          
                      METHODS OF PAYMENT
          
          
          There are several basic methods of receiving payment for 
          products sold abroad. As with domestic sales, a major 
          factor that determines the method of payment is the amount 
          of trust in the buyer's ability and willingness to pay. For 
          sales within the United States, if the buyer has good 
          credit, sales are usually made on open account; if not, 
          cash in advance is required. For export sales, these same 
          methods may be used; however, other methods are also often 
          used in international trade.  Ranked in order from most 
          secure for the exporter to least secure, the basic methods 
          of payment are
          
          1.   cash in advance,
          2.   letter of credit,
          3.   documentary collection or draft,
          4.   open account, and
          5.   other payment mechanisms, such as consignment sales.
          
          Since getting paid in full and on time is of utmost concern 
          to exporters, risk is a major consideration. Many factors 
          make exporting riskier than domestic sales. However, there 
          are also several methods of reducing risks. One of the most 
          important factors in reducing risks is to know what risks 
          exist. For that reason, exporters are advised to consult an 
          international banker to determine an acceptable method of 
          payment for each specific transaction.
          
          CASH IN ADVANCE
          
          Cash in advance before shipment may seem to be the most 
          desirable method of all, since the shipper is relieved of 
          collection problems and has immediate use of the money if a 
          wire transfer is used. Payment by check, even before 
          shipment, may result in a collection delay of four to six 
          weeks and therefore frustrate the original intention of 
          payment before shipment. On the other hand, advance payment 
          creates cash flow problems and increases risks for the 
          buyer. Thus, cash in advance lacks competitiveness; the 
          buyer may refuse to pay until the merchandise is received.
          
          DOCUMENTARY LETTERS OF CREDIT AND DRAFTS
          
          The buyer may be concerned that the goods may not be sent 
          if the payment is made in advance. To protect the interests 
          of both buyer and seller, documentary letters of credit or 
          drafts are often used. Under these two methods, documents 
          are required to be presented before payment is made.  Both 
          letters of credit and drafts may be paid immediately, at 
          sight, or at a later date. Drafts that are to be paid when 
          presented for payment are called sight drafts. Drafts that 
          are to be paid at a later date, which is often after the 
          buyer receives the goods, are called time drafts or date 
          drafts.
          
          Since payment under these two methods is made on the basis 
          of documents, all terms of sale should be clearly 
          specified. For example, "net 30 days" should be specified 
          as "net 30 days from acceptance" or "net 30 days from date 
          of bill of lading" to avoid confusion and delay of payment. 
          Likewise, the currency of payment should be specified as 
          "US$XXX" if payment is to be made in U.S. dollars. 
          International bankers can offer other suggestions to help.
          
          
          Banks charge fees -- usually a small percentage of the 
          amount of payment -- for handling letters of credit and 
          less for handling drafts. If fees charged by both the 
          foreign and U.S. banks for their collection services are to 
          be charged to the account of the buyer, this point should 
          be explicitly stated in all quotations and on all drafts.  
          The exporter usually expects the buyer to pay the charges 
          for the letter of credit, but some buyers may not accept 
          terms that require this added cost. In such cases the 
          exporter must either absorb the letter of credit costs or 
          lose that potential sale.
          
          Letters of credit
          
          A letter of credit adds a bank's promise of paying the 
          exporter to that of the foreign buyer when the exporter has 
          complied with all the terms and conditions of the letter of 
          credit. The foreign buyer applies for issuance of a letter 
          of credit to the exporter and therefore is called the 
          applicant; the exporter is called the beneficiary.
          
          Payment under a documentary letter of credit is based on 
          documents, not on the terms of sale or the condition of the 
          goods sold. Before payment, the bank responsible for making 
          payment verifies that all documents are exactly as required 
          by the letter of credit. When they are not as required, a 
          discrepancy exists, which must be cured before payment can 
          be made. Thus, the full compliance of documents with those 
          specified in the letter of credit is mandatory.
          
