Business
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IBM-416-Chapter16-FinancialRisk-PaymentMethods1.pptxInternational Risk & Payment Terms
Chapter 16
1
International Business Risks
Political Risk
Social Risk
Economic Risk
Financial Risk
2
Political Risk
Government Instability
Change in Business Regulations
New Trade Barriers
3
Social Risk
Religious Beliefs
Values
Family-work Relationships
4
Economic Risk
Consumer Spending Patterns
Inflation
Exchange Rate Fluctuations
5
Financial Risk
Incomplete international data
Greater likelihood of procedural errors
Events outside the company’s control
Company financials contain risk
6
Payment Terms
Cash in Advance
Letter of Credit
Documentary Collection
Open Account
Minimum Guarantee
Consignment
7
L/Cs Come in Different Forms
Most common: Confirmed, irrevocable, drawn on a U.S. bank, payable in US dollars
Confirmed: a U.S. bank adds its guarantee to pay assuming terms of the L/C are met
Irrevocable: can not be changed or cancelled without permission of both buyer & seller.
Drawn on a U.S. bank: payment will be available to seller through a U.S. bank
Payable in US dollars: avoids foreign exchange issues
Letter of Credit Participants
| Term | Definition | Activity |
| Applicant | Importer | Buy |
| Beneficiary | Exporter | Sell |
| Opening Bank | Importer’s Bank | Issues L/C |
| Advising Bank | Exporter’s Bank | Advises L/C |
| Confirming Bank | Advising Bank or 3rd Party Bank | Confirms L/C |
| Paying Bank | Any bank as specified in L/C | Pays the Draft |
7. Documents
3. Letter of Credit
Applicant Importer/Buyer
Exporter’s Bank/ Advising Bank
Importer’s Bank/ Issuing Bank
Buyer & Seller Agree
6.
Documents
8.
Documents
2. Application
1.
1.
5. Product is Shipped
2.
9.
10.
Export Letter of Credit Cycle
4.
Letter of Credit
Beneficiary
Exporter/Seller
11
1. Buyer & Seller Agree to Transaction Terms
2. Buyer submits application to Issuing Bank
3. Issuing Bank
A. Reviews application & buyers credit availability
B. Issues LC
C. Sends LC to advising bank or beneficiary
4. Advising bank reviews LC and forwards to beneficiary
5. Beneficiary reviews LC, manufactures & ships product
6. Documents are completed & gathered by beneficiary & sent to Advising Bank
7. Advising Bank negotiates the documents and if clean forwards documents to issuing bank
A. If discrepancies are found, beneficiary is notified before documents are sent to issuing bank.
8. Issuing Bank negotiates documents & advises applicant that documents will be accepted and funds will be transferred per the LC.
9. Funds are transferred from the Issuing bank to Advising bank.
10. Funds are received by advising bank & beneficiary.
| PAYMENT | PAYMENT | WHERE | ADVANTAGES TO | |
| METHOD | TERMS | USED | BUYER | SELLER |
| CASH | -Buyer pays seller | -New relationships | -No advantage-pays | -Eliminates risk |
| IN ADVANCE | before goods are | -Smaller transactions | prior to receipt of | of non-payment |
| shipped | -Where buyer is | goods and | ||
| unable to obtain | documents | |||
| an L/C | ||||
| LETTER | -Buyer's bank | -When ability of | -Provides reasonable | -Substitutes bank's |
| OF CREDIT | undertakes to make | importer to pay is | assurance that | credit for buyer |
| payment when | uncertain | proper shipment is | -Provides assured | |
| documents are | -In countries where | made prior to | & prompt | |
| presented by | there is a regulatory | payment | payment | |
| seller as stipulated in | requirement | - May obtain lower | -Protects against | |
| L/C | -When a seller needs | price due to | cancellation of | |
| an L/C to obtain | reduced credit risk | sales contract | ||
| bank financing | to seller |
Comparison of Int’l Payment Terms
Click to edit Master text styles
Second level
Third level
Fourth level
Fifth level
12
| PAYMENT | PAYMENT | WHERE | ADVANTAGES TO | |
| METHOD | TERMS | USED | BUYER | SELLER |
| DOCUMENTARY | -Documents are | -Ongoing business | -Delays payment | -Seller retains |
| COLLECTION | exchanged through a | relationship | until receipt of | title of goods |
| bank for payment | -Transactions not | documents | until payment | |
| or acceptance | requiring the | -Buyer can be | or acceptance | |
| protection & expense | financed by seller | |||
| of an L/C | with use of time | |||
| draft | ||||
| OPEN | - Buyer pays seller | - High trust | - Allows buyer to | -No advantage |
| ACCOUNT | after receipt of an | relationship | delay payment until | risks of Non |
| invoice, normally after | - Intercom any | goods inspected | Payment | |
| goods are shipped | transactions | and/or | ||
| goods are sold |
Comparison of Int’l Payment Terms
Click to edit Master text styles
Second level
Third level
Fourth level
Fifth level
13
| PAYMENT | PAYMENT | WHERE | ADVANTAGES TO | |
| METHOD | TERMS | USED | BUYER | SELLER |
| MINIMUM | -Buyer pays portion | -Guaranteed Sale | -Not out of pocket | -Better profits |
| GUARANTEE | of order & remainder | -Long Term relations | full amount | as based on |
| when product sold | selling price | |||
| -Higher risk | ||||
| CONSIGNMENT | -Buyer pays when | -Long Term relations | -No liability until | - None |
| goods sold | -Subsidiary Office | product sold | ||
| -Inventory to sell |
Comparison of Int’l Payment Terms
Click to edit Master text styles
Second level
Third level
Fourth level
Fifth level
14
