Payment Terms: Dr. A.K. Sengupta Principal Advisor CED Former Dean, Indian Institute of Foreign Trade

Payment Terms
Dr. A.K. Sengupta

Principal Advisor CED
Former Dean, Indian Institute of Foreign Trade
1
The export Sales Contract must clearly specify how and when the
payment is to be made.
Options of payments by the buyer:
•Advance Payment
•Open Account
•Consignment Sales
•Documentary bills
•Documents against payment (DP)
•Documents against acceptance (DA)
•Documentary Letter of Credit (LC)
2
Payment in Advance
• Most advantageous payment term for the seller point of view.
• The importer sends remittance with the confirmation of order or
before the shipment is made.
• The remittance is made by draft, cheque, mail or transfer.
• Advance payment may be insisted upon when goods are
manufactured to order in accordance to the specification of the
importer.
• Buyers are unknown to the seller or his credit worthiness is
doubtful.
3
Open Account
• Under this method the seller carries the entire financial burden.
• Here the seller ships the goods with no financial documents to
his advantage.
• Because of great risks associated with the open account
method by the seller, it is generally restricted to cases of
transactions between inter-connected companies or where the
exporter and overseas buyers have a long and well established
commercial relationship.
• Indian exporters are allowed to sell abroad on open account
basis only with special permission of the R.B.I. Normally this
permission is given to foreign companies operating in India.
4
Consignment Sales
• The exporter makes shipment to overseas consignee/ agent,

but retain the title to the goods even though the overseas
agents will have the physical possession of the goods.
• The payment is made only when the goods are ultimately sold
by the overseas consignee to other parties.
• The procedure is costly and risky to exporter.
• His payment will be due on a date which cannot be foreseen –
As a result he may be faced with cash flow problem.
5
• This type of payment is risky too – if the consignee fails to sell
the goods, he may return the goods any time at the seller’s
expense.
• Moreover the price to be realized is also uncertain and will
depend on market conditions.
• Advantage of such sale is that the buyer gets an opportunity to
examine the goods and the seller may get a higher price if the
buyer is satisfied with the quality etc.
6
Documentary Bills
Documentary bills act as a bridge between:

a) Exporter’s unwillingness to part with the goods until he is
paid for and b) Importer’s unwillingness to part with
his money unless he is sure of receiving the goods.
Banks provide a via media by giving the necessary
assurances to both the parties. Under this form of
payment, the exporter agrees to submit the documents
to his bank.
DP and DA Bills
•Two types of payment under Documentation Bills

•Documents against Payment (DP)
•Documents against Acceptance (DA)
7
DP
•Exporter ships goods to foreign buyer.

•Exporter’s bank sends documents including bill of exchange
and bill of lading to its Correspondent Bank in the buyer’s
country.
•Correspondent Bank presents documents to buyer and on
payment of the bill of exchange, delivers the documents to
him so that the can take possession of the goods.
•The correspondent bank sends the money received from the
buyer to the exporter’s bank which is ultimately credited to
exporter’s account.
8
DA
•The correspondent bank will submit the bill of exchange to be

signed by the buyer to indicate his acceptance of the payment
obligation.
•After the buyer accepts the bill, he will get possession of the
documents.
•On the due date of payment, the bank will again present the
bill to the buyer who then makes the payment.
•The money received is remitted through the usual banking
channels to be credited to the exporter’s account.
•DP bills are drawn on “sight” i.e. no credit is involved.
•DA bills involve credit for a fixed period and are therefore
drawn on “usance” basis.
9
Commercial Risks of DP & DA
•Both DP and DA are common in export trade- there are
various commercial risks.
DP
•Under DP terms, the importer may fail to accept the
documents by making the payment.
•But in this case the documents remain still in the hands of the
bank and the exporter will at least not lose possession of the
title of goods.
•He may find alternative buyer or bring back the goods.
DA
•In case of DA the risk is greater as the buyer has already
taken possession of the goods, which may or may not be in his
custody on the maturity date.
•If he fails to fulfill his obligation on the due date, the exporter
will have no alternative but to start legal proceedings to receive
his payments.
10
Facility under ECGC to cover the risk
Documentary Letter of Credit
What is LC?
•Under documentary credits, the importer approaches his

bank, which on the basis of the instructions given by the
importer, gives a written undertaking to the overseas exporter
that if the exporter presents documents the bank will make
payment of the given amount to the exporter.
•In effect, the credit of the issuing bank is substituted for that of
the buyer.
11
Parties to the letter of Credit
•The Opener – The opener is the buyer (the importer) - The LC

is opened at the initiative and request of the buyer.
•The Issuer – The issuer also called the opening or Issuing
Bank is the bank in the importer’s country issuing the LC at the
request of the buyer.
•The Beneficiary – The beneficiary is the party in whose favour
the credit is issued – seller or the exporter.
•The confirming Bank – The confirming bank is a bank in the
exporter’s country which guarantees the credit.
12
How LC Works
This is explained by the following example:
•Suppose a US-based buyer wants to purchase goods from an
Indian exporter.
•The Indian exporter instead of drawing directly on the US
importer, requests him to arrange a LC.
•The US importer applies to his bank in USA to issue a letter of
credit.
•In his application for the LC to the bank, the importer sets
forth the terms of sale and mentions the documents which
shall accompany the draft, the usuance, the date of shipment
etc.
•If the bank is prepared to issue the credit, the importer will
sign the LC contract, in which he will have agreed to reimburse
the bank for all outlays and give such securities as the13 bank
•The issuing bank will now notify its correspondent bank in the
exporters country and request the latter to confirm the credit to
the exporter.
•The correspondent bank will now inform the exporter that a
LC has been arranged.
•The exporter will now ship the goods to the US buyer, draw a
time draft on the issuing bank in India. The Indian bank will
mail the draft and documents to its own correspondent bank in
USA, which in turn, will present it to the drawn bank for
acceptance.
•The accepting bank will deliver the documents to the importer.
Usually against a “trust receipt”, an instrument under which the
bank retains title to the merchandise. The importer makes
payment when the draft matures.
14

Payment Terms: Dr. A.K. Sengupta Principal Advisor CED Former Dean, Indian Institute of Foreign Trade

Uploaded by

Copyright:

Available Formats

Payment Terms: Dr. A.K. Sengupta Principal Advisor CED Former Dean, Indian Institute of Foreign Trade

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Payment Terms: Dr. A.K. Sengupta Principal Advisor CED Former Dean, Indian Institute of Foreign Trade

Uploaded by

Copyright:

Available Formats

What are the different payment options discussed in the document?

What are the advantages and disadvantages of payment in advance?

Payment Terms

Dr. A.K. Sengupta

Options of payments by the buyer:

• The exporter makes shipment to overseas consignee/ agent,

Documentary bills act as a bridge between:

•Two types of payment under Documentation Bills

•Exporter ships goods to foreign buyer.

•The correspondent bank will submit the bill of exchange to be

Documentary Letter of Credit

•Under documentary credits, the importer approaches his

•The Opener – The opener is the buyer (the importer) - The LC

You might also like