          Often a letter of credit issued by a foreign bank is 
          confirmed by a U.S.  bank. This means that the U.S. bank, 
          which is the confirming bank, adds its promise to pay to 
          that of the foreign, or issuing, bank. Letters of credit 
          that are not confirmed are advised through a U.S. bank and 
          are called advised letters of credit. U.S. exporters may 
          wish to confirm letters of credit issued by foreign banks 
          not only because they are unfamiliar with the credit risk 
          of the foreign bank but also because there may be concern 
          about the political or economic risk associated with the 
          country in which the bank is located. An international 
          banker or the local U.S. Department of Commerce district 
          office can help exporters evaluate these risks to determine 
          what might be appropriate for each specific export 
          transaction.
          
          A letter of credit may be either irrevocable (that is, it 
          cannot be changed unless both the buyer and the seller 
          agree to make the change) or revocable (that is, either 
          party may unilaterally make changes). A revocable letter of 
          credit is inadvisable. A letter of credit may be at sight, 
          which means immediate payment upon presentation of 
          documents, or it may be a time or date letter of credit 
          with payment to be made in the future. See the "Drafts" 
          section of this chapter.
          
          Any change made to a letter of credit after it has been 
          issued is called an amendment. The fees charged by the 
          banks involved in amending the letter of credit may be paid 
          by either the exporter or the foreign buyer, but who is to 
          pay which charges should be specified in the letter of 
          credit. Since changes can be time-consuming and expensive, 
          every effort should be made to get the letter of credit 
          right the first time.
          
          An exporter is usually not paid until the advising or 
          confirming bank receives the funds from the issuing bank. 
          To expedite the receipt of funds, wire transfers may be 
          used. Bank practices vary, however, and the exporter may be 
          able to receive funds by discounting the letter of credit 
          at the bank, which involves paying a fee to the bank for 
          this service. Exporters should consult with their 
          international bankers about bank policy.
          
          A Typical Letter of Credit Transaction
          
          Here is what typically happens when payment is made by an 
          irrevocable letter of credit confirmed by a U.S. bank:
          
          1.   After the exporter and customer agree on the terms of 
               a sale, the customer arranges for its bank to open a 
               letter of credit. (Delays may be encountered if, for 
               example, the buyer has insufficient funds.)
          
          2.   The buyer's bank prepares an irrevocable letter of 
               credit, including all instructions to the seller 
               concerning the shipment.
          
          3.   The buyer's bank sends the irrevocable letter of 
               credit to a U.S.  bank, requesting confirmation. The 
               exporter may request that a particular U.S. bank be 
               the confirming bank, or the foreign bank selects one 
               of its U.S. correspondent banks.
          
          4.   The U.S. bank prepares a letter of confirmation to 
               forward to the exporter along with the irrevocable 
               letter of credit.
          
          5.   The exporter reviews carefully all conditions in the 
               letter of credit. The exporter's freight forwarder 
               should be contacted to make sure that the shipping 
               date can be met. If the exporter cannot comply with 
               one or more of the conditions, the customer should be 
               alerted at once.
          
          6.   The exporter arranges with the freight forwarder to 
               deliver the goods to the appropriate port or airport.
          
          7.   When the goods are loaded, the forwarder completes the 
               necessary documents.
          
          8.   The exporter (or the forwarder) presents to the U.S. 
               bank documents indicating full compliance.
          
          9.   The bank reviews the documents. If they are in order, 
               the documents are airmailed to the buyer's bank for 
               review and transmitted to the buyer.
          
          10.  The buyer (or agent) gets the documents that may be 
               needed to claim the goods.
          
          11.  A draft, which may accompany the letter of credit, is 
               paid by the exporter's bank at the time specified or 
               may be discounted at an earlier date.
          
