1、 Learning Objectives Understanding the main modes of payment in international trade Negotiating terms of payment Writing a letter asking for L/C amendments Speaking Task Warm-up Practice Listening Task Follow-up Practice Writing Task Reading TaskWe need to discuss some questions about what we are go
2、ing to learn in this unit.Sure,thatll help us understand better about what we are asked to do.1.The terms of payment are an important part of the sales contract both sellers and buyers are concerned about.Now store the words and phrases that are associated with payment terms and then explain or desc
3、ribe these terms.letter of creditPayment Terms 2)Discuss the following questions.1)What are the main contradictions that exist between sellers and buyers in international payment?2)What are both sellers and buyers concerned about in negotiating payment?3)What are the commonly used methods of payment
4、 in international trade?Can you tell the advantages and disadvantages of each for both sellers and buyers?Introductory Remarks The terms of payment are an important part of the business contractFrom the sellers point of view,the best terms would be full payment in cash at the time of sale，while the
5、buyers would prefer to have the goods before making paymentImporters and exporters are separated from each other by thousands of milesThis adds to the difficulties of coming to an agreement on how payment should be madeThe exporters and importers usually meet each other half way and agree to payment
6、 by letter of credit opened by a reliable bankA letter of credit is a bankers guarantee that payment will be made on presentation of all the required shipping documents.In this way，the sellers or exporters receive a guarantee not only from the buyers or importers,but also from a banker that payment
7、will be made on delivery of the goodsOn the other hand,the buyers or importers are given the guarantee that the banker will not make payment unless the shipping documents are presentedMain Modes of Payment in International Trade I.Remittance A.Mail Transfer(M/T)B.Telegraphic Transfer(T/T)C.Demand Dr
8、aft(D/D)II.Collection A.Clean Bill for Collection B.Documentary Bill for Collection 1.Document against Payment(D/P)(1)D/P at sight (2)D/P after sight D/P T/R 2.Document against Acceptance III.Letter of Credit(L/C)Understanding Letters of CreditDo you know that 50%of L/C documents presented to banks
9、are rejected?This costs you dearly,in extra bank charges,your wasted time and the customer dissatisfaction.Key ContentsvWhat is a letter of credit?vLearn the differences between different types of L/Cs and when to use them.vDiscover which are the most usual types of L/C-Sight,Deferred Payment,Transf
10、erable,Standby.Applicant（Importer）Beneficiary（Exporter）1 S/C Paying bank Issuing bankAdvising bank Negotiating bank8 Paying the money for documents2 L/C application4 Credit advice5Presenting documents for negotiation3 Issuing L/C6 Recourse 7 Reimbursement Performance of L/CDifferent Types of Letters
11、 of Creditv1.According to the attaching of documents 1)Clean credit 2)Documentary creditv2.According to the revocability of credit 1)Revocable credit 2)Irrevocable creditv3.According to the transferability of credit 1)Transferable credit 2)Non-transferable creditv4.According to the adding of confirm
12、ation 1)Confirmed credit 2)Unconfirmed creditv5.According to the time of payment 1)Sight credit 2)Usance or time creditv6.According to the method of payment 1)Payment credit 2)Deferred payment credit 3)Acceptance credit 4)Negotiation credit v7.According to the credit amount to be used revolvingly 1)
13、Automatic 2)Semi-automatic 3)Non-automatic v8.Other credits 1)Red clause credit 2)Back to back credit 3)Reciprocal credit 4)Standby credit Identify the following letters of credit 1.Deferred L/C is a credit available by deferred payment,under which payment must be effected on a specified future date
14、.2.Red Clause L/C is one with a clause inserted into the credit authorizing the negotiating bank to make an advance of the amount under the credit,whole or part,to the beneficiary.3.Transferable L/C The beneficiary is entitled to ask the bank to transfer L/C rights partially or wholly to a third par
15、ty.This is used for direct financing of supplies,where the selling party is not the direct producer but is an intermediary.4.Revolving L/C The underlying L/C amount is renewed during the life of the L/C according to pre-defined terms and conditions.It is advantageous for contracts with repeated good
16、s deliveries.Revolving L/C Transferable L/C Clean L/C Sight L/C Deferred L/C Irrevocable L/C Red clause L/C Confirmed L/Cv5.Clean L/C is a credit under which payment will be effected only against a draft without any shipping documents attached thereto or sometimes,against a draft with an invoice alo
17、ne attached thereto.v6.Irrevocable L/C is a credit that constitutes a definite undertaking of the issuing bank and can be amended or cancelled by the issuing bank only on condition that all parties concerned.v7.Confirmed L/C is a credit that is advised to the beneficiary with another banks confirmat
