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Exercise 1:
1. Cash in advance:
With the cash-in-advance payment method, the exporter can avoid credit risk or the
risk of non-payment since payment is received prior to the transfer of ownership of the
goods. Exporter is exposed to virtually no risk as the burden of risk is placed nearly
completely on the importer. However, requiring payment in advance is the least attractive
option for the buyer
High risks for buyer:
- Loses use of funds until good arrive.
- Seller may not ship goods as the order (quantity, product, quality, shipping method).
For example, delivery is late, the product has different qualities.
- Seller does not ship when requested.
How to minimize the risks:
- The buyer should deal with small amount of money or order a little mount of goods.
- The buyer should cooperate with the exporter who is trustworthy, has good operating
history.
- The buyer has transaction with the exporter many time or is familiar with the exporter.
2. Letter of credit (L/C):
Risk is evenly spread between seller and buyer, provided that all terms and conditions are
adhered to.
Risks for seller:
- The importer applies the letter of credit from an issuing bank without strict compliance
with the contract. The terms and conditions of credit should be in compliance with the
contract. In many cases, however, the importer do not open/issue the credit based on
the sales contract because kinds of reasons.
- Payment methods L/C require absolute accuracy between payment documents and the
contents specified in L/C. If there is only a small mistake in preparing documents, the
exporter can be caught errors and refused to pay by the buyer and issuing bank.
- If the exporter presents documents that are inconsistent with the L/C, and the exporter
must handle the goods like unloading and storing. The exporter must pay cost for this
and the importer can reject to receive goods.
- If the issuing bank loses its solvency, even if the presentation of documents are perfect,
it will not be paid.
Risks for buyer
- The importer may receive poor quality or damaged goods during the process of
transportation and still have to pay the fully payment to the issuing bank. Because, the
banks act as intermediaries on documents and have nothing to do with the goods.
- If the importer does not pay attention to carefully check the documents (errors of words,
phrase, number of documents, authorities grant certificates ...), and accept the set of
documents with errors will be damaged harm and difficulties in later complaints.
- Currency risk: A letter of credit also carries forex risk. There will be an agreed upon
currency in the letter of credit. At least one of the parties will have a different currency
than that, and hence they will face a risk due to currency fluctuations. It can also work
in favor
How to minimize:
- The exporter should consult with your bank before the importer applies for an LC.
- The exporter and importer should negotiate with and agree on detailed terms to be
incorporated into the LC.
- The exporter must determine if all LC terms can be met within the prescribed time
limits.
- The exporter should ensure that all the documents are consistent with the terms and
conditions of the LC.
- Because LCs have many opportunities for discrepancies, documents should be
prepared by well-trained professionals or outsourced
- Beware of many discrepancy opportunities that may cause non-payment or delayed
payment.
- The importer should do business with the prestigious exporter to make sure that goods
has good quality.
3. Documentary collection
Risks for the exporter, though D/C terms are more convenient and cheaper than an LC to
the importer.
High risks for the seller:
- No guaranty of payment by any bank.
- No protection against order cancellation.
- Non-payment risk: The payment is not made until after the goods are shipped.
Risks for the buyer:
- Low Quality Goods Shipment Risk
How to minimize the risks:
- The exporters and importers have a well-established relationship.
- The exporter is confident that the importing country is politically and economically
stable.
- The seller does not doubt the buyer’s ability and willingness to pay for the goods.
4. Open account (TT Deferred payment):
High risks for the seller:
- Exporters may be forced either by accepted market practice or the threat of competition
to trade on open account terms.
- Non-Payment Risk
- Delays in payment of the buyer.
Risks for the buyer:
- Low quality of goods delivery risk (Importer would be exposed to a low quality of
goods delivery risk if the determined payment term is shorter than the expected transit
time plus import procedures)
- The buyer can bear the cost returning merchandise: if there is limited success in selling
the product, there is a need to ship it back to the exporter.
How to minimize the risks:
- The seller should cooperate with the buyer who is trustworthy, has good operating
history and good skills of selling.
- The seller should collect accurate information clearly about the reliability of available
data on foreign buyers to evaluate and determine creditworthiness to purchase on open
account.
- The buyer makes sure that the deferred payment period is longer than the transit time
between exporter's location to importer's location for a chosen mode of transport.
Exercise 2:
DISCUSSION:
Discrepancies occur when documents submitted contain language or term different from
those in the letter of credit or some other apparent irregularity.
Most discrepancies occur because the exporter does not present all the documents required
under the L/C or because the documents do not strictly conform to the L/C requirements.
There are 3 types of discrepancies:
In cases in which the buyer is looking for an excuse to reject the documents (when the price of the
product is falling, the product is destroyed on shipment, etc.), the buyer may not accede to a waiver
or amendment of the discrepancy. The buyer could also delay correction.
Advantage of the importer:
They may require the exporter for a huge discount off the contract price.
Disadvantage of the exporter:
The exporter loses the use of the proceeds for a certain period of time.
The exporter will be incurred further bank charges to correct the discrepancy
The exporter also faces the risk that the credit will expire before the discrepancies are
corrected.
When the discrepancy cannot be corrected or the buyer refuses to waive or amend the terms of the
credit, the seller can still attempt to obtain payment by requesting the bank to obtain authority to
pay or send the documents for collection (documentary collection) outside the terms of the L/C. If
the buyer refuses to accept the documents
Disadvantage for exporter:
The bank will not pay the exporter
The exporter has to either find a buyer abroad have the merchandise returned.