          Example of a Confirmed Irrevocable Letter of Credit
          
          The example of a confirmed irrevocable letter of credit in 
          figure 13-1 illustrates the various parts of a typical 
          letter of credit. In this sample, the letter of credit was 
          forwarded to the exporter, The Walton Building Supplies 
          Company (A) by the drawee bank, C&S/Sovran Corporation (B) 
          as a result of the letter of credit being issued by the 
          First Hong Kong Bank, Hong Kong (C), for the account of the 
          importer, BBH Hong Kong (D). The date of issue was March 8, 
          1991 (E), and the exporter must submit proper documents 
          (e.g., a commercial invoice in one original and three 
          copies) (F) by June 23, 1991 (G) in order for a sight draft 
          (H) to be honored.
          
          Tips on Using a Letter of Credit
          
          When preparing quotations for prospective customers, 
          exporters should keep in mind that banks pay only the 
          amount specified in the letter of credit -- even if higher 
          charges for shipping, insurance, or other factors are 
          documented.
          
          Upon receiving a letter of credit, the exporter should 
          carefully compare the letter's terms with the terms of the 
          exporter's pro forma quotation.  This point is extremely 
          important, since the terms must be precisely met or the 
          letter of credit may be invalid and the exporter may not be 
          paid.  If meeting the terms of the letter of credit is 
          impossible or any of the information is incorrect or 
          misspelled, the exporter should get in touch with the 
          customer immediately and ask for an amendment to the letter 
          of credit to correct the problem.
          
          The exporter must provide documentation showing that the 
          goods were shipped by the date specified in the letter of 
          credit or the exporter may not be paid. Exporters should 
          check with their freight forwarders to make sure that no 
          unusual conditions may arise that would delay shipment. 
          Similarly, documents must be presented by the date 
          specified for the letter of credit to be paid. Exporters 
          should verify with their international bankers that 
          sufficient time will be available for timely presentation.
          
          International letters of credit are usually governed by 
          uniform customs and practices or by ICC Publication No. 
          400. International bankers may be consulted for more 
          information.
          
          Exporters should always request that the letter of credit 
          specify that partial shipments and transshipment will be 
          allowed. Doing so prevents unforeseen problems at the last 
          minute.
          
          DRAFTS
          
          A draft, sometimes also called a bill of exchange, is 
          analogous to a foreign buyer's check. Like checks used in 
          domestic commerce, drafts sometimes carry the risk that 
          they will be dishonored.
          
          Sight Drafts_
          
          A sight draft is used when the seller wishes to retain 
          title to the shipment until it reaches its destination and 
          is paid for. Before the cargo can be released, the original 
          ocean bill of lading must be properly endorsed by the buyer 
          and surrendered to the carrier, since it is a document that 
          evidences title.
          
          Air waybills of lading, on the other hand, do not need to 
          be presented in order for the buyer to claim the goods. 
          Hence, there is a greater risk when a sight draft is being 
          used with an air shipment.
          
          In actual practice, the bill of lading or air waybill is 
          endorsed by the shipper and sent via the shipper's bank to 
          the buyer's bank or to another intermediary along with a 
          sight draft, invoices, and other supporting documents 
          specified by either the buyer or the buyer's country (e.g., 
          packing lists, consular invoices, insurance certificates). 
          The bank notifies the buyer when it has received these 
          documents; as soon as the amount of the draft is paid, the 
          bank releases the bill of lading, enabling the buyer to 
          obtain the shipment.
          
          When a sight draft is being used to control the transfer of 
          title of a shipment, some risk remains because the buyer's 
          ability or willingness to pay may change between the time 
          the goods are shipped and the time the drafts are presented 
          for payment. Also, the policies of the importing country 
          may change. If the buyer cannot or will not pay for and 
          claim the goods, then returning or disposing of them 
          becomes the problem of the exporter.
          
          Exporters should also consider which foreign bank should 
          negotiate the sight draft for payment. If the negotiating 
          bank is also the buyer's bank, the bank may favor its 
          customer's position, thereby putting the exporter at a 
          disadvantage. Exporters should consult their international 
          bankers to determine an appropriate strategy for 
          negotiating drafts.
          