18、ion added thereto.v8.Sight L/C calls for the presentation of sight drafts,under which the beneficiary(the drawer)is entitled to receive payment at once on presentation of his draft to the drawee bank or to the issuing bank if drawn on the issuing,once the relevant documents have been checked and fou
19、nd to be in order.Advantages&Disadvantages of a Letter of Credit vAdvantages to the Exporter Shifts credit risk from the Importer to the Importers Bank(Issuing Bank).An undertaking from the Issuing Bank that payment will be made under the Letter of Credit,provided that you meet all terms and conditi
20、ons of the Letter of Credit.If the Letter of Credit is not issued as agreed,you are not obligated to ship against it.vDisadvantages to the Exporter Documents must be prepared in strict compliance with the requirements stipulated in the Letter of Credit.Non-compliance leaves you exposed to risk of no
21、n-payment and removes the protection afforded by the Issuing Bank since the final decision on the documents then rests with the Importer.Advantages and Disadvantages of Documentary CollectionvThe major advantage of a cash against documents payment method for the Buyer is the low cost,versus opening
22、a Letter of Credit.The advantage for the Seller is that he can receive full payment prior to releasing control of the documents,although this is offset by the risk that the Buyer will,for some reason,reject the documents(or they will not be in order).Since the cargo would already be loaded(to genera
23、te the documents),the Seller has little recourse against the Buyer in case of non-payment.A payment against documents arrangement involves a high level of trust between the Seller and the Buyer and should be adopted only by parties well known to each other.Risks in Documentary CollectionsvFor the Ex
24、porter If it is a sight draft,the exporter will reduce the risk of non-payment but will not eliminate it totally since the importer may not be in a position to pay for the goods or may not be able to procure sufficient foreign exchange to make the payment.In this case the exporter may be forced to e
25、ither call back the goods or negotiate sale to some other interested party,which may be at a reduced rate.In the case of term draft,the risk to the exporter is higher since the foreign buyer will take possession of the goods and may not pay at due date,forcing therefore the exporter to try and colle
26、ct payment from the foreign buyer in the foreign buyers home country.vFor the Importer The importer faces the risk of paying for goods of sub-standard quality or even with shortages.In such a circumstance,it would take some time to get refunds from the exporter.It could also happen that the exporter
27、 refuses to make refunds,leading the importer to lengthy legal proceedings.When to use Documentary Collections?Since Documentary Collections transactions entail some measure of trust,it is advisable to use the mechanism when the following conditions apply:When the exporter and importer have a well e
28、stablished relationship When there is little or no threat of a total loss resulting from the buyers inability or refusal to pay When the foreign political and economic situation is stable When a letter of credit is too expensive or not allowed In this part you will listen to a conversation about mod
29、es of international payment,and a passage about letter of credit.Try to finish the exercises while listening.Are you ready?10.1.1 Listen to the dialogue about the modes of international payments and fill in the tree according to what you hear in the dialogue.M/TT/TD/DD/AD/P Sight L/C Time L/Cremitta
30、ncecollectionletter of creditModes of International PaymentIrrevocable L/CRevolving L/C 10.1.2 Listen to the following passage and fill in the missing parts.A letter of credit,also referred to as an L/C,is a payment term generally used for international sales transactions.It is basically a mechanism
31、,which allows importers to offer secure terms of payment to exporters in which a bank(or more than one bank)gets involved.At the very outset one must understand that letters of credit deal in documents,not goods.The idea in an international trade transaction is to shift the risk from the actual buye
32、r to a bank.Thus a letter of credit is a payment undertaking given by a bank to the seller and is issued on behalf of the applicant i.e.the buyer.The buyer is the applicant and the seller is the beneficiary.The bank that issues the L/C is referred to as the issuing bank which is generally in the cou
33、ntry of the buyer.The bank that advises the L/C to the seller is called the advising bank which is generally in the country of the seller.The specified bank makes the payment upon the successful presentation of the required documents by the seller within the specified time frame.Note that the bank s
