CASH IN ADVANCE

What is Cash in Advance?

Cash in advance is a payment term used in some trade agreements. It requires that a
buyer pay the seller in cash before a shipment is received and oftentimes before a
shipment is even made.
Cash in advance is a provision that can be required in any transaction in which there is a
delay between the sales agreement and the sales delivery.

Understanding Cash in Advance

Cash in advance payment methods are used to eliminate credit risk or the risk of
nonpayment, for the seller. In general, the structure of cash in advance transaction fully
benefits the seller and poses risks for the buyer.
Cash in advance payments are not necessarily uncommon trade terms, but the risks for a
buyer increase if the seller or network they are dealing with is not highly credible
In a transaction with cash in advance terms, the seller requires the buyer to make the
entire payment upfront in order to initiate the process of shipping the expected goods.
This protects the seller from lost money for goods shipped without payment and also
alleviates any need for collections recourse.

When to Use Cash in Advance Terms

 1. The importer is a new customer and/or has a less established operating history.
2. The importer’s creditworthiness is doubtful, unsatisfactory, or unverifiable.
3. The political and commercial risks of the importer’s home country are very high.
4. The exporter’s product is unique, not available elsewhere, or in heavy demand.
5. The exporter operates an Internet-based business where the acceptance of credit card
payments is a must to rem

Characteristics of Cash in Advance

CASH IN ADVANCE MARKETS- Online marketplaces and international business trade are
two areas where cash in advance payments can be the most common. Most consumers and
businesses are comfortable with making e-commerce purchases through well established
businesses like Walmart, Target, and Home Depot.

Contingent Guarantees - Generally, a business’s decision to institute cash in advance payments

will depend on its risks. Larger businesses may have greater latitude to offer better payment
terms for buyers because their accounts receivable and collections processes are more advanced.
Smaller companies may not have the advantages of full-service accounts receivable and
collections support. At small companies, write-offs for uncollected payments may also lead to
unmanageable losses.
Methods of Payment in International Trade

World Bank

The World Bank is an international financial institution that provides loans to developing
countries for capital programs.
The World Banks official goal is the reduction of poverty.
According to the World Banks Articles of Agreement (as amended effective 16 February
1989), all of its decisions must be guided by a commitment to promote foreign
investment, international trade, and facilitate capital investment.

The World Bank is comprised of two institutions:

1. The International Bank for Reconstruction and Development (IBRD) lends to

governments of middle income and creditworthy low-income countries
2. The International Development Association (IDA) provides interest-free loans—called
credits— and grants to governments of the poorest countries

EXPORT AND IMPORT FINANCE METHODS

Factoring (Cross-Border Factoring) - The accounts receivable are sold to a third party (the
factor), that then assumes all the responsibilities and exposure associated with collecting from
the buyer.

Accounts Receivable Financing - An exporter that needs funds immediately may obtain a bank
loan that is secured by an assignment of the account receivable.

Letters of Credit - These are issued by a bank on behalf of the importer promising to pay the
exporter upon presentation of the shipping documents.

Banker’s Acceptance - This is a time draft that is drawn on and accepted by a bank (the
importer’s bank). The accepting bank is obliged to pay the holder.

Working Capital Financing - Banks may provide short-term loans that finance the working
capital cycle, from the purchase of inventory until the eventual conversion to cash.

Countertrade - These are foreign trade transactions in which the sale of goods to one country is
linked to the purchase or exchange of goods from that same country.

Medium-Term Capital Goods Financing - The importer issues a promissory note to the
exporter to pay for its imported capital goods over a period that generally ranges from three to
seven years.
METHODS OF PAYMENT IN INTERNATIONAL TRADE

METHODS OF PAYMENT IN INTERNATIONAL TRADE

PAYMENT RISK DIAGRAM

LETTER OF CREDIT

A letter of credit, or "credit letter"- is a letter from a bank guaranteeing that a buyer's payment
to a seller will be received on time and for the correct amount. In the event that the buyer is
unable to make a payment on the purchase, the bank will be required to cover the full or
remaining amount of the purchase. It may be offered as a facility

What is Letter of Credit?