          Time Drafts and Date Drafts_
          
          If the exporter wants to extend credit to the buyer, a time 
          draft can be used to state that payment is due within a 
          certain time after the buyer accepts the draft and receives 
          the goods, for example, 30 days after acceptance. By 
          signing and writing "accepted" on the draft, the buyer is 
          formally obligated to pay within the stated time. When this 
          is done the draft is called a trade acceptance and can be 
          either kept by the exporter until maturity or sold to a 
          bank at a discount for immediate payment.
          
          A date draft differs slightly from a time draft in that it 
          specifies a date on which payment is due, for example, 
          December 1, 19XX, rather than a time period after the draft 
          is accepted. When a sight draft or time draft is used, a 
          buyer can delay payment by delaying acceptance of the 
          draft. A date draft can prevent this delay in payment but 
          still must be accepted.
          
          When a bank accepts a draft, it becomes an obligation of 
          the bank and a negotiable investment known as a banker's 
          acceptance is created. A banker's acceptance can also be 
          sold to a bank at a discount for immediate payment.
          
          CREDIT CARDS
          
          Many U.S. exporters of consumer and other products 
          (generally of low dollar value) that are sold directly to 
          the end user accept Visa and MasterCard in payment for 
          export sales. In international credit card transactions, 
          merchants are normally required to deposit drafts in the 
          currency of their country; for example, a U.S. exporter 
          would deposit a draft in U.S. dollars. U.S. merchants may 
          find that domestic rules and international rules governing 
          credit card transactions differ somewhat and should contact 
          their credit card processor for more specific information.
          
          International credit card transactions are typically placed 
          by telephone or fax, methods that facilitate fraudulent 
          transactions. Merchants should determine the validity of 
          transactions and obtain proper authorizations.
          
          OPEN ACCOUNT
          
          In a foreign transaction, an open account is a convenient 
          method of payment and may be satisfactory if the buyer is 
          well established, has demonstrated a long and favorable 
          payment record, or has been thoroughly checked for 
          creditworthiness. Under open account, the exporter simply 
          bills the customer, who is expected to pay under agreed 
          terms at a future date. Some of the largest firms abroad 
          make purchases only on open account.
          
          Open account sales do pose risks, however. The absence of 
          documents and banking channels may make legal enforcement 
          of claims difficult to pursue. The exporter may have to 
          pursue collection abroad, which can be difficult and 
          costly. Also, receivables may be harder to finance, since 
          drafts or other evidence of indebtedness are unavailable.
          
          Before issuing a pro forma invoice to a buyer, exporters 
          contemplating a sale on open account terms should 
          thoroughly examine the political, economic, and commercial 
          risks and consult with their bankers if financing will be 
          needed for the transaction.
          
          OTHER PAYMENT MECHANISMS
          
          Consignment sales
          
          In international consignment sales, the same basic 
          procedure is followed as in the United States. The material 
          is shipped to a foreign distributor to be sold on behalf of 
          the exporter. The exporter retains title to the goods until 
          they are sold by the distributor. Once the goods are sold, 
          payment is sent to the exporter. With this method, the 
          exporter has the greatest risk and least control over the 
          goods and may have to wait quite a while to get paid.
          
          When this type of sale is contemplated, it may be wise to 
          consider some form of risk insurance. In addition, it may 
          be necessary to conduct a credit check on the foreign 
          distributor (see the section of this chapter titled 
          "Decreasing Credit Risks Through Credit Checks"). 
          Furthermore, the contract should establish who is 
          responsible for property risk insurance covering 
          merchandise until it is sold and payment received.
          
          Foreign currency
          
          A buyer and a seller in different countries rarely use the 
          same currency. Payment is usually made in either the 
          buyer's or the seller's currency or in a mutually agreed-on 
          currency that is foreign to both parties.
          