34、crutinizes the“documents”and not the“goods”for making payment.Thus the process works both in favor of both the buyer and the seller.The seller gets assured that if documents are presented on time and in the way that they have been requested on the L/C the payment will be made and buyer on the other
35、hand is assured that the bank will thoroughly examine these presented documents and ensure that they meet the terms and conditions stipulated in the L/C.In this part you are going to read two conversations in pairs and then you will be asked to answer some questions about what you have read.Please r
36、ead louder!10.2.1 Read the dialogue and then answer the following questions.Having settled the price of the transaction,Mr Brown,an old customer of Mr Song,is discussing with Mr Song about terms of payment.1)What is Mr Songs usual terms of payment with his customers?Confirmed,irrevocable letter of c
37、redit against presentation of sight draft.2)What payment terms did Mr Brown propose?D/A against presentation of time draft or term documentary credit.3)Did Mr Song agree to accept Mr Browns payment terms?What did he say?No.He said their capital would be tied up for several months after they effected
38、 shipment 4)What was Mr Browns proposed number of days after sight or term documentary credit?90 days5)What was Mr Browns explanation?Because of the size of this order,they might not be able to make full payment till the end of the fiscal year.The current economic downturns in the U.S.and other exis
39、ting factors had drained their cash flow to the limit.6)What payment terms did Mr Song accept in the end?He made a concession by accepting D/P at sight for half the total payment,and deferred payment credit at 90 days for the remaining balanceHaving settled the price of the transaction,Mr Stone and
40、Mr Zhang,are discussing terms of payment.1)What was Mr Zhangs proposal on terms of payment?vConfirmed,irrevocable letter of credit payable against shipping documents.2)Why was Mr Stone against paying by letter of credit?vPaying by letter of credit was really troublesome and cost him a lot.3)Why did
41、Mr Zhang insist L/C should be used?vBecause a confirmed and irrevocable letter of credit allows exporters the additional protection of the bankers guarantee.4)What was Mr Stones proposal?v50%by L/C and the balance by D/P.5)What was their final conclusion?vPayment by L/C at sight.6)When should Mr Sto
42、ne open the covering L/C?v He should open the L/C early in May,about 30 days before the time of shipment.10.2.2 Read the dialogue and then answer the following questions 1)Which method of payment would you choose for international transactions?And why?2)What kind of services can a banker offer to yo
43、u in international transactions?How do they help you?3)What do you think are the main risks that are involved in international trade payment for both an exporter and a banker?PRE-READING QUESTIONS FOR PAIR WORKQuestions1)Why has international trade always been considered“low risk”by banks?Compared w
44、ith other forms of bank lending,financing trade transactions is popular because these deals are short term,self liquidating,secured(by the underlying goods)and speedily completed.2)What kind of risks does a bank face in financing international transactions?There are three main areas of risk micro ri
45、sks,macro risks,and product risks.3)To avoid fraud,what should a lending banker to the importer consider?Before undertaking to establish a DC for an importer,the bank should consider the financial standing of the importer,the goods and the status of the exporter(or beneficiary of the DC.4)What is on
46、e of the greatest services a bank can do for its exporter in advising the DC it receives from an overseas bank?Check carefully whether the DC is workable and that the exporter will be able to comply with its terms and conditions.5)How does this article enlighten you as an importer/exporter?(Open)L/C
47、 Amendment If payment of export trade is made by letter of credit,the seller,on receiving the relevant L/C,should first of all make a thorough examination to see whether the clauses set in the L/C are in full conformity with the terms stated in the S/C.A minor difference between the two,if not disco
48、vered or duly amended,may cause the seller much inconvenience because the negotiating bank will refuse negotiation of the documents according to the instructions given by the opening bank.Therefore,if any discrepancies or some unforeseen special clauses to which the seller does not agree are found i
49、n the L/C,the seller should send an advice to the buyer,asking him to make amendments.Sometimes an unexpected situation regarding supply,shipping,etc.may arise.In this case,an amendment to the original L/C will also be required.Amendment to a Letter of Credit For the seller to change the terms noted
50、 on an irrevocable letter of credit,it must request an amendment from the buyer.The amendment process is as follows:The seller requests a modification or amendment of questionable terms in the letter of credit;2.If the buyer and issuing bank agree to the changes,the issuing bank will change the lett