Due to the nature of international dealings, including factors such as distance, differing
laws in each country, and difficulty in knowing each party personally, the use of letters
of credit has become a very important aspect of international trade.
A letter of credit, or "credit letter" is a letter from a bank guaranteeing that a buyer's
payment to a seller will be received on time and for the correct amount. In the event that
the buyer is unable to make a payment on the purchase, the bank will be required to
cover the full or remaining amount of the purchase. It may be offered as a facility.
A document issued by a financial institution on behalf of a buyer stating the amount of
credit the buyer has available, and that the institution will honor drafts up to that amount
written by the buyer. It gives the buyer the prestige and financial backing of the issuing
institution and satisfies the requirements of the seller in completing the transaction.
The accepting institution has a prior agreement as to how the buyer will pay for the
drafts as they are presented.
 A commitment, usually by a bank on behalf of a client, to pay a beneficiary a stated
amount of money under specified conditions.

Parties Involved in LC Transaction

1. Applicant - is the party that arranges for the letter of credit to be issued.
2. Beneficiary - The Beneficiary is the party named in the letter of credit in whose favor the
letter of credit is issued.
3. Issuing or Opening Bank - The Issuing or Opening Bank is the applicant’s bank that
issues or opens the letter of credit in favor of the beneficiary and substitutes its
creditworthiness for that of the applicant.
4. Advising Bank - An Advising Bank may be named in the letter of credit to advise the
beneficiary that the letter of credit was issued. The role of the Advising Bank is limited to
establish apparent authenticity of the credit, which it advises.
5. Paying Bank - The Paying Bank is the bank nominated in the letter of credit that makes
payment to the beneficiary, after determining that documents conform, and upon receipt
of funds from the issuing bank or another intermediary bank nominated by the issuing
bank.
6. Confirming Bank - The Confirming Bank is the bank, which, under instruction from the
issuing bank, substitutes its creditworthiness for that of the issuing bank. It ultimately
assumes the issuing bank’s commitment to pay.

How a Letter of Credit Works

Because a letter of credit is typically a negotiable instrument, the issuing bank pays the
beneficiary or any bank nominated by the beneficiary. If a letter of credit is transferable,
the beneficiary may assign another entity, such as a corporate parent or a third party, the
right to draw.
Banks also collect a fee for service, typically a percentage of the size of the letter of
credit. The International Chamber of Commerce Uniform Customs and Practice for
Documentary Credits oversees letters of credit used in international transactions. There
are several types of letters of credit available.

Letter of Credit Transaction

1. The importer arranges for the issuing bank to open an LC in favor of the exporter.
2. The issuing bank transmits the LC to the advising bank, which forwards it to the exporter.
3. The exporter forwards the goods and documents to a freight forwarder.
4. The freight forwarder dispatches the goods and submits documents to the advising bank.
5. The advising bank checks documents for compliance with the LC and pays the exporter.
6. The importer’s account at the issuing bank is debited.
7. The issuing bank releases documents to the importer to claim the goods from the carrier.
TYPES OF LETTER OF CREDIT

1. Commercial Letter of Credit - This is a direct payment method in which the issuing
bank makes the payments to the beneficiary.
2. Irrevocable Letter of Credit - This LC cannot be cancelled or modified without
consent of the beneficiary (Seller). This LC reflects absolute liability of the Bank (issuer)
to the other party.
3. Revocable Letter of Credit - This LC type can be cancelled or modified by the Bank
(issuer) at the customer's instructions without prior agreement of the beneficiary (Seller).
4. Stand-by Letter of Credit - This LC is closer to the bank guarantee and gives more
flexible collaboration opportunity to Seller and Buyer. The Bank will honor the LC when
the Buyer fails to fulfill payment liabilities to Seller.
5. Confirmed Letter of Credit - In addition to the Bank guarantee of the LC issuer, this
LC type is confirmed by the Seller's bank or any other bank. Irrespective to the payment
by the Bank issuing the LC (issuer), the Bank confirming the LC is liable for
performance of obligations.
6. Unconfirmed Letter of Credit - Only the Bank issuing the LC will be liable for
payment of this LC.
7. Transferable Letter of Credit - This LC enables the Seller to assign part of the letter of
credit to other party(ies). This LC is especially beneficial in those cases when the Seller is
not a sole manufacturer of the goods and purchases some parts from other parties, as it
eliminates the necessity of opening several LC's for other parties.
 8. Back-to-Back Letter of Credit - This LC type considers issuing the second LC on the
basis of the first letter of credit. LC is opened in favor of intermediary as per the Buyer's
instructions and on the basis of this LC and instructions of the intermediary a new LC is
opened in favor of Seller of the goods.
9. Payment at Sight Letter of Credit - According to this LC, payment is made to the seller
immediately (maximum within 7 days) after the required documents have been
submitted.
10. Deferred Payment Letter of Credit - According to this LC the payment to the seller is
not made when the documents are submitted, but instead at a later period defined in the
letter of credit. In most cases the payment in favor of Seller under this LC is made upon
receipt of goods by the Buyer.
11. Red Clause Letter of Credit - The seller can request an advance for an agreed amount
of the LC before shipment of goods and submittal of required documents. This red clause
is so termed because it is usually printed in red on the document to draw attention to
"advance payment" term of the credit.
12. Green Clause Letter of Credit - An LC that pays advance to the seller just not against
the written undertaking and a receipt, but also a proof of warehousing the goods.

