fees charged by the banks involved in amending the letter of credit may be paid by either the exporter or the foreign buyer, but who is to pay what charges should be specified in the letter of credit.

An exporter is usually not paid until the advising or confirming bank receives the funds from the issuing bank. To expedite¹ the receipt of funds, wire transfers may be used. Bank practices vary, however, and the exporter may be able to receive funds by discounting¹ the letter of credit at the bank, which involves paying a fee to the bank for this service.

Notes:

¹ documentary letters of credit – товарные аккредитивы ² applicant – заявитель

³ beneficiary – бенефициарий, выгодоприобретательdiscrepancy – разница; различие

confirmed – подтвержденный

6 confirming bank – подтверждающий банкadvising bank – извещающий банк

opening bank – банк-эмитент

9 negotiating bank – банк, производящий учет (переуступку) векселей ¹° irrevocable – безотзывный

¹¹ unilaterally – в одностороннем порядке

¹² time or date letter of credit – срочный или датированный аккредитив ¹³ amendment – поправка

¹ to expedite – ускорять

¹ discounting – продажа, учет

A Typical Letter of Credit Transaction (see Fig. 23)

1.The Seller and the Buyer conclude a sales contract with a method of payment usually by a letter of credit (documentary credit).

2.The Buyer applies to his issuing bank, usually in the Buyer's country, for a letter of credit in favor of the Seller (beneficiary).

3.The issuing bank requests another bank, usually a correspondent bank in the Seller's country, to advise, and usually to confirm, the credit.

4.The advising bank, usually in the Seller's country, forwards the letter of credit to the Seller informing about the terms and conditions of the credit.

5.If the credit terms and conditions conform to the sales contract, the Seller prepares goods and documentation, and arranges delivery of the goods to the carrier.

6.The Seller presents the documents evidencing the shipment and the draft (bill of exchange) to the paying, accepting or negotiating bank named in the credit (the advising bank usually).

7.The bank examines the documents and the draft for compliance with the credit terms. If complied with, the bank will pay, accept or negotiate.

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8.The bank, if other than the issuing bank, sends the documents and the draft to the issuing bank.

9.The bank examines the documents and the draft for compliance with the credit terms. If complied with, the Seller's draft is honored.

10.The documents are released to the Buyer after payment, or on other terms agreed between the bank and the Buyer.

11.The Buyer surrenders the bill of lading to the carrier (in case of ocean freight) in exchange for the goods or the delivery order.

3b. Vocabulary

Replace the phrases in italics with the correct expression from the box.

1.The bank wrote to another bank they usually work with in the exporter’s country.

2.The importer’s bank has just put out the credit.

3.The exporters received a letter telling them about the credit from the bank.

4.The importers sent a request to open a credit to their bank.

5.The two businessmen discussed the contract which was agreed at the end of the meeting.

6.The importers wanted the advising bank to confirm that the credit was available.

7.The importers were willing to arrange a guaranteed credit in favour of the exporters.

Figure 23. Typical Letter of Credit Transaction

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3с. Comprehension

Study a sample advice of a credit (Fig.24) and answer the questions:

1.Who is the buyer?

2.Who is the seller?

3.Which is the opening bank?

4.Which is the advising bank?

5.What kind of letter of credit is it?

6.What kind of draft will be attached to the transport documents?

Dear Sirs:

We have been requested by the Sun Bank, Sunlight City, Import-Country to advise that they have opened with us their irrevocable documentary credit number SB-87654 for account of DEF Imports, 7 Sunshine Street, Sunlight City, ImportCountry in your favor for the amount of not exceeding twenty five thousand U.S. dollars (US$25,000.00)

available by your draft(s) drawn on us at sight for full invoice value accompanied by the following documents:

1.Signed commercial invoice in five (5) copies indicating the buyer's Purchase Order No. DEF-101 dated January 10, 2006.

2.Packing list in five (5) copies.

3.Full set 3/3 clean on board ocean bill of lading, plus two (2) non-negotiable copies, issued to order of the Sun Bank, Sunlight City, Import-Country, notify the above accountee, marked "freight Prepaid", dated latest March 19, 2001, and showing documentary credit number.

4.Insurance policy in duplicate for 110% CIF value covering Institute Cargo Clauses (A), Institute War and Strike Clauses, evidencing that claims are payable in Import-Country.

Covering: 100 Sets 'ABC' Brand Pneumatic Tools, 1/2" drive, complete with hose and quick couplings, CIF Sunny Port Shipment from Moonbeam Port, Export-Country to Sunny Port, Import-Country

1.All documents indicating the Import License No. IP/123456 dated January 18, 2006.

2.All charges outside the Import-Country are on beneficiary's account.

Documents must be presented for payment within 15 days after the date of shipment.

Draft(s) drawn under this credit must be marked

Drawn under documentary credit No. SB-87654 of the Sun Bank, Sunlight City, Import-Country, dated January 26, 2006.

We confirm this credit and hereby undertake that all drafts drawn under and in conformity with the terms of this credit will be duly honored upon delivery of documents as specified, if presented at this office on or before March 26, 2006.

Very truly yours,

Authorized Signature

Unless otherwise expressly stated, this Credit is subject to the Uniform Customs and Practice for Documentary Credits, 1993 Revision, International Chamber of Commerce Publication No. 500.

Figure 24. Sample Advice of Credit

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