          One of the uncertainties of foreign trade is the 
          uncertainty of the future exchange rates between 
          currencies. The relative value between the dollar and the 
          buyer's currency may change between the time the deal is 
          made and the time payment is received. If the exporter is 
          not properly protected, a devaluation in the foreign 
          currency could cause the exporter to lose dollars in the 
          transaction. For example, if the buyer has agreed to pay 
          500,000 French francs for a shipment and the franc is 
          valued at 20 cents, the seller would expect to receive 
          $100,000. If the franc later decreased in value to be worth 
          19 cents, payment under the new rate would be only $95,000, 
          a loss of $5,000 for the seller. On the other hand, if the 
          foreign currency increases in value the exporter would get 
          a windfall in extra profits. However, most exporters are 
          not interested in speculating on foreign exchange 
          fluctuations and prefer to avoid risks.
          
          One of the simplest ways for a U.S. exporter to avoid this 
          type of risk is to quote prices and require payment in U.S. 
          dollars. Then the burden and risk are placed on the buyer 
          to make the currency exchange.  Exporters should also be 
          aware of problems of currency convertibility; not all 
          currencies are freely or quickly convertible into U.S. 
          dollars.  Fortunately, the U.S. dollar is widely accepted 
          as an international trading currency, and American firms 
          can often secure payment in dollars.
          
          If the buyer asks to make payment in a foreign currency, 
          the exporter should consult an international banker before 
          negotiating the sales contract. Banks can offer advice on 
          the foreign exchange risks that exist; further, some 
          international banks can help one hedge against such a risk 
          if necessary, by agreeing to purchase the foreign currency 
          at a fixed price in dollars regardless of the value of the 
          currency when the customer pays. The bank charges a fee or 
          discount on the transaction. If this mechanism is used, the 
          fee should be included in the price quotation.
          
          Countertrade and barter
          
          International countertrade is a trade practice whereby a 
          supplier commits contractually, as a condition of sale, to 
          undertake specified initiatives that compensate and benefit 
          the other party. The resulting linked trade fulfills 
          financial (e.g., lack of foreign exchange), marketing, or 
          public policy objectives of the trading parties. Not all 
          suppliers consider countertrade an objectionable 
          imposition; many U.S.  exporters consider countertrade a 
          necessary cost of doing business in markets where U.S. 
          exports would otherwise not occur.
          
          Simple barter is the direct exchange of goods or services 
          between two parties; no money changes hands. Pure barter 
          arrangements in international commerce are rare, because 
          the parties' needs for the goods of the other seldom 
          coincide and because valuation of the goods may pose 
          problems. The most common form of compensatory trade 
          practiced today involves contractually linked, parallel 
          trade transactions each of which involves a separate 
          financial settlement. For example, a countertrade contract 
          may provide that the U.S. exporter will be paid in a 
          convertible currency as long as the U.S. exporter (or 
          another entity designated by the exporter) agrees to export 
          a related quantity of goods from the importing country.
          
          U.S. exporters can take advantage of countertrade 
          opportunities by trading through an intermediary with 
          countertrade expertise, such as an international broker, an 
          international bank, or an export management company. Some 
          export management companies offer specialized countertrade 
          services. Exporters should bear in mind that countertrade 
          often involves higher transaction costs and greater risks 
          than simple export transactions.
          
          The Department of Commerce can advise and assist U.S. 
          exporters faced with countertrade requirements. The Finance 
          and Countertrade Division of the Office of Finance, 
          Industry, and Trade Information monitors countertrade 
          trends, disseminates information (including lists of 
          potentially beneficial countertrade opportunities), and 
          provides general assistance to enterprises seeking barter 
          and countertrade opportunities.  For information, contact 
          Finance and Countertrade Division, Office of Finance, 
          Industry, and Trade Information, International Trade 
          Administration, U.S. Department of Commerce, Washington, 
          D.C.; telephone 202-377-4471. UNCITRAL is expected to 
          publish a legal guide to countertrade contracts in 1992.
          