Advantages of LC for the Buyer:

Elimination of risk of losing money for the Buyer.

Payments are made after fulfilment of the Seller's contractual obligations
Transfer of ownership over shipped goods to the Buyer within the period indicated in the
LC and according to other terms

Advantages of LC for the Seller:

Possibility of payment before handing the goods over to the Buyer

Possibility of execution of complex commercial contracts
Guarantee of payment independent of the Buyer (subject to the fulfillment of contractual
obligations)

Risks involved

The Beneficiary is exposed to the Commercial risk on Issuing Bank, Political risk on the
Issuing Bank’s country and Foreign Exchange Risk in case of issuance of Letter of
Credits.
The Beneficiary’s documents must comply with the terms and conditions of the Letter of
Credit for Issuing Bank to make the payment.
Since all the parties involved in Letter of Credit deal with the documents and not with the
goods, the risk of Beneficiary not shipping goods as mentioned in the LC is still persists.
The Letter of Credit as a payment method is costlier than other methods of payment such
as Open Account or Collection
Tips for Exporters

Consult with your bank before the importer applies for an LC.
Consider whether a confirmed LC is needed.
Negotiate with the importer and agree upon detailed terms to be incorporated into the LC.
Determine if all LC terms can be compiled within the prescribed time limits.
Ensure that all the documents are consistent with the terms and conditions of the LC.
Beware of many discrepancy opportunities that may cause nonpayment or delayed
payment.

Documentary Collection

What Is a Documentary Collection?

A documentary collection is a process by which an exporter's bank collects funds from

the importer's bank in exchange for documents detailing shipped merchandise.
A documentary collection is a trade transaction in which exporters allow their bank to
act as a collection agent for payment of shipped goods to the buyer.

Understanding a Documentary Collection

A documentary collection (D/C) is so-called because the exporter receives payment from
the importer in exchange for the shipping documents, with the funds and documents
channeled through their respective banks.
Shipping documents are documents required for the buyer to clear customs and take
delivery of the goods. Shipping documents include a commercial invoice, certificate of
origin, insurance certificate, and packing list. A key document in documentary collections
is the bill of exchange or draft, which is a formal demand for payment from the exporter
to importer.

Parties to Documentary Collection

1. Principal - is the party entrusting the handling of a collection to a bank (Exporter, Seller,
Remitter, Drawer of the Draft)
2. Remitting Bank - is the bank to which the principal has entrusted the handling of a
collection (Exporter’s Bank handling the collection)
3. Collecting Bank - is any bank, other than the remitting bank, involved in processing the
collection (Usually Buyer’s Bank)
4. Presenting Bank - is the collecting bank making presentation to the drawee.
5. Drawee - is the one to whom presentation is to be made in accordance with the
collection instruction (Importer, Buyer, Payee)
Documents against Payment (D/P) "Sight Draft” - With a D/P collection, the exporter ships
the goods and then gives the documents to his bank, which will forward the documents to the
importer’s collecting bank, along with instructions on how to collect the money from the
importer. In this arrangement, the collecting bank releases the documents to the importer only on
payment for the goods. Once payment is received, the collecting bank transmits the funds to the
remitting bank for payment to the exporter.

