Overview 5 minutes Overview Start Trade Payment Methods with the overview of the part. Show the 2-66 and clarify each topic given in the overview. 2-66 Objectives 5 minutes What are you expecting to learn in the Trade Payment Methods Part? (Let the participants share their expectations.) Objective Show the 2-67. Inform the participants about the objectives. Make sure the participants understand each objective clearly. 2-67 Please turn to page 2-81 of your manual. 2-80
Scenario 5 minutes Scenario Let the participants read the scenario, and then discuss it from different perspective. Give concrete examples from SECI region. Introduction 5 minutes Show the 2-68 and start process with introducing the Part 3. 2-68 Introduce the part and emphasize the distinction of trade between past and today. Please turn to page 2-82 of your manual. 2-81
Trade Payment Methods 5 minutes Show the 2-69 and continue process with explaining Trade Payment Methods. 2-69 Discussion Let the participants discuss their opinions about recent trade methods. Are these methods facilitating or complicating recent trade methods? Cash in Advance 7 minutes Show the 2-70 and continue process with explaining the process of the first payment method Cash in Advance. 2-70 Attention Attention that paying in advance gives the greatest protection for the seller and puts the risk on the buyer. Please turn to page 2-83 of your manual. 2-82
Could you give an example to what kind of problems the buyer could have? (Ask several of the participants. Give 2 minutes for answers.) Summarize and write the answers of the participants on the flipchart. Flipchart Although this method of payment is not uncommon, the seller requiring full payment in advance may cause lost sales to a foreign or domestic competitor who is able to offer more attractive payment terms. In some circumstances this cash in advance method can be modified to a partial payment in advance with agreed upon installments or additional terms available. Please turn to page 2-84 of your manual. 2-83
Advantages and Risks of Cash in Advance Method 7 minutes Show the 2-71 and continue process with explaining the advantages and risks of cash in advance method 2-71 As a buyer and a seller in which positions do you choose / accept cash in advance method? (Ask several of the participants. Give 2 minutes for answers.) How do you think the seller uses the money received from the buyer? (Ask several of the participants. Give 2 minutes for answers.) Show the 2-72 and explain the suitable situations for Cash in Advance. 2-72 Please turn to page 2-85 of your manual. 2-84
Open Account 4 minutes Show the 2-73 and continue process with explaining the open account. 2-73 An open account transaction means that the goods are manufactured and delivered before payment is necessary. Attention that the method provides great flexibility and in many countries sales are likely to be made on an open account basis if the manufacturer has been dealing wit the buyer over a long period of time and has established a secure working relationship. Please turn to page 2-86 of your manual. 2-85
Advantages and Risks of the Open Account Method 7 minutes Show the 2-74 and continue process with the Advantages and and Risks of the Open Account Method. 2-74 What do you think about how the seller could decrease the risks of open account method? (Ask several of the participants. Give 2 minutes for answers.) Show the 2-75 and explain suitable situations. 2-75 Show the 2-76 and explain unsuitable situations. 2-76 Give a 10 minutes break. Break Please turn to page 2-87 of your manual. 2-86
On Consignment 5 minutes Show the 2-77 and continue process with explaining the On Consignment process. 2-77 With consignment sales, the seller does not receive payment until the importer sells or resells the goods. Explain On Consignment as explained in the paragraph. What are the disadvantages of this method of payment? (Ask several of the participants. Give 2 minutes for answers.) Please turn to page 2-88 of your manual. 2-87
Advantages and Risks of the On Consignment Method 8 minutes Show the 2-78 and continue process with explaining the advantages and risks of the On Consignment Method. 2-78 In your business life, have you used on consignment method? If yes, could you give examples of advantages and risks of that method from your experiences? (Ask several of the participants. Give 2 minutes for answers.) Summarize and write the answers of the participants on the flipchart. Flipchart Show the 2-79 and explain the suitable situations for on Consignment. 2-79 Please turn to page 2-89 of your manual. 2-88
Draft or Documentary Collection 8 minutes Show the 2-80 and continue process with explaining the Draft or Documentation Process. 2-80 The Draft or Documentary Collection method is employed when either the cash in advance method is not acceptible to the buyer, or the open account method is not acceptable to the seller. Explain the method as explained in the page (Appendix A-17). What do you think about the reason why the seller or the buyer may accept draft or documentary collection method instead of cash in advance or open account? (Ask several of the participants. Give 2 minutes for answers.) Please turn to page 2-90 of your manual. 2-89
