Deck 7: Terms of Payment

Question 1

Several people claim that letters of credit will soon be replaced by the concept of TradeCard. What is this product, and why do those people think it has such a bright future?

Answer 1

The Trade Card is a patented electronic form of payment that can be utilized to complete payment transactions between the importer and exporter. This form of payment is attempting to rival letters of credit and procurement cards as the preferred form of payment.
The Trade Card appears to be a promising product for the future because of its efficiency, affordability, and expediency in enabling the payment of invoices. Once documents are deemed satisfactory by all parties, the Trade Card can be used to issue payment when goods are received in a secure manner. Also, documents of all types ( pro forma invoice, transport documents, bill of landing, packing list, etc.) can be exchanged safely and the credit rating of the customer can be assessed and guaranteed for the benefit of the exporter. Letters of credit in comparison to the Trade Card are time consuming in process (back and forth between issuing banks and advising banks) and depend on the credit standing of importer. Additionally, procurement cards are beneficial for both domestic and international purchase, yet recent changes in bank exchange rate practices, exchange rate discrepancies caused by variation in transaction processing dates, and exchange rate fees have diminished the preference of these cards in light of the Trade Card.

Question 2

Describe the concept of bank guarantees. What are the different types of bank guarantees?

Answer 2

Bank guarantees are a means to safeguard the interests of importer by having a bank provide a contract stating that the institution will guarantee that the exporter will conduct the necessary steps outlined by the contract. Bank guarantees are used to ensure that the exporter will uphold its obligations to the importer, as opposed to making certain that the importer will issue payment to the exporter.
The various forms of bank guarantees (or stand-by letters of credit) are payment guarantee, advance payment guarantee (repayment guarantee), maintenance guarantee, performance guarantee, and tender (bid guarantee). Payment guarantees cover the requirements of the customer (or distributor) in regards to the exporter. Advance payment guarantees make certain that payments are issued prior to the start of any work obligations by a contractor; if a contractor does not succeed in beginning the work, then the funds are refunded. On the contrary, maintenance guarantees makes certain that contractors execute the services required by the contract following the conclusion of the service. Performance guarantees are the most prominent types of guarantees and are used to make certain that a contractor completes a project. The final form of guarantee, the tender guarantee, is utilized by the recipient to ascertain whether a contractor is placing bids without ulterior motives and ensures that the contractor will follow through with the contract once it has been granted.

Question 3

Why is it more difficult and riskier to collect receivables from a foreign purchaser?

Answer 3

To obtain receivables from a foreign purchaser is more complex and uncertain because of the following issues: unclear credit information on foreign entities; there are not clear lines of communication; collections are pricey and complicated to collect; obtaining legal recourse is difficult; litigation is expensive; and there is mistrust among the exporting and importing parties, especially within new markets. If a problem arises and the foreign purchaser fails to present receivables, exporters must find credible means to collect their payments from within their country, the importers country, or through a neutral international entity to settle the dispute.
Because of the nature of international trade, with all of its unknown variables, collecting payment is challenging just for the obvious fact that the transactions are not limited to the domestic field. Rather, exporters and importers from various nations attempt to conduct business under their respective domestic regulations across international frameworks. Coordinating the differences in trade regulations, payments, receivables, and banking safeguards enable the exchange of goods to be possible.

Question 4

What are the differences between political risks and commercial risks of non-payment?

Question 5

Describe the concept of cash in advance.

Question 6

Describe the process of documentary collection.

Question 7

Describe the mechanism of a letter of credit, from the exchange of the pro forma invoice to final payment.

Question 8

What is credit insurance? Why is it associated with open-account transactions?