IBM 416 Lecture Notes - Lecture 2: U.S. Bancorp, Wire Transfer, Fax

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Chapter 14: Methods of Payment
· What are the facts and insights listed in the chapter? (p 178, 180, 181, 184) Facts: Many
companies think that exporting is too risky. Credit cards are a popular method of payment for
exports.Some letters of credit are revocable, which means that you or the buyer can unilaterally make
changes. As a result, such letters of credit carry more risk than irrevocable letters of credit. Even
exporters who take precautions occasionally experience payment problems. Insights: You can reduce
risk to a safe level. Letters of credit, export credit insurance programs, and reference checks through
banks and international credit reporting agencies can help protect you. Trade laws are often
straightforward, and legal advice about them is easily obtained. Because international credit card
transactions are typically handled by telephone or fax, fraud can be an issue. Determine the validity of
transactions and obtain the proper authorizations before sending goods or performing services. Smart
exporters insist on irrevocable letters of credit. If you experience payment problems, try these three
avenues: 1. Try to negotiate directly with the customer. 2. Work with your bank, legal counsel, and the
U.S. Commercial Service—particularly if negotiations fail and the sum involved is large. 3. Try
arbitration through the International Chamber of Commerce if other means fail. This route is often faster
and less costly than legal action.
· What are the payment methods that suit high-risk customers? (p 177) payment-on-delivery
terms through a documentary sight draft or an irrevocable confirmed letter of credit—or even payment
in advance.
· What are the good credit practices? (p 177) Other good credit practices include being aware of
any unfavorable changes in your customers’ payment patterns, refraining from going beyond normal
commercial terms, and consulting with your international banker on how to cope with unusual
circumstances or in difficult markets. It is always advisable to check a buyer’s credit
· How can U.S. Commercial Service International Company Profile (ICP) help you? (p 177) A
U.S. Commercial Service International Company Profile (ICP) provides useful information for credit
checks (see Chapter 6). For a fee, you may request an ICP on companies in many countries. The ICP
contains financial background on the company and a discussion regarding its size, capitalization, years
in business, and other pertinent information, such as the names of other U.S. companies that conduct
business with the firm. You can then contact those U.S. companies to find out about their payment
experience with the foreign firm.
· What are the basic methods of payment? (p 178)
• Cash in advance
• Documentary letter of credit
• Documentary collection or draft
• Open account
• Other payment mechanisms
· What are the characteristics of
o Cash in advance. (p 178): your company is relieved of collection problems and has immediate use
of the money. A wire transfer is commonly used and has the advantage of being almost immediate.
o Documentary letter of credit. (p 179) Documentary letters of credit or documentary collections or
drafts are often used to protect the interests of both buyer and seller. These two methods require that
payment be made on presentation of documents conveying the title and showing that specific steps have
been taken. Letters of credit and drafts may be paid immediately or at a later date
o Sight draft (p 179, 182): Drafts that are paid on presentation. A sight draft is used when the exporter
wishes to retain title to the shipment until it reaches its destination and payment is made.
o Time, date draft (p 179, 182) Drafts that are to be paid at a later date, often after the buyer receives
the goods, are called time drafts or date drafts. A time draft is used when the exporter extends credit to
the buyer. The draft states that payment is due by a specific time after the buyer accepts the time draft
and receives the goods. By signing and writing “accepted” on the draft, the buyer is formally obligated
to pay within the stated time.
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