Attention Attention that the buyer, after examine the documents, has three options. Explain these options as mentioned in the page. Please turn to page 2-91 of your manual. 2-90
Sight Drafts 5 minutes Show the 2-81 and continue process with explaining the Sight Draft. 2-81 Explain the sight draft as explained first paragraph of the page (Appendix A-18,19). Please turn to page 2-92 of your manual. 2-91
Time Drafts 5 minutes Show the 2-82 and continue process with explaining the Time Draft process. 2-82 If the seller has provided credit terms to the buyer, thereby allowing the merchandise to be released before payment is received; it is called a time draft. Explain the time draft as explained at the bottom of the page. (Appendix A-20) Advantages and Risks of Draft or Documentary Collection Method 5 minutes Show the 2-83 and continue proces with explaining the advantages and risks of Draft or Documentary Collection Method. 2-83 Please turn to page 2-93 of your manual. 2-92
Letter of Credit 4 minutes The Letter of Credit has been a keystone of international trade for many years. Introduce Letter of Credit as explained in the first paragraph of the page. What do you know about Letter of Credit and its differences from other payment methods? (Ask several of the participants. Give 2 minutes for answers.) What is a Letter of Credit? 10 minutes Explain Letter of Credit as explained at the bottom paragraphs of the page. Please turn to page 2-94 of your manual. 2-93
Show the 2-84 and continue process with explaining the Letter of Credit Process. 2-84 Show the 2-85 and explain what a Letter of Credit is not. Direct attention of the participants to post-it box at the same time. 2-85 Please turn to page 2-95 of your manual. 2-94
Continue explaining Letter of Credit as explained in the paragraphs. Post-it Direct attention of the participants to the post-it box and explain Letter of Credit s Usefullness in International Trade. What do you think about the advantages of the Letter of Credit s instructions? (Ask several of the participants. Give 2 minutes for answers.) Give a 10 minutes break. Break Please turn to page 2-96 of your manual. 2-95
Parties and Terms in Letters of Credits 4 minutes To understand Letter of Credit exactly, the parties and terms which are used in Letter of Credit should be examined. Show the 2-86 and continue process with explaining the parties of Letter of Credit. 2-86 There are four parties in Letter of Credit. Explain these parties as explained in the paragraphs. Letter of Credit Terms and Conditions 10 minutes Show the 2-87 and continue process with explaining Letter of Credit Terms and Conditions. 2-87 Explain the Draft as explained in the last paragraph of the page. Please turn to page 2-97 of your manual. 2-96
A letter of credit should contain a stated expiry date. Explain the Expiration Date of a Letter of Credit as explained in the second paragraph of the page. Most Commercial Letters of Credit contain a Latest Shipping Date. Explain the subject as explained in the third paragraph of the page. Who opens L/C and for whom? (Ask several of the participants. Give 2 minutes for answers.) Please turn to page 2-98 of your manual. 2-97
Unless the credit stipulates otherwise, the UCP requires that documents be presented within 21 days of the date of shipment or at another such period stated in the Letter of Credit. Explain the subject Latest Date for Presentation as explained in the related paragraphs. Attention Any idea about UCP? (Ask several of the participants. Give 2 minutes for answers.) Attention that the letter of credit process has been standardized by a set of rules published by the International Chamber of Commerce (ICC). These rules are called the Uniform Customs and Practice for Documentary Credits (UCP) and are contained in ICC Publication No. 500. Please turn to page 2-99 of your manual. 2-98
Basic Procedures for Establishing a Letter of Credit 8 minutes Show the 2-88 and continue process with explaining Issuance Letter of Credit. 2-88 Explain issuance process of Letter of Credit as explained in the bulleted sentences of the page (Appendix A-21). Please turn to page 2-100 of your manual. 2-99
Show the 2-89 and continue process with explaining Payment under Letter of Credit Process. 2-89 Explain Payment Under a Letter of Credit process as explained in the bulleted sentences of the page. Please turn to page 2-101 of your manual. 2-100
Documentary Requirements 6 minutes Show the 2-90 and continue process with explaining requirements for Drafts. 2-90 Draft is drawn on whom? (Ask several of the participants. Give 2 minutes for answers.) Show the 2-91 and explain the requirements for Invoices. 2-91 Please turn to page 2-102 of your manual. 2-101
Show the 2-92 and continue process with explaining requirements for Insurance Documents. 2-92 If other documents are required such as weight lists, consular invoices, certificates of quantity or quality, and the like, they must be issued and presented in accordance with the Letter of Credit. Give information about other documents as explained in the first and second paragraph of the page. Amendment of a Letter of Credit 5 minutes Show the 2-93 and continue process with explaining the amendment Letter of Credit. 2-93 If the seller doesn't agree with the terms of the Letter of Credit, the buyer will normally receive a Request for an Amendment. Explain the amendment process as explained at the bottom of the page. Please turn to page 2-103 of your manual. 2-102