          
          DECREASING CREDIT RISKS THROUGH CREDIT CHECKS
          
          Generally, it is a good idea to check a buyer's credit even 
          if credit risk insurance or relatively safe payment methods 
          are employed. Banks are often able to provide credit 
          reports on foreign companies, either through their own 
          foreign branches or through a correspondent bank.
          
          The Department of Commerce's WTDRs also provide useful 
          information for credit checks. For a fee, a WDTR may be 
          requested on any foreign company. Although the WTDR is 
          itself not a credit report, it does contain some financial 
          information and also identifies other U.S.  companies that 
          do business with the reported firm. The exporter may then 
          contact those companies directly to find out about their 
          payment experience.
          
          Private credit reporting services also are available. 
          Several U.S.  services compile financial information on 
          foreign firms (particularly larger firms) and make it 
          available to subscribers. Reliable evaluations can also be 
          obtained from foreign credit reporting services, many of 
          which are listed in The Exporter's Guide to Foreign Sources 
          for Credit Information, published by Trade Data Reports, 
          Inc., 6 West 37th Street, New York, NY 10018.
          
          COLLECTION PROBLEMS
          
          In international trade, problems involving bad debts are 
          more easily avoided than rectified after they occur. Credit 
          checks and the other methods that have been discussed can 
          limit the risks involved.  Nonetheless, just as in a 
          company's domestic business, exporters occasionally 
          encounter problems with buyers who default on payments.  
          When these problems occur in international trade, obtaining 
          payment can be both difficult and expensive. Even when the 
          exporter has insurance to cover commercial credit risks, a 
          default by a buyer still requires time, effort, and cost. 
          The exporter must exhaust all reasonable means of obtaining 
          payment before an insurance claim is honored, and there is 
          often a significant delay before the insurance payment is 
          made.
          
          The simplest (and least costly) solution to a payment 
          problem is to contact and negotiate with the customer. With 
          patience, understanding, and flexibility, an exporter can 
          often resolve conflicts to the satisfaction of both sides.
          
          This point is especially true when a simple 
          misunderstanding or technical problem is to blame and there 
          is no question of bad faith.  Even though the exporter may 
          be required to compromise on certain points -- perhaps even 
          on the price of the committed goods -- the company may save 
          a valuable customer and profit in the long run.
          
          If, however, negotiations fail and the sum involved is 
          large enough to warrant the effort, a company should obtain 
          the assistance and advice of its bank, legal counsel, and 
          other qualified experts. If both parties can agree to take 
          their dispute to an arbitration agency, this step is 
          preferable to legal action, since arbitration is often 
          faster and less costly. The International Chamber of 
          Commerce handles the majority of international arbitrations 
          and is usually acceptable to foreign companies because it 
          is not affiliated with any single country. For information 
          contact the vice president for arbitration, U.S. Council of 
          the International Chamber of Commerce, telephone 
          212-354-4480. The American Arbitration Association is also 
          a reputable arbitration agency that handles international 
          disputes; for information telephone 212-484-4000.
          
          U.S. Government Trade Complaint Service
          
          The Trade Complaint Service is available to aid U.S. 
          exporters who find themselves in a trade dispute as a 
          result of a specific overseas commercial transaction. These 
          disputes, which are processed through the Department of 
          Commerce's district offices, must meet certain criteria.  
          After a firm has made every effort to settle the complaint 
          without U.S.  government assistance, cases are accepted 
          when it can be clearly shown that communications have 
          broken down and the value of the claim is more than $1,000. 
          Simple collection claims are not accepted.
          
          Commerce makes every effort to restore communications 
          between the parties to the dispute in order to arrive at an 
          amicable settlement.  When legal proceedings are initiated, 
          U.S. government assistance is normally withdrawn.
          
          