Documents against Acceptance (D/A) “Time Draft” - With a D/A collection, the exporter
extends credit to the importer by using a time draft. The documents are released to the importer
to claim the goods upon his signed acceptance of the time draft. By accepting the draft, the
importer becomes legally obligated to pay at a specific date. At maturity, the collecting bank
contacts the importer for payment. Upon receipt of payment, the collecting bank transmits the
funds to the remitting bank for payment to the exporter.
Typical Simplified D/C Transaction Flow

1. The exporter ships the goods to the importer and receives in exchange the documents.
2. The exporter presents the documents with instructions for obtaining payment to its bank.
3. The exporter’s remitting bank sends the documents to the importer’s collecting bank.
4. The collecting bank releases the documents to the importer upon receipt of payment.
5. Or the collecting bank releases the documents on acceptance of draft from the importer.
6. The importer then presents the documents to the carrier in exchange for the goods.
7. Having received payment, the collecting bank forwards proceeds to the remitting bank.
8. Once payment is received, the remitting bank credits the exporter’s account.

With D/Cs, the exporter has little recourse against the importer in case of non-payment.
Thus, D/Cs should be used only under the following conditions: When to Use Documentary
Collections

The exporter and importer have a well-established relationship.

The exporter is confident that the importing country is politically and economically
stable.
An open account sale is considered too risky, and an LC is unacceptable to the importer.

The Risks of Documentary Collections

The exporter's risk is higher with a time draft versus a sight draft. The exporter might not
get paid in the case of a time draft. Also, the buyer's bank would have released the
documents with the buyer's acceptance of the time draft meaning the buyer would have
the merchandise.
If the transaction is a sight draft, the seller's risk is limited if the buyer didn't pay. With a
sight draft, the buyer would not have access to the goods because the buyer's bank would
not release the documents without payment. The seller would have to find another buyer
or pay to have the goods shipped back home.
Unfortunately, D/Cs can be exploited by fraudsters posing as either the exporter or
importer. As a result, D/Cs are not recommended for exports to nations that are politically
or economically unstable. D/Cs are best suited for established trade relationships in sound
export markets, and for transactions involving ocean shipments rather than air or land
shipments, which are more difficult to control.
Pros

Market Competitiveness
Relatively low risk for overseas buyer and help their cash flow
A simpler, faster and cheaper method of payment than a documentary credit Exporter
retain title to the goods until your buyer accepts the bill of exchange.
If buyer fails to honor the bill of exchange, you can take legal action against them in
accordance with laws governing the bill of exchange.
Bank’s assistance in obtaining payments.

Cons

Risk of non-payment may be greater. If bill of exchange specifies payment at a date after
delivery, exporter hands over control of the goods but run the risk of non-payment on the
due date.
Bank’s role is limited and do not guarantees payment. The banks don’t verify the
shipping documents or guarantee payment by your buyer.
May strain exporters cash flow, especially if the bill of exchange provides for extended
credit terms.
Exposed to FX risk from the date of the sale contract to the time of payment.

Government Assisted Foreign Buyer Financing

What is Foreign Buyer Financing?

- International sales of high-value capital goods or services and exports to large-scale

projects, which require medium- or long-term financing, often pose special challenges to
exporters as commercial lenders may be reluctant to lend large sums to foreign buyers,
especially those in developing countries, for extended periods.
- One viable solution to these challenges is foreign buyer financing offered by the U.S.
Export-Import Bank (Ex-Im Bank). As the official U.S. export credit agency, Ex-Im
Bank supports the purchases of U.S. goods and services by creditworthy foreign buyers
who are unable to obtain the financing they need through traditional commercial sources.
 Key Points

1. Government-assisted foreign buyer financing helps turn export opportunities,

especially in high-risk emerging markets, into real transactions for large U.S.
corporations and established medium-sized companies, as well as their small business
suppliers.
2. Creditworthy foreign buyers can obtain loans needed for purchases of U.S. goods and
services, especially high-value capital goods or services and exports to large-scale
projects.
3. This type of financing provides direct loans to foreign buyers at a fixed interest rate
or provides guarantees for term financing offered by commercial lenders.
4. Financing is available for medium-term (up to 5 years) and long-term (generally up to
10 years) transactions.

Key Common Features of Ex-Im Bank’s Loan Guarantees and Direct Loans

- Ex-Im Bank assists U.S. exporters by providing direct loans or guaranteeing commercial
loans to creditworthy foreign buyers for purchases of U.S. goods and services. They are
generally used to finance the purchase of high-value capital equipment or services or
exports to large-scale projects that require medium- or long-term financing. Ex-Im
Bank’s foreign buyer financing is also used to finance the purchase of refurbished
equipment, software, and certain banking and legal fees, as well as some local costs and
expenses.