Continue explaining the amendment process. Attention Could you discuss the advantages and risks of amendment in a letter of credit? (Ask several of the participants. Give 2 minutes for answers.) Summarize and write the answers of the participants on the flipchart. Flipchart Please turn to page 2-104 of your manual. 2-103
Advantages and Risks of the Letter of Credit Method 4 minutes Show the 2-94 and continue process with explaining the advantages and risks of the Letter of Credit. 2-94 Show the 2-95 and continue explaining the advantages and risks. 2-95 A Case about Letter of Credit 5 minutes In this case a classic situation about Letter of Credit is given. Continue process with the case. Please turn to page 2-105 of your manual. 2-104
Explain the role of Letter of Credit in this situation. Attention A letter of credit gives both parties some guarantee of a fair trade transaction. Explain the position of seller and buyer and their risks. Please turn to page 2-106 of your manual. 2-105
Types of Letter of Credit 1 minute Show the 2-96 and continue process with the types of Letter of Credit. 2-96 All Letters of Credit are issued in either a "revocable" or an "irrevocable" form and "confirmed" or "unconfirmed." They should be read carefully and understood to determine the advantages and to decide which one is fitting for a particular situation. Revocable Letter of Credit 2 minutes Unless stated otherwise all credits are revocable. (Appendix A-22) Post-it Direct attention of the participants to the post-it box and explain Revocable Letter of Credit for Importer and Exporter. How does the seller prevent no payment under revocable letter of credit? (Ask several of the participants. Give 2 minutes for answers.) Please turn to page 2-107 of your manual. 2-106
Irrevocable Letter of Credit 2 minutes With this type of credit the buyer's bank has given an irrevocable promise to pay the seller, on his/her proof of compliance with the set conditions of the Letter of Credit, and the bank without the authorization of the exporter cannot change this. (Appendix A-23) Post-it Confirmed Direct attention of the participants to the post-it box and explain Irrevocable Letter of Credit for Importer and Exporter. 1 minute A confirmed letter of credit is when a second guarantee is added to the document by another bank. Explain the subject as explained in the related paragraph. Who is going to pay for the confirmation charges? (Ask several of the participants. Give 2 minutes for answers.) Unconfirmed 2 minutes An unconfirmed letter of credit is when the document carriers the assurance of just the issuing bank. Explain the subject as explained in the last paragraph of the page. What do you think in which situations confirmed and in confirmed Letter of Credit is acceptable? (Ask several of the participants. Give 2 minutes for answers.) Give a lunch break. Break Please turn to page 2-108 of your manual. 2-107
Confirmed and Unconfirmed Credit for Importer and Exporter 5 minutes Post-it Confirmation is never to the importer s advantage. Direct attention of the participants to the post-it box and explain Confirmation from the Importer s Viewpoint. Inform the participants about the directions for confirmation of the credit as explained at the related paragraphs. Give concrete examples for each situation (Appendix A-24,25,26). Could you compare all types of letter of credit s (revocable, irrevocable, confirmed, unconfirmed) advantages and risks for the seller and the buyer? (Ask several of the participants. Give 2 minutes for answers.) Summarize and write the answers of the participants on the flipchart. Flipchart Please turn to page 2-109 of your manual. 2-108
Special Letters of Credit 7 minutes Show the 2-97 and continue process with explaining Special Letters of Credit. 2-97 Explain each type of Special Letters of Credit briefly. Attention Red Clause Letter of Credit provides the seller with cash prior to shipment to finance production of the goods. Deferred Payment Letter of Credit gives the buyer a grace period for payment. Usually Revolving Letter of Credit arrangements limit the number of times the buyer may drawn down its line over a predetermined period. Back to Back Letter of Credit is used by traders to arrangements to pay the ultimate supplier. Please turn to page 2-110 of your manual. 2-109
Transferable Letter of Credit allows the seller to transfer all or part of the proceeds of the original Letter of Credit to a second beneficiary, usually the ultimate supplier of the goods (Appendix A-27). What is the risk of Transferable L/C? (Ask several of the participants. Give 2 minutes for answers.) Assignment of Proceeds is riskier than Transferable Letter of Credit because the assignee is dependent upon the beneficiary for compliance. Export Letters of Credit 10 minutes Continue process with explaining the export Letter of credit as explained in the last paragraph of the page (Appendix A-28,29,30). Please turn to page 2-111 of your manual. 2-110
