International Trade Finance and Payment Methods
International Trade Finance and Payment Methods tests whether you can match a payment mechanism to the risk profile of a transaction, read a letter of credit critically, and manage currency exposure. Questions frequently present a documentary discrepancy and ask what happens next.
The risk ladder
From most secure for the exporter to least: cash in advance → documentary letter of credit → documentary collection (D/P documents against payment, then D/A documents against acceptance) → open account → consignment. The mirror image applies to the importer.
Letters of credit under UCP 600
- Banks deal in documents, not goods, and the credit is independent of the underlying contract.
- A nominated bank has a maximum of five banking days after presentation to examine documents.
- Strict compliance is required; a discrepancy entitles the issuing bank to refuse.
- Confirmed adds a second bank's undertaking; irrevocable cannot be amended without all parties' consent; other forms include transferable, back-to-back, revolving, and standby (ISP98).
- Watch expiry date and place of presentation, latest shipment date, partial shipment and transhipment rules, and the exact document list.
Other instruments
Export credit insurance, factoring, forfaiting, export credit agency support, performance and advance-payment guarantees. Currency risk is managed through forward contracts, options, money-market hedges, and choice of invoicing currency; exposures are transaction, translation, and economic.
Worked example
A CIF letter of credit for USD 250,000 requires shipment no later than 30 June and a full set of clean on-board ocean bills of lading, with presentation within 21 days. The B/L presented is dated 2 July and the insurance certificate is dated 5 July. Two discrepancies: late shipment, and insurance dated after shipment when it must not be. The issuing bank may refuse; the applicant may waive, but only if it chooses. The correct preventive action is to request an LC amendment before shipment, not to present and hope.
Traps that cost marks
- Believing an LC guarantees the quality or quantity of goods.
- Presenting an air waybill under a credit calling for an ocean bill of lading.
- Missing the 21-day presentation period or the LC expiry.
- Treating D/A as safe: it is an unsecured credit sale.
- Assuming confirmation is only needed in high-risk countries rather than wherever bank risk is unacceptable.