UCPDC - Export Import Term Payment & Comparison

Import / Export Payment Terms and Comparison
Common payment terms
Open account:
You ship, then forward your shipping documents directly to your buyer and await payment.
C.A.D. (Cash against documents):

You ship then forward your shipping documents to an agent named by your buyer (may be a bank) who
pays you when authorized by your buyer.
Sight draft or time draft (Documentary collections):

You ship, then use your bank as an agent to forward shipping documents to your buyer through his bank.
The buyer's bank must obtain payment/promise of payment from the buyer before releasing shipping
documents.
Advised letter of credit:

Before you ship you receive your buyer's bank's written conditional obligation to pay you, usually upon
presentation of conforming shipping documents to the buyer's bank after shipment.
Confirmed letter of credit:

Before you ship you receive your buyer's bank's written conditional obligation to pay you, which is further
"guaranteed" by a U.S. bank acceptable to you. To be paid you usually present your conforming shipping
documents to the U.S. confirming bank.
Cash in advance:
You receive cash from the buyer before shipping.
Methods of payment
Comparison of various methods of payment

Goods Available Usual Time Of
Method Risk To Exporter Risk To Importer
To Buyer Payment
Maximum-Relies on
Cash In Advance After Payment Before Shipment Very Low exporter to ship
goods as ordered
Assured of quantity
Letter of Credit
When documents and also quality at
Confirmed
After Payment are available at Very Low shipment if
Unconfirmed
shipment inspection report is
(Advised)
required
If draft unpaid,
Documentary Assured of quantity,
goods must be
Collection Sight Draft On presentation of also quality, if goods
After Payment returned or
Documents against draft to importer are inspected before
disposed of,
Payment shipment
usually at loss
Documentary Minimal—Can
Collection Time Draft On maturity of Relies on importer check shipment for
Before payment
Documents against draft to pay draft quantity and quality
Acceptance before payment
Before payment, After use; Substantial risk
exporter retains inventory and unless through
Consignment Very Low
title until goods warehousing cost foreign branch or
are sold or used to exporter subsidiary
Relies on importer
to pay account as
Open Account Before payment As agreed Very Low
agreed—complete
risk
Letters of credit: the basics
Definition:
A documentary credit is a (conditional) bank undertaking of payment. It is a written undertaking by a bank
(issuing bank) given to the seller (beneficiary) at the request, and on the instructions of the buyer
(applicant) to pay at sight or at a determinable future date up to a stated sum of money, within a
prescribed time limit and against stipulated documents or other conditions. The issuing bank is putting out
its credit and good name for the sake of the buyer.
Buyer:
Because the documentary credit is a conditional undertaking, payment is made on behalf of the buyer
against documents, which may represent the goods and give the buyer rights to them.
Seller:
Because the documentary credit is a bank undertaking, the seller can look to the bank for payment,
instead of relying upon the ability or willingness of the buyer to pay.
However, because the undertaking is conditional, the seller only has the right to demand payment if he
meets all the requirements of the credit. It is, therefore, unwise for the seller to proceed with shipment
until he is aware of these requirements and is satisfied he can meet them.
Summary:
Documentary credits therefore:
 Are an arrangement by banks for settling international commercial transactions.

 Provide a form of security for the parties involved.
 Ensure payment, provided that the terms and conditions of the letter of credit have been fulfilled.
 Mean that payment by such means is based on documents only, and not on merchandise or
services involved.
Types of letters of credit
Merchandise, Commercial, Trade:

The majority of LCs issued are in payment for goods in shipment or current services performed. Payment
is normally made against documents for goods shipped. (Article 1&2, UCP 500)
Standby:
Normally, this type of LC functions like a guarantee. This type of credit can be drawn against only upon
performance of service or financial obligation default. It is a definite undertaking of the issuing bank.
Similar to commercial LCs, standby's are governed by the International Standby Practices 1998. (ISP98)
Revocable:
A revocable letter of credit may be amended or canceled by the issuing bank at any moment and without
prior notice to the beneficiary. (Article 6 & 8, UCP 500)
Unconfirmed:
Bears only the obligation of the issuing bank. The beneficiary should look to the credit worthiness of only
the issuing bank, and not to any intermediary. (Article 9, UCP 500)
Confirmed:
Is a credit in which a second obligation is added to the letter of credit by another bank. (Article 9, UCP
500)
Sight:
Payment is at sight, which means that the drafts and documents are honored, if in order, by making
payment without delay.
Time, Usance:
The draft honored by accepting it for payment at a future date. Payment is delayed until the maturity of
the draft.
Transferable credit:
Can be transferred by the original beneficiary to one or more other parties. It is normally used when the
first beneficiary does not supply the merchandise himself, but is a middleman and wants to transfer all or
part of his rights to the actual supplier. (Article 48, UCP 500)
Guidelines for the beneficiary when reviewing the L/C
Be Sure to Verify:
1. Correct name and address
2. Sufficient credit amount
3. Documents required are obtainable and according to terms of sale
4. Points of shipment and destination are correct
5. Insurance coverage requirements are obtainable and according to terms of sale
6. Shipping date allows sufficient time to dispatch goods
7. Expiration date allows sufficient time for presentation of draft and documents
8. Description of goods is correct and simply stated

UCPDC - Export Import Term Payment & Comparison

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Import / Export Payment Terms and Comparison

Common payment terms

C.A.D. (Cash against documents):

Sight draft or time draft (Documentary collections):

Advised letter of credit:

Confirmed letter of credit:

Comparison of various methods of payment

Letters of credit: the basics

 Are an arrangement by banks for settling international commercial transactions.

Types of letters of credit

Merchandise, Commercial, Trade:

Guidelines for the beneficiary when reviewing the L/C

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