What do you think about the kind of problems exporters could meet? Could you give examples from your business environment? (Ask several of the participants. Give 2 minutes for answers.) Summarize and write the answers of the participants on the flipchart. Flipchart Show the 2-98 and 2-98. Continue process with explaining the ten common mistakes. 2-98 2-99 Please turn to page 2-112 of your manual. 2-111
Show the 2-100, 2-101 and continue process with explaining the checklist. Let the participants fill the checklist during your explanations. Attention 2-100 Please turn to page 2-113 of your manual. 2-112
Import Letters of Credit 5 minutes Continue process with explaining the Import Letter of Credit (Appendix A-31,32). Could you compare and discuss the advantages and risks that the complying and uncomplying documents for importer? (Ask several of the participants. Give 2 minutes for answers.) Summarize and write the answers of the participants on the flipchart. Flipchart Please turn to page 2-114 of your manual. 2-113
s Importers Commonly Ask About Letters of Credit 10 minutes Show the 2-102 and continue process with the questions importers commonly ask. 2-102 When the Letter of Credit expiry date is established, should enough time be allowed for the goods to get to me or for payment to be made when extended payment terms have been negotiated (e.g. 60 days after sight)? Answer the question with a concrete example. What are the costs to issue a Letter of Credit? Answer the question with a concrete example. Is there anyway that I can protect myself from receiving inferior quality goods by using a Letter of Credit? Answer the question with a concrete example. Please turn to page 2-115 of your manual. 2-114
How quickly will the exporter take delivery my Letter of Credit? Answer the question with a concrete example. Under a Letter of Credit, what kind of recourse available to me if the goods arrive and they are not the the quantity or quality agreed upon? Answer the question with a concrete example. What happens if my ocean shipment arrives before my transportation documents? Answer the question with a concrete example. Please turn to page 2-116 of your manual. 2-115
Problems that may be encountered and Tips 7 minutes Show the 2-103 and continue process with notifying the most common problems of Letter of Credit and tips. 2-103 The banks use limited discreation in matching the terms and conditions of the Letter of the Credit against the documents presented. Notify this problem with the given example and suggest the tip as explained in the paragraph. In some cases the letter of credit fails to anticipate an aspect of the transaction. Notify this problem with the given example and suggest the tip as explained in the paragraph. Please turn to page 2-117 of your manual. 2-116
Sometimes it is possible to miss the time limits when presenting the required documents. Explain the situation and suggest the tip as given in the paragraph. Have you had such problems? Do you want add other problems and tips you know? What should be done to avoid those kinds of problems? (Ask several of the participants. Give 2 minutes for answers.) Flipchart Summarize and write the answers of the participants on the flipchart. Suggest solutions if it is possible. Comparison of Various Methods of Payment 6 minutes The five explained payment methods are used for different situations and each has some advantages and risks. Please turn to page 2-118 of your manual. 2-117
Show the 2-104 and continue process with comparing the Payment Methods as shown in the table. 2-104 Give a 10 minute break. Break Please turn to page 2-119 of your manual. 2-118
Case: Fruit Juice for Europe 16 minutes Exercise After this exercise the participants will be able to analyze the payment terms in a trade operation. Give each participant one copy of case. Let the participants read the case. Ask the case questions to different participants. After all give feedback to the participants and finish the exercise. 1- b 2- a 3- Agents and distributors 4- No exclusivity. First, they should try. Please turn to page 2-120 of your manual. 2-119
Case: Be Careful with the Contract 17 minutes Exercise After this exercise the participants will be able to the role or irrevocable confirmed documentary credit in trade. Divide the participants into groups of three. Let each group select a leader. Give each group one copy of case. Let the groups discuss and find solutions for the situation in the case. After group discussion let the group leaders to explain their group solutions. After all give feedback to the participants and finish the exercise. The comments for feedback can be found in Appendix B. Attention Please turn to page 2-121 of your manual. 2-120
Case: Real Documentary Credits 17 minutes Exercise After this exercise the participants will be able to analyze the terms of payment. Give each participant one copy of case. Let the participants read the case. Ask the case questions to different participants. Finally, give feedback to the participants and finish the exercise. Credits of this kind definitely are not what are normally expected as documentary credits, and they should be discouraged. There is the fact, on the other hand, that the credit clearly stated that 60% of its amount was without responsibility or engagement on the part of the issuing bank. Any objection by the beneficiary to such a credit should be made on receipt, not after the credit applicant s nonpayment of the amount not covered by the credit. Give a 10 minutes break. Break Role Play: International Trade Deal 40 minutes Exercise Divide participants into groups and give each group one copy of case (Appendix B). Let participants study their roles. Ask groups to play their role and fill in the necessary documents (in the appendix A) according to their role. Please turn to page 2-122 of your manual. 2-121
Summary 2 minutes Summary Summarize the important points of Part 3 and continue process with the progress check. Two questions often arise in international trade. The first, for sellers, is: If I ship the goods, am I certain to be paid for them? The second, for buyers, is: If I send the money, will I be certain to receive the goods? No transaction should take place unless the answers are definitely yes. Yet the two seem to contradict each other. The seller can answer yes if the seller receives payment in advance, and the buyer can answer yes if the buyer makes payment after delivery, but both of these solutions fail to protect the other party from nonperformance. Therefore, importers and exporters are well advised to arrange their contractual terms to avoid court litigation. They have to use fully discussed payment terms and select the one that satisfies both parties. According to the transaction, the most convenient payment terms should be chosen but in general we conclude that the most popular ones are a letter of credit and documents against payment. Please turn to page 2-123 of your manual. 2-122
Please turn to page 2-124 of your manual. 2-123
Progress Check 8 minutes Check Let the participants take the test and explain the correct answer for each question after completion of the test. 1. In a documentary collection, the banks; a. Evaluate the quality of the goods before shipment b. Act as intermediaries in the collection process c. Finance the buyer and the seller d. Dictate the terms e. Only check the drafts 2. An exporter receives a P/O (purchase order) and payment for 100 kg. of knitting yarn. This is an example of which type of payment option? a. Cash in advance b. On consignment c. Open account d. Letter of credit e. Draft or documentary collection 3. If the bank holds shipping documents in custody and delivers them to the buyer upon receipt of payment, what type of document of payment term is this? a. Letter of credit b. Cash in advance c. Cash against goods d. Documents against collection e. Open account 2-124
4. An exporter receives a P/O (purchase order) for 1000 pullovers and ships the goods and the documents directly to the buyer before receiving payment for the goods. Which payment option is this? a. Cash against documents b. On consignment c. Time draft d. Cash in advance e. Open account 5. An open account transaction gives all of the advantages to the; a. Consignee b. Seller c. Bank d. Forwarder e. Buyer 6. Identify the payment option(s) which place(s) the seller in the risky position of nonpayment by the buyer (select all that apply)? I. Cash in advance III. Irrevocable letter of credit at sight II. Open account IV. On consignment a. I and II b. Only II c. II and IV d. Only I e. Only III 2-125
7. What kind of payment option(s) should the seller consider when his/her products are in low demand (select all that apply)? I. Cash in advance III. Open account II. Letter of credit IV. Documents against payment a. Only II b. II and III c. Only III d. III and IV e. Only IV 8. Identify the risk(s) faced by the seller when collecting payment from an overseas buyer (select all that apply). I. Country III. Industrial II. Political IV. Foreign exchange a. Only I b. Only III c. II and III d. III and IV e. I and IV 9. What payment option(s) should the seller consider when he/she is willing to extend credit to the buyer? a. Cash in advance b. Letter of credit at sight c. Draft or documentary collection d. Documents against payment e. Documents against acceptance 2-126
10. The seller is best protected by which of the following payment terms; a. Open account b. Revolving letter of credit c. Confirmed, irrevocable letter of credit d. Red clause letter of credit e. Transferable letter of credit 11. In a letter of credit transaction, the bank deals; a. Only with goods, not with documents b. Only with documents, not with goods c. With documents and goods d. With quantity and quality of goods e. Only with payment 12. The exporter is about to close a deal with the importer but he/she does not know the issuing bank well. So what kind of letter of credit should be opened to satisfy the exporter and minimize the risk? a. Confirmed b. Avalized c. Straight d. Red clause e. Back to back 2-127
13. In some cases the seller may need some advance payment in order to make the deal possible. A L/C may assure that certain sums be paid in advance of the presentation of documents and any advance paid will be deducted from the total credit available when the credit is paid. What sort of L/C is this? a. Back to back b. Confirmed c. Red clause d. Straight e. Transferable 14. If you are intermediary purchasing materials under L/C for resale to a final purchaser and you do not want to disclose your source to the buyer, what kind of L/C should you use? a. Back to back b. Red clause c. Back to - back d. Revolving e. Confirmed 2-128