17014125806171000000 SH O R T C OU R S E S ER I ES THE SHORT COURSE IN INTERNATIONAL TRADE SERIES A Short Course in International Business Culture A Short Course in International Business Ethics A Short Course in International Business Plans A Short Course in International Contracts A Short Course in International Economics A Short Course in International Intellectual Property Rights A Short Course in International Joint Ventures A Short Course in International Marketing A Short Course in International Marketing Blunders A Short Course in International Negotiating A Short Course in International Payments A Short Course in International Trade Documentation A SHORT COURSE IN International Payments 4th Edition How to use letters of credit, D/P and D/A terms, prepayment, credit and cyberpayments in international transactions Edward G. Hinkelman World Trade Press 800 Lindberg Lane, Suite 190 Petaluma, California 94952 USA Tel: +1 (707) 778-1124 Fax: +1 (707) 778-1329 USA Order Line: +1 (800) 833-8586 E-mail: sales@worldtradepress.com (Giant maps for building lobbies, conference rooms and education) A Short Course in International Payments, 4th Edition ISBN 978-1-60780-050-7 By: Edward G. Hinkelman Series Concept: Edward G. Hinkelman Cover Design: Ronald A.
Blodgett Text Design: Seventeenth Street Studios, Oakland, California USA Copyright Notice © Copyright 2011 by Edward G. All Rights Reserved. Reproduction of any part of this work beyond that permitted by the United States Copyright Act without the express written permission of the copyright holder is unlawful. Requests for permission or further information should be addressed to Publisher, World Trade Press at the address above.
Disclaimer This publication is designed to provide general information concerning aspects of international trade. It is sold with the understanding that the publisher is not engaged in rendering legal or any other professional services. If legal advice or other expert assistance is required, the services of a competent professional person or organization should be sought. Library of Congress Cataloging-in-Publication Data Hinkelman, Edward G., 1947– A short course in international payments: how to use letters of credit, D/P and D/A terms, prepayment, credit and cyberpayments in international transactions / Edward G.
Electronic funds transfers. International business enterprises–--Finance. Title: International payments.15'5--dc21 2011193354 Printed in the United States of America v INTRODUCTION The past 15 years have seen a dramatic fall in trade barriers, the globalization of markets, and a huge growth in international trade. Companies of all sizes are seeking to take advantage of the opportunities in this new world economy.
International transactions, however, add an additional layer of risk for buyers and sellers familiar only with doing business in their domestic markets. Currency regulations, foreign exchange risk, political, economic, or social upheaval in the buyer’s or seller’s country, questions of payment, and different business customs may all contribute to uncertainty. Ultimately, sellers want to get paid and buyers want to get what they pay for. Choosing the right payment method can be the key to a transaction’s feasibility and profitability.
This book is designed to help both buyers and sellers learn about international payment options. The relative merits of the four most common types of payments are explained, and the two most common options—documentary collections and documentary letters of credit—are featured. This book also contains chapters on cyberpayments, Incoterms 2010, a comprehensive glossary, and a section devoted to documents used in international transactions. To learn more about payment methods read one or more of the publications listed in the resources chapter and consult with the international trade finance department of your bank.
Hinkelman Petaluma, California vi A SHORT COURSE IN INTERNATIONAL PAYMENTS ACKNOWLEDGMENTS The author wishes to acknowledge the many bankers, freight forwarders, and international traders who gave their time to answer his incessant questions regarding the details of international payments and trade documentation. The book would have been impossible without their experience, expertise, and assistance. Special thanks to the following: Jeff Gordon and Britt-Marie Morris of Wells Fargo HSBC Trade Bank N. in San Francisco for answering questions and supplying a number of the forms used in this book.
Katrin Gretemer at SBC Warburg Dillon Read (Swiss Bank Corporation) in Zürich, Switzerland for permission to reprint a number of the forms used in this book. Christoph von der Decken of Hapag Lloyd (America) Inc. in Piscataway, New Jersey and Susan Nalducci of Hapag-Lloyd (America), Inc. in Corte Madera, California for permission to reprint a number of the forms used in this book.
Karen Cross and Sandy Graszynski of Roanoke Brokerage Services, Inc. in Schaumburg, Illinois for permission to reprint a number of forms used in this book. Vilva Kivijarvi at the Fritz Companies in San Francisco, California (now UPS Freight Services) for permission to reprint a number of the forms used in this book. vii TABLE OF CONTENTS Chapter 1: KEY ISSUES IN INTERNATIONAL PAYMENTS.
1 Chapter 2: INTRODUCING THE BUYER AND THE SELLER. 5 Chapter 3: INTRODUCING THE BASIC TERMS OF PAYMENT. 10 Chapter 4: FOREIGN EXCHANGE BASICS. 16 Chapter 5: CONTRACT BASICS.
19 Chapter 6: GUIDE TO INCOTERMS ® 2010. 24 Chapter 7: NOTES ON GRANTING AND OBTAINING CREDIT. 29 Chapter 8: DRAFTS AND ACCEPTANCES. 36 Chapter 9: DOCUMENTARY COLLECTIONS.
38 Chapter 10: DOCUMENTARY CREDITS , PART 1. 50 Basic Procedure Chapter 11: DOCUMENTARY CREDITS , PART 2. 67 Settlement (Making Payment) Chapter 12: DOCUMENTARY CREDITS , PART 3. 75 Standard Credits Chapter 13: DOCUMENTARY CREDITS , PART 4.
86 Special Letters of Credit Chapter 14: DOCUMENTARY CREDITS , PART 5. 101 Issues and Checklists Chapter 15: SAMPLE BANK FEES. 113 Chapter 17: DOCUMENT CHECKLISTS. 182 viii A SHORT COURSE IN INTERNATIONAL PAYMENTS CHAPTER 1 Key Issues in International Payments T H E R E A R E S E V E R A L broad issues that affect what payment method will ultimately be used in an international transaction.
Every participant in the transaction must consider these issues, though they will affect each differently and to a different degree. Even after these broader issues are resolved, questions will continue to be raised throughout the transaction. Therefore, careful consideration of these issues can make a transaction go smoother, keep costs to a minimum, and ensure timely and efficient delivery and distribution of goods. Who Bears the Credit Risk? In almost all business transactions the buyer would prefer to obtain easy, extended, and inexpensive (preferably free!) credit terms.
Credit gives the commercial buyer the opportunity to resell the goods before having to pay for them. In many instances, the buyer will have a market for goods but not possess sufficient working capital to make an outright purchase and payment prior to their resale. Credit makes many such transactions possible. At the same time, the seller has a different set of priorities.
Having paid for product development, raw materials, component parts, labor, and overhead, the seller needs to get his investment back. The seller may not know the buyer or may not trust that the buyer is financially stable enough to make payment at a future date. International transactions are not as stable, secure, transparent, or reliable as domestic transactions and many things can happen between the time of the sale and the expected time of payment. For these and other reasons, the seller will always prefer to be paid immediately; either at delivery or even prior to delivery.
■ B U Y E R / I M P O R T E R : Prefers that the seller bear the credit risk and wants to make certain that he receives the goods once he has paid ■ S E L L E R / E X P O R T E R : Prefers that the buyer bear the credit risk and wants to make certain he receives payment for goods shipped Who Finan ces the Transaction? In an international transaction it may take from several weeks to several months for merchandise to find its way from the warehouse of the seller to the warehouse of the buyer. Goods must be prepared for export, trucked or sent by rail to the port, export cleared, shipped to another port, possibly transshipped to the final port, warehoused awaiting customs clearance, inspected, customs cleared, sent overland to the final destination, and finally inventoried at the buyer’s warehouse. The seller has already made a substantial investment in manufacturing the product and doesn’t feel that he should bear the brunt of the costs of financing. 1 2 A SHORT COURSE IN INTERNATIONAL PAYMENTS The buyer, on the other hand, knows that it may be one or two months before he even sees the goods in his warehouse, another one or more months before he sells the goods, and another one or several months before he gets paid from his customers.
Why should he pay for goods or pay for the financing of goods he doesn’t even have in his warehouse? Although both buyer and seller would wish that the other party finance the transaction and pay for the costs of financing, the realities are that both buyer and seller typically need to compromise somewhat in order to make the transaction happen. ■ BUYER/IMPORTER: Needs funds for payment and during the period before resale of goods, and prefers that the seller finance the transaction ■ SELLER/EXPORTER: Needs funds for production and the period before payment is received, and prefers that the buyer finance the transaction In What Currency will Payment be Made ? The currency specified for payment in a contract can have a significant effect upon the ultimate profitability of the transaction for either the buyer or seller. If the value of the specified currency appreciates between the contract date and payment date, it is a hardship for the buyer. If it depreciates, it is a benefit to the buyer.
In most instances, the specified currency of the transaction will be a “hard currency,” such as the US dollar (US$), the European euro (€), the Swiss franc (SwF) or the Japanese yen (¥). In some instances, however, it will be impossible to conclude a transaction in anything other than a local, less stable currency. In these instances, it may be possible to “hedge” the foreign exchange risk. See “Hedging” in Chapter 4: Foreign Exchange Basics.
■ B U Y E R / I M P O R T E R : Wants (typically) to make payment in own currency or in a currency that is expected to decrease in value between the date of the contract and date of the payment ■ S E L L E R / E X P O R T E R : Wants (typically) to receive payment in own currency, a hard currency, or in a currency that is expected to increase in value between the date of the contract and date of the payment What are the Political and Legal Risks? The political environment in both the country of export and the country of import can have disastrous effects on international business transactions. Political instability can lead to changes in trade policy, restrictions on foreign transfers, restrictions on the importation or exportation of certain goods, changes in monetary policy leading to devaluation of the local currency, and riots or civil unrest causing loss or damage to merchandise potentially not covered by insurance, among other problems. Although political risks are generally outside the direct control of either trader, they can sometimes be predicted in the short term and managed to a degree. KEY ISSUES IN INTERNATIONAL PAYMENTS 3 Legal risks can also affect an international transaction and can only be managed through extreme diligence.
Lack of comprehensive knowledge of legal issues can precipitate problems unimaginable in the local marketplace. These include unknown procedural restrictions, import regulations, and more. E X A M P L E : A contract signed in a foreign country was ruled invalid because the trader was improperly in the country on a